January 23, 2006
Risky business | Unhappy with their 401(k)-style retirement plans, police unions across Maine are asking towns to reinstate pensions
By Whit Richardson
These days, the thought of retiring after 20 years on the job, regardless of age and at 50% pay, sounds too good to be true to most workers. But that is exactly the retirement plan many police departments around Maine want their municipal employers to sign them up for.
Local police unions in Cape Elizabeth, Falmouth and Windham currently are negotiating a buy-back into special pension plans for law enforcement employees offered by the Maine State Retirement System. Their hopes may have heightened recently when Westbrook's police union convinced the city in October 2005 to buy back into a similar retirement plan. Those benefits, say police officers and their union representatives, are needed to attract and keep qualified police officers. "Many people are fleeing the state of Maine to go to other states where the benefits are better," says Paul Gaspar, executive director of the Maine Association of Police, which represents 44 police departments in the state, including Cape Elizabeth, Falmouth and Windham.
Buying into that plan, however, comes with a cost that some towns and cities are reluctant to pay ˆ especially when employers in the private sector largely decided long ago that a traditional pension plan could be a prohibitively expensive benefit to offer employees. Since the number of private-sector pension plans peaked at 112,000 in the mid 1980s, it has declined to 30,000, according to a 2005 report from the Pension Benefit Guaranty Corp.
If companies with billion-dollar budgets are switching to 401(k) plans and other so-called defined contribution plans as a primary form of retirement benefits, many municipal officials ask, why should small municipalities and other public sector employers not follow the lead? "Municipalities, while we're slightly different, can't be going in the opposite direction that is being experienced by the businesses in the region and by the citizens who are paying the taxes," says Cape Elizabeth Town Manager Michael McGovern. "I see that there's always going to be a dilemma when public sector benefits aren't closely correlated with private sector benefits."
The traditional pension plan, known as a defined benefit plan, has long been the norm in the public sector. The reason: Pensions have been seen as an important competitive advantage in attracting employees who might otherwise choose the private sector, which has traditionally been able to offer higher salaries, says Kathy Eitelberg, national public sector market director for The Segal Co., a New York, N.Y.-based benefits, compensation and human resources consulting firm. In the public sector, 95% of employers still offer a retirement plan ˆ the vast majority being defined benefit plans ˆ while in the private sector 50% of employers offer no retirement benefits, according to Eitelberg. "I think the public sector does the right thing," she says. "It's good public policy to have a strong retirement system."
In recent years, though, there has been some movement in the public sector toward private, 401(k)-type pension plans. States such as Michigan and Alaska, in 1997 and 2005 respectively, switched from a defined benefit plan to a defined contribution plan for new government employees, according to the Baton Rouge, La.-based National Association of State Retirement Administrators. And in the past 12 years, the Maine State Retirement System, which administers pension plans for state employees, teachers and participating local districts, has seen 25 municipalities, counties and government agencies withdraw from membership, including Franklin and Knox Counties and employers such as the Maine Municipal Association and the Maine State Housing Authority.
Some municipalities, such as Westbrook and Presque Isle, withdrew because maintaining special defined benefit plans for its law enforcement employees was prohibitively expensive. But some municipalities and unions opted out by choice, attracted by alternatives they thought could offer a more secure financial future for employees.
The reality of the markets
Many of the municipalities that left the Maine State Retirement System ˆ which currently has about 57,000 active members paying into the system and $8.6 billion in assets, according to its 2005 Annual Report ˆ did so when the stock market was booming. During the 90s, defined contribution plans, which are 401(a)s or 457 plans in the public sector, looked especially lucrative to many public sector employees. The uncommonly high returns that 401-type plans were showing at the time created unrealistic expectations, says Cape Elizabeth's McGovern. "Everyone thought they were going to be very comfortable in retirement and they were going to be able to retire at a young age," he says. "And then we all got slapped with the reality that the markets can go down as well as up."
Cape Elizabeth police officers are one group that agreed in 1994 to jump to the defined contribution plans. Following the market's sharp declines in the beginning of this decade, though, those employees now see the defined contribution plans as too risky, says Gaspar. Many also face the prospect of working more years and having to supplement their income during retirement, says McGovern.
"A defined contribution plan depends very much on the vagaries of the marketplace: You put in a certain amount of money and if the market is very good you can realize a pretty good return," adds John Milazzo, chief deputy officer of the Maine State Retirement System "However, in a [pension] plan the risk, which is the cost of funding the plan in bad market times, falls on the employer."
Shouldering that risk is something municipalities who've opted out of pension plans are reluctant to do again. McGovern says the cost of buying back into one of the special retirement plans Maine State Retirement offers law enforcement employees is too high, and wouldn't be fair to the other 70 town employees who would remain in defined contribution plans.
The Maine State Retirement System has said that Cape Elizabeth would need to buy back $750,000 worth of retirement time for the eight employees of the police department who did not stay in the system or who were hired since the town left it, according to McGovern. The contribution the town would need to pay into the plans for the first three years would be 12.6% of each employee's salary, according to McGovern. That number would then drop to around seven percent, or about $49,000 for the eight police officers. In the current setup, the town contributes seven percent to officers' defined contribution plans, but has offered to increase that contribution to 10% in negotiations.
Paul Gaspar, who previously was an officer in Cape Elizabeth for 10 years, acknowledges there is a cost to the town, but says offering the special retirement plan is important to attract qualified candidates in a competitive job market. He also says the specific demands on police officers don't allow them to remain on the job until they are, say, 60 years old. "In what other profession do employees have the authority to use deadly force?" Gaspar says. "It's one of those awesome responsibilities that people shouldn't be doing after 35 years."
A blank check
A similar stalemate ended in October 2005, when after three years of negotiations the 31-member Westbrook police union finally signed a contract with the city that would buy the police officers back into the Maine State Retirement System. The new plan will allow those officers to retire after 25 years, regardless of age, at 50% pay.
John Desjardins, a detective and president of Westbrook's police union, says the union wanted to get back into Maine State Retirement because officers didn't have confidence in their 401 plans. Desjardin also echoes Gaspar's concern that there should be a mechanism to allow law enforcement employees to retire earlier than other professions. "It's a young person's job ˆ people don't want to be wrestling with 19-year-old drunks at the age of 60," Desjardins says.
Westbrook City Manager Jerre Bryant attributes the long negotiations not to resistance to the idea of returning to a defined benefit plan, but to debate over the amount of benefits the city could afford. Westbrook had pulled out of the Maine State Retirement System in 1995 for the same reason many municipalities did: In the late 1980s Bryant says the city's contribution to its 35 police and fire department employees' defined benefit plans was more than 30% of the employees' salaries, or $340,000. By comparison, the town contributed 10% to its officers' 401 plans.
But Bryant says the city finally reversed its direction when it took a look at the labor market. He says he saw that the majority of comparable employers in southern Maine offered some version of a defined benefit plan. "Even if it is more expensive, we wanted to be in that area as far as recruitment is concerned," Bryant says.
While Bryant says Westbrook's return to a defined benefit plan was necessary to remain competitive in attracting police officers, he also says it could cost the city much more in the future. The problem is, he's not sure exactly how much more. "Going into a defined benefit plan is like signing a blank check," he says. "Today I can tell you what our costs are, but I can't tell you what they will be in five or 10 years."
In the Maine State Retirement System, the contribution municipalities pay on their employees' wages is set by actuarial assumptions and can change over time. Bryant says the Legislature has promised the employer contribution will not rise above eight percent, but he says he doesn't trust that promise. Neither do McGovern or the Cape Elizabeth Town Council, which is why Cape Elizabeth doesn't seem to want to budge in negotiations. "We do not know long term with a defined benefit plan what our percentage contribution will be," McGovern says. "We do not know the cost now and in the future, because we do not know what the rates of return will be."
While the debate over retirement benefits for police officers continues in Cape Elizabeth, Falmouth and Windham, the move back to defined benefit plans is likely to come up again as police union contracts expire around the state. One such debate could be played out in Presque Isle when its police union's contract expires in 2007.
The city left Maine State Retirement in 1996 because of the high cost of funding the special plans for its police officers. At the time, the town was paying between 22% and 28% of its employees' salaries into the retirement plan, according to City Manager Tom Stevens. The Presque Isle Police Department, which is represented by the Teamsters, fought the change in 1996 and plans to negotiate a defined benefit pension again when its contract expires next year, according to Presque Isle Police Sergeant Joey Seeley. "We're having a hard time filling positions because we don't have Maine State Retirement," Seeley says. "That's one of the things were going to fight for."
Local police unions in Cape Elizabeth, Falmouth and Windham currently are negotiating a buy-back into special pension plans for law enforcement employees offered by the Maine State Retirement System. Their hopes may have heightened recently when Westbrook's police union convinced the city in October 2005 to buy back into a similar retirement plan. Those benefits, say police officers and their union representatives, are needed to attract and keep qualified police officers. "Many people are fleeing the state of Maine to go to other states where the benefits are better," says Paul Gaspar, executive director of the Maine Association of Police, which represents 44 police departments in the state, including Cape Elizabeth, Falmouth and Windham.
Buying into that plan, however, comes with a cost that some towns and cities are reluctant to pay ˆ especially when employers in the private sector largely decided long ago that a traditional pension plan could be a prohibitively expensive benefit to offer employees. Since the number of private-sector pension plans peaked at 112,000 in the mid 1980s, it has declined to 30,000, according to a 2005 report from the Pension Benefit Guaranty Corp.
If companies with billion-dollar budgets are switching to 401(k) plans and other so-called defined contribution plans as a primary form of retirement benefits, many municipal officials ask, why should small municipalities and other public sector employers not follow the lead? "Municipalities, while we're slightly different, can't be going in the opposite direction that is being experienced by the businesses in the region and by the citizens who are paying the taxes," says Cape Elizabeth Town Manager Michael McGovern. "I see that there's always going to be a dilemma when public sector benefits aren't closely correlated with private sector benefits."
The traditional pension plan, known as a defined benefit plan, has long been the norm in the public sector. The reason: Pensions have been seen as an important competitive advantage in attracting employees who might otherwise choose the private sector, which has traditionally been able to offer higher salaries, says Kathy Eitelberg, national public sector market director for The Segal Co., a New York, N.Y.-based benefits, compensation and human resources consulting firm. In the public sector, 95% of employers still offer a retirement plan ˆ the vast majority being defined benefit plans ˆ while in the private sector 50% of employers offer no retirement benefits, according to Eitelberg. "I think the public sector does the right thing," she says. "It's good public policy to have a strong retirement system."
In recent years, though, there has been some movement in the public sector toward private, 401(k)-type pension plans. States such as Michigan and Alaska, in 1997 and 2005 respectively, switched from a defined benefit plan to a defined contribution plan for new government employees, according to the Baton Rouge, La.-based National Association of State Retirement Administrators. And in the past 12 years, the Maine State Retirement System, which administers pension plans for state employees, teachers and participating local districts, has seen 25 municipalities, counties and government agencies withdraw from membership, including Franklin and Knox Counties and employers such as the Maine Municipal Association and the Maine State Housing Authority.
Some municipalities, such as Westbrook and Presque Isle, withdrew because maintaining special defined benefit plans for its law enforcement employees was prohibitively expensive. But some municipalities and unions opted out by choice, attracted by alternatives they thought could offer a more secure financial future for employees.
The reality of the markets
Many of the municipalities that left the Maine State Retirement System ˆ which currently has about 57,000 active members paying into the system and $8.6 billion in assets, according to its 2005 Annual Report ˆ did so when the stock market was booming. During the 90s, defined contribution plans, which are 401(a)s or 457 plans in the public sector, looked especially lucrative to many public sector employees. The uncommonly high returns that 401-type plans were showing at the time created unrealistic expectations, says Cape Elizabeth's McGovern. "Everyone thought they were going to be very comfortable in retirement and they were going to be able to retire at a young age," he says. "And then we all got slapped with the reality that the markets can go down as well as up."
Cape Elizabeth police officers are one group that agreed in 1994 to jump to the defined contribution plans. Following the market's sharp declines in the beginning of this decade, though, those employees now see the defined contribution plans as too risky, says Gaspar. Many also face the prospect of working more years and having to supplement their income during retirement, says McGovern.
"A defined contribution plan depends very much on the vagaries of the marketplace: You put in a certain amount of money and if the market is very good you can realize a pretty good return," adds John Milazzo, chief deputy officer of the Maine State Retirement System "However, in a [pension] plan the risk, which is the cost of funding the plan in bad market times, falls on the employer."
Shouldering that risk is something municipalities who've opted out of pension plans are reluctant to do again. McGovern says the cost of buying back into one of the special retirement plans Maine State Retirement offers law enforcement employees is too high, and wouldn't be fair to the other 70 town employees who would remain in defined contribution plans.
The Maine State Retirement System has said that Cape Elizabeth would need to buy back $750,000 worth of retirement time for the eight employees of the police department who did not stay in the system or who were hired since the town left it, according to McGovern. The contribution the town would need to pay into the plans for the first three years would be 12.6% of each employee's salary, according to McGovern. That number would then drop to around seven percent, or about $49,000 for the eight police officers. In the current setup, the town contributes seven percent to officers' defined contribution plans, but has offered to increase that contribution to 10% in negotiations.
Paul Gaspar, who previously was an officer in Cape Elizabeth for 10 years, acknowledges there is a cost to the town, but says offering the special retirement plan is important to attract qualified candidates in a competitive job market. He also says the specific demands on police officers don't allow them to remain on the job until they are, say, 60 years old. "In what other profession do employees have the authority to use deadly force?" Gaspar says. "It's one of those awesome responsibilities that people shouldn't be doing after 35 years."
A blank check
A similar stalemate ended in October 2005, when after three years of negotiations the 31-member Westbrook police union finally signed a contract with the city that would buy the police officers back into the Maine State Retirement System. The new plan will allow those officers to retire after 25 years, regardless of age, at 50% pay.
John Desjardins, a detective and president of Westbrook's police union, says the union wanted to get back into Maine State Retirement because officers didn't have confidence in their 401 plans. Desjardin also echoes Gaspar's concern that there should be a mechanism to allow law enforcement employees to retire earlier than other professions. "It's a young person's job ˆ people don't want to be wrestling with 19-year-old drunks at the age of 60," Desjardins says.
Westbrook City Manager Jerre Bryant attributes the long negotiations not to resistance to the idea of returning to a defined benefit plan, but to debate over the amount of benefits the city could afford. Westbrook had pulled out of the Maine State Retirement System in 1995 for the same reason many municipalities did: In the late 1980s Bryant says the city's contribution to its 35 police and fire department employees' defined benefit plans was more than 30% of the employees' salaries, or $340,000. By comparison, the town contributed 10% to its officers' 401 plans.
But Bryant says the city finally reversed its direction when it took a look at the labor market. He says he saw that the majority of comparable employers in southern Maine offered some version of a defined benefit plan. "Even if it is more expensive, we wanted to be in that area as far as recruitment is concerned," Bryant says.
While Bryant says Westbrook's return to a defined benefit plan was necessary to remain competitive in attracting police officers, he also says it could cost the city much more in the future. The problem is, he's not sure exactly how much more. "Going into a defined benefit plan is like signing a blank check," he says. "Today I can tell you what our costs are, but I can't tell you what they will be in five or 10 years."
In the Maine State Retirement System, the contribution municipalities pay on their employees' wages is set by actuarial assumptions and can change over time. Bryant says the Legislature has promised the employer contribution will not rise above eight percent, but he says he doesn't trust that promise. Neither do McGovern or the Cape Elizabeth Town Council, which is why Cape Elizabeth doesn't seem to want to budge in negotiations. "We do not know long term with a defined benefit plan what our percentage contribution will be," McGovern says. "We do not know the cost now and in the future, because we do not know what the rates of return will be."
While the debate over retirement benefits for police officers continues in Cape Elizabeth, Falmouth and Windham, the move back to defined benefit plans is likely to come up again as police union contracts expire around the state. One such debate could be played out in Presque Isle when its police union's contract expires in 2007.
The city left Maine State Retirement in 1996 because of the high cost of funding the special plans for its police officers. At the time, the town was paying between 22% and 28% of its employees' salaries into the retirement plan, according to City Manager Tom Stevens. The Presque Isle Police Department, which is represented by the Teamsters, fought the change in 1996 and plans to negotiate a defined benefit pension again when its contract expires next year, according to Presque Isle Police Sergeant Joey Seeley. "We're having a hard time filling positions because we don't have Maine State Retirement," Seeley says. "That's one of the things were going to fight for."
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