POLICEPAY.NET
Oh, they are obscene - really obscene! If you believe this, go back and reread the first two posting. The bottom line? It does not matter how obscene they appear. Pensions (a ten dollar bill) are only a portion of the cost to the employer. What matters is total cost - PERIOD! General Motors did not become non-competitive with the Japanese because of pensions and health insurance. They became non-competitive because their "unit costs" were higher than the Japanese "unit costs." Unit costs is all costs - land. labor, capitol, and entrepreneurship. It is true that labor is a big component, but it is still just a portion of the cost.
Why is it that people speak with such sanctimony when talking about "public funds?" Why are "public funds" any more sacred than corporate and individual funds? Why are public funds elevated to a status of Deity and non-public funds seen as decadent and obscene? I am looking at today's edition of the Wall Street Journal and on the front page is Bernard Madoff. Until yesterday, he was a full partner in the "public funds." Now, he is a outcast with no say so. The purpose of this diatribe is to pronounce that all funds (money) are created equally. I choke every time I hear the phrase "public coffers." What is that? God's checking account?
Last week, I received an email from Modesto. It was the most intelligent rebuttal to my remarks that I have ever received. I was amazed at the knowledge that this person had concerning pensions and pay. It was impressive. One of the points raised was the burden of risk that the city had to shoulder concerning defined benefit pensions and how the writer felt this to be something less than prudent. I was at the San Francisco airport when I received this articulate email. I quickly shot back a reply that pointed out that risk was a two-way street that offered gains as well as losses. In no time, I received a response that readily acknowledged this, but insisted that the risk, good or bad, should not be borne by the employer. You know, I cannot disagree with any of the arguments that my writer raised.
Today, we will look at those risks. There are four major risks - market, mortality, actuarial, and political. Not sure about that last one? Well, if it was not for the political risk we would not be having this discussion. California is inundated with the "more conservative than thy" groups. This has led to the development of a popular consensus that governmental entities should not be subject to risk like all of us are in our personal lives.
Let's look at the risk and potential negative exposure. Market risk means that the invested assets may be less than what is required currently - the evil unfunded liability(think the devil, the plague, or Hitler). The mortality risk (We wouldn't have promised such a generous pension if I had known you were going to live so long.) Actuarial risk (Sorry, we thought more people would quit before becoming vested.). The political risk (We did not know that Review-Journal or the Union Tribune might suddenly attack your pension, forcing us to lower the benefits.)
The political risk is the sole property of the employee. The other three are transient. They can be shifted between the employee and the employer at anytime. Let me put some labels on this. A plan that puts the risk on the employer is a "defined benefit plan." A better name would be guaranteed benefit. The plan where the employee has the risk is a "defined contribution plan." A better name would be guaranteed contribution. The assumptions that actuaries use for defined benefit plans have been very good. It is true that any given point in time the actual results are better or worse than the assumptions, but in the long run the assumptions are fairly accurate.
You could easily assume that this risk is the thing that is causing the strong push back on public safety pensions, but that would be wrong. It is not the risk that brings out this public animus. It is the vulgar shadow of a pension deemed outrageous by empirical data that has evolved into dogma. The anger raised by the 90% pension is not based on economics or mathematics, but the oldest vice know to man - envy. They have it and I don't.
When I was growing up in the fifties and sixties, there was a shoe shine man (African descent) who always had a shiny, relative new Cadillac Coupe De ville. When we went to a football game, or the county fair, the person with the most expensive and best looking car was this shine guy. While it was never said directly, but with pointed remarks, most people felt that a person in his station in society was not deserving of having the best car in town. After all, he was the lowly shine man at the barbershop.
The thing that the people in my town never acknowledged was the sacrifice that this man had to make to be number one in the car parade. He made no more money than other shine men. He just spent his differently. I am sure he had no savings, life insurance or health insurance. I know for a fact that his home was a shack on the East side of town. He had no television and never ate out. Another thing I am certain about is that none of us "uppity white folks" ever took the time to calculate the value of the forbearance required to own that Cadillac. We just saw a shine man driving this expensive automobile. He already held a position of low esteem in our town because of his dark skin and his unskilled job. The car just added contempt to his resume.
I know what many of you are thinking. Our police officers and firefighters have the Cadillac (90% pension) and all of the other amenities of life. In the first issue of this saga I told you that the average police officer in California has a total compensation package of $125,000. Do you find a compensation package of $125,000 for police officers to be offensive? How about for Bill Gates? The editor of the local newspaper? A lawyer in your town? The President of the United States? You just cannot take your eyes off of the Cadillac?
A message to my guys. As long as you have a Cadillac (90% pension) parked in your driveway, you are going to be under constant attack. You need to replace the Cadillac with a utilitarian vehicle that costs the same as the Cadillac. And, what might that be? It is a defined contribution plan that costs the same as a defined benefit plan. There is no stated benefit with a defined contribution plan, just a steady annual contribution. As long as the 90% pension is on the stage, you are going to get the tomatoes lobed at you.
Feel free to email me your thoughts. I like rebuttal. Start lobing the tomatoes at me.
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y wouldn't lay off officers if the Modesto Police Officers Association agrees to defer raises for one year, saving the city $820,000."
