On Public Salaries: Situation 1, City of Houston Attorneys

We hear a lot these days about public sector salaries exceeding their private sector equivalents. A lot of those stories are about federal employees and they are being refuted along the way by other organizations, as you can see in this Washington Post story.

Our concern is the public’s perception about the salaries and benefits of public employees at city and local levels (counties or special districts). We find that comparisons at these levels are difficult to make.

For instance, there are no private sector animal control department positions, so how would you compare those salary scales? We don’t know. And there are a lot of similar type of city positions that would not compare well in an honest apples-to-apples sampling to private sector equivalents.

But what we do know is that there are a few jobs in public employment that do have some comparisons in the private sector. Take for example city attorneys:

The city of Houston, currently the fourth largest city in the United States, provides a spreadsheet on the salaries of its employees here. We used that information to do a little number crunching for the salaries of city attorneys. As you can imagine, there are many levels of city attorneys in the fourth largest city in the United States, all with very specific job descriptions and qualifications criteria, a situation which really defies our capabilities for pure apples-to-apples comparisons with private sector attorneys. The work is different.

But if you consider that the highest paid city attorney position has a salary cap of $221,338 it's pretty easy to guess that this person is making far less than they would in the private sector. There's no doubt that the Houston mayor engages in a pretty exhaustive search for an attorney best qualified to advise and litigate for the fourth largest city in the country. It’s our guess also that the person is very qualified from a legal perspective, has a long record of success in either private or public sector, and is capable of handling very high profile matters in the courts and in the political arena.

So what would a person of that stature earn at say, Vinson & Elkins, or Baker Botts or Giuliani LLC? The Glass Door website, where people can anonymously report their salaries, reports that a first year attorney at Vinson & Elkins receives $160,000 and 8-year “veterans” receive $249-271,000. That’s not too hard to imagine as true. We can only guess that partners earn well in excess of $500,000 per year. Compare that to ranges in the chart below, which shows the pay scale for all the levels of city attorneys in Houston:

So essentially, based on the chart, attorneys who choose public service know that they will earn much less in comparative pay to those who go into the private sector.

If a top notch attorney has the option of spending ten years at a V&E, earning $5 million in salary or the city of Houston, earning $2 million over that time, which organization will attract the best attorney? The public sector employer is asking the person to forego up to $3 million  in earning potential. That same dynamic plays out for every single person represented on the chart. What is the proper level of compensation for those persons for their retirement?  

We don’t really know the answer to that question, as it is something that the city and V&E would work out with the person. But the contrast in private sector versus public sector employment salary ranges and their effects on a person’s retirement security are fairly obvious – it’s better to be in the private sector!

As a final note, the city attorney for Houston is currently David Feldman, a former partner at V&E and managing partner of his own firm, Feldman, Rogers, Morris and Grover, LLP. It’s easy to assume that Mr. Feldman did not take the City Attorney position to make money, or to earn retirement benefits. He did it out of a sense of duty for service to his city. Which is a calculation that most public employees make as well, despite the sacrifice. – Max Patterson

Private Sector Employers Outpace Public Employers in Retirement Benefits Paid for Decades

We were digging around the Employee Benefit Research Institute site the other day to see what they offered in comparing public sector and private sector retirement benefits in terms of total compensation.

In case you don’t know them, the Employee Benefit Research Institute is a non-partisan research organization that uses a wide range of research and data to compile reports about retirement benefits in the United States. The EBRI Founders are executives from some of America’s leading companies for executive recruitment and compensation – they aren’t pushing political agendas. Thus we encourage those of you who are serious about understanding the trends and dynamics surrounding pensions in the private and public sector to spend a lot of time on this site.

Anyway, in our search for comparison data, we could not find one particular study that directly answered our question. But in rooting around we saw that the January 2009 study, “Where – and How Much – Do Employers Spend on Compensation?” had data showing how much employers spent on their employees’ total compensation for the past four decades through 2007. The study went one step further and broke out the retirement benefits paid by private and public sector organizations.

We did a little number crunching ourselves by pulling the gross retirement benefit numbers paid for employees by state and local governments and comparing them to the retirement benefits paid by private employers. The key was calculating the rate of increase for each by decade. (Comparing the dollar amounts themselves wouldn’t really meaningfully demonstrate anything due to the differences in size of the private and public sectors.)

So what did we find?

Private sector employers have increased their spending on retirement benefits (excluding Social Security) at a faster rate of growth in three of the last four decades (through 2007).

In only one decade, from 1980-1990 did public sector employers far outpace their payments for retirement benefits over those paid by private sector employers. (The 1980s were a fast growth decade in general, recovering from economic doldrums in the 70s, and it’s likely that private sector employees’ regular pay accelerated more quickly than public sector employees pay did. But that’s speculation and are neither here nor there in relation to this discussion.)

Our number crunching effort can be seen in the chart below. Pay particular attention to the rate of growth figures.

What should we make of these numbers?
 
Well, they disprove the notion that the retirement benefits paid to state and local government are excessive by comparison to the private sector. They simply aren’t, and they haven’t been.
 
These numbers indicate the opposite, that state and local government employers need to do more to keep pace with private sector employers for retirement benefits that attract quality employees!

We doubt that cities will want to hear that as they struggle with their budgets during this economic downturn, but these numbers take steam out of the politically fashionable argument du jour that since the private sector is doing it the public sector should be doing it too. – Max Patterson

Ft. Worth Demonstrates Flexibility in Texas System of Local Control of Public Employee Pensions

On Tuesday, the Fort Worth Star-Telegram carried a story noting how the City of Fort Worth will be adjusting its employees’ pension benefits to meet some projected shortfalls. The city’s actions demonstrate the remarkable flexibility that all Texas cities possess when considering funding and meeting their employees’ pension promises.

Not all cities are finding themselves in the same situation as Fort Worth – in fact most Texas cities are not. But when one city has a problem, it’s localized. Other pension systems around the U.S. aren’t built this way, and the negative headlines in the national media pay testimony to their failures. Despite its problems, Ft. Worth took big steps toward recovery this week. They should be applauded for the way they handled it.

The Texas system enabling local control of public employee pensions should be applauded as well. It works. – Max Patterson

Social Security and Public Employees in Texas: A GAO Report Provides Validation

Shortly after we hit the “Publish” button on our previous blog we came across a U.S. Government Accountability Office report that offers validation of our statement that “Many public sector employers and employees do not pay into the Social Security system.” We have an update for what “many” means.

The report, “Social Security Administration: Management Oversight Needed to Ensure Accurate Treatment of State and Local Government Employees,” says that 53 percent of public employees in Texas would not have Social Security benefits available to them because they don’t pay into the system during their years of service to municipalities.

The report provides a number of additional background points and factoids that interested public pension observers should know. Here are some introductory excerpts about the federal government’s relationship to Texas’ public employees, present and future:

When the Social Security Act was passed in 1935, state and local government employees were excluded from Social Security. As a result, some state and local government workers who were not covered by a retirement system were left without benefits when they retired. To help these employees, in 1950, Congress added section 218 to the Social Security Act allowing states to enter into voluntary agreements to provide Social Security coverage to certain state and local government employees….Within a year of this amendment, about 30 states had executed section 218 agreements with the Social Security Administration.

Subsequently, additional amendments to the Social Security Act changed Social Security and Medicare coverage for state and local government workers. Starting in 1991, the Social Security Act required all state and local government employees to be covered by Social Security if they were not covered by a qualifying state or local retirement system.

More recently, Social Security has projected future financial shortfalls in its programs. According to Social Security’s Board of Trustees, the program’s annual surpluses of tax income over expenditures are expected to turn to cash flow deficits this year [2010] before turning positive again in 2012. In addition, all of the accumulated Treasury obligations held by the trust funds are expected to be exhausted by 2037. Once exhausted, annual program revenue will be sufficient to pay only about 78 percent of scheduled benefits in 2037 (and gradually declining to 75 percent by 2084), according to the Social Security trustees’ 2010 intermediate assumptions.

Many options have been proposed to help assure the financial stability of Social Security, among them requiring all newly hired public employees to participate in the program. Although this approach could improve Social Security’s finances at least temporarily and would simplify Social Security as it pertains to public employees, we have previously reported that such a change could also result in increased costs for the affected governments and their employees.[emphasis added.]

On page 11 of the report, the GAO provides the following map summary, showing that Texas is among 5 states who has less than 50 percent of its state and local government employees enrolled in Social Security:

A chart on page 46 of the report goes into more detail about Texas:

There are a number of observations that we will make about this report and the relationship of Social Security/Medicare to Texas’ public employees in future blogs. – Max Patterson

Heartland Institute Report Requires Careful Reading and Discerning Consideration

Readers of the “The State Public Crisis: A 50-state Report Card” developed by Eli Lehrer and Steve Stanek of the Heartland Institute should view its assertions, findings, and recommendations with skepticism, or at least acknowledge the need to do some additional research.

First, neither Lehrer or Stanek are trained economists or actuaries. Both have substantial political or media backgrounds, but neither states any experience that’s directly involved with pensions. That’s a red-flag in my view, right from the start. (Their bios are included at the bottom of this entry.) There are people who dedicate their lives to understanding pensions and their public policy complexities but Lehrer and Stanek are not such people. They are treating this complicated subject from a very political viewpoint.

Second, their report is so general as to be dangerous and misleading. Across the United States, and especially in Texas, there are so many types and varieties of pension systems that the broad-brush, sky-is-falling approach taken by Lehrer and Stanek throughout their report is more misleading than it is informative. The report’s first paragraph is enough to demonstrate the hyperbole: “Taxpayers in almost every U.S. state owe large and possibly unpayable (sic) retirement pensions to the men and women who work for the government. The deep recession of 2008-2009 has moved up the day of reckoning, requiring immediate action by many states to avoid financial catastrophe.” Really? That certainly is not happening in Texas.

Third, more facts are weighing against their prescription to “Move to Defined Contribution Plans.” They make some statements in that section that are false or coming under increasing fire.

For instance, they say “Defined benefit plans put virtually no risk on the workers or retirees, because taxpayers must make up any funding shortfalls.” This is not totally true. Many public sector employers and employees do not pay into the Social Security system, so there is considerable risk to the employees, as they must rely on the performance of their pension system. And any expected shortfalls fall on the back of both the employees and their city or municipal district. Most employees have seen their personal contribution rate gradually increase over the years and many in Texas are at 8 percent or more, which is higher than the 7.62 percent contribution for Social Security.

Here’s another statement that deserves exploration: “the amount available for retirement (in defined contribution plans) depend on how much money was set aside and the success of the investments. The risk is on the workers.” The reason they offer is “the number of U.S. businesses that offer defined benefit plans has dropped to about 38,000 compared with more than 114,000 in 1983, according to the IRS. Yet they remain the standard benefit for government.”

A couple of problems here. Private businesses have moved to defined contribution plans of various sorts because of tax breaks they receive from doing so. This policy change resulted from concerns about some companies’ use of retirement investments to operate their own business. Public entities do not receive any such tax breaks and they weren’t using the retirement funds as part of their general fund. If anything, many public pension problems that exist today result from cities that hold back their contributions to their employees’ plans. In that sense they are operating their city with funds that should be contributed to the pensions. We advise against this practice as it does put extra burden on the plans. But that’s another blog for the future!

But finally, our readers should know that there is increasing concern – among private sector employer themselves – about the ability of defined contribution plans to provide retirement security.

As Stanek and Lehrer note about defined contribution plans, “the risk is on the workers.” Increasingly, private sector employers are seeing that their employees are not up to the task of taking on this risk, whether it’s their voluntary levels of contribution or their ability to see investment results that would lead to retirement security.

A 2009 study of 401(k)s by Deloitte – available to Stanek and Lehrer but not cited, if it was reviewed at all – indicated that only 14 percent of private sector employers feel that ‘most’ employees will be adequately prepared to retire, while 19 percent cite “very few” and 67 percent feel “some” will be prepared. All the numbers show increasing concerns about 401(k)s ability to deliver retirement security. Granted, the $20,000-$30,000 average yearly public sector benefit (depending on the system and years of service in Texas) is not much better in terms of providing retirement security. But let’s stick with Stanek-Lehrer's point that public employees should be moved to an even worse system.
There’s no doubt that private and public sector employers are concerned about the state of their employees’ pensions. The Deloitte study finds that 37 percent of private sector employers are considering conducting a retirement readiness assessment in response to their concerns. And many public pensions in Texas have financial counselors dedicated to helping their system retirees with the financial situations.
These are our top-line observations of the Stanek-Lehrer report card. Based on that, we don’t feel that digging deeper into their details of their report will amount to any more than wasted time. – Max Patterson

Bios for Stanek and Lehrer as Provided in their Report

Eli Lehrer is senior fellow at The Heartland Institute and national director of its Center on Finance, Insurance, and Real Estate. Lehrer played a major role in founding the smartersafer.org coalition, a coalition of taxpayer, environmental, insurance, and free-market groups dedicated to risk-based insurance rates, mitigation, and environmental protection.

Prior to joining Heartland, Lehrer worked as speechwriter to United States Senate Majority Leader Bill Frist (R.-Tenn.). He has previously worked as a manager in the Unisys Corporation’s Homeland Security Practice, senior editor of The American Enterprise magazine, and as a fellow for The Heritage Foundation. He has spoken at Yale and George Washington Universities.

Steve Stanek is a research fellow for The Heartland Institute and managing editor of Budget & Tax News. He has been a freelance writer and editor since 1997, producing marketing materials and business articles for corporate clients, as well as feature articles and news stories for Chicago-area newspapers, magazines, and business publications. Before becoming a freelance writer, Stanek worked nearly 11 years in corporate communications. He also has worked as a newspaper reporter and editor at weekly and daily newspapers in Illinois.

When 401(k) Is Not OK – Why Defined Contribution Plans Aren’t a Good Idea

It’s increasingly common these days for members of city councils to consider changing police, fire and municipal employee pension plans from Defined Benefits (DB) to Defined Contributions (DC), those similar to private sector 401(k)s.

The council members – usually the newer ones making a name for themselves early in their political career – offer many reasons for proposing this change but key among them is that most taxpayers don’t have defined benefit plans themselves. It’s a ‘level the playing field’ sort of politically-charged approach.

It’s also rash and ill-advised. There’s a significant body of evidence that show DC plans aren’t a good idea for employees, for many reasons. Key among the concerns right now is the fact that 401(k)s aren’t working out very well for private sector employees. If the goal of private and sector employers is to improve retirement security for all workers, 401(k)s aren’t getting the job done.

Take for instance the findings of a recent study on 401(k)s and the real-life evidence from a state that tried such a switch in 1991.

A Deloitte study, the “Annual 401(k) Benchmarking Survey: 2009 Edition,” reported that 19% (up 2 percentage points from the previous year) of private sector plan sponsors believe "very few" of their employees will be financially prepared to retire. As a result, more than 60% of the employers are considering adding features such as re-enrollment to help increase deferral rates while others plan to conduct a retirement readiness assessment. If the 401(k) is the way to go, then why are employers taking such strident measures to make it work?

In West Virginia, the Teachers' Retirement System (TRS) closed their DB plan to new members in 1991. All new hires were offered a DC plan. This decision resulted in the loss of new members, making it more difficult to finance their unfunded obligations. Because the DC plan was not reducing employer costs nor providing an adequate level of retirement income, West Virginia Legislature reopened the DB plan for public school teachers. In June 2008, when given the choice to return to the DB plan, 78% of those in the DC plan chose to switch.

As the issues of converting to a DC plan continue to surface, hopefully more public employers will realize that a DC plan may not be the solution. We’re going to touch on this issue in many future blogs, but 401(k)s aren’t okay for public employee retirement security.

Fact vs. Fiction in the Public Employee Pension Debates

As the representative of public employee pensions around the state, TEXPERS is responsible for monitoring the media and helping them to do their jobs informing the public by providing the most accurate information.

Since the administration and decision making for pensions is really a very complex subject, we can’t make the assumption that everyone has all the right information all the time. So bear with us as we try to clear up a few misperceptions we’re seeing in the media.

Defined Benefit (DB) vs. Defined Contribution (DC) Plans
In our view, traditional DB plans are better for the taxpaying public than defined contribution plans. While some critics claim that DB plans put more burden on the taxpayer, studies have shown the opposite. The 2008 study from the National Institute on Retirement Security demonstrates how DB plans deliver the same level of retirement benefits, at half the cost of DC plans. The study showed that DB plans:

1. Avoid the problem of "over-saving," resulting in a 15% cost savings;
2. Maintain an optimally balanced investment portfolio rather than typically down-shifting over time to a lower risk/return asset allocation, resulting in a 5% cost savings; and
3. Achieve higher returns, resulting in a 26% cost savings, because of professional asset management rather than individual investment decisions.

Performance
Yet another study shows that the public employee pension plans in Texas are doing their job in delivering results on behalf of plan members over the long-term. And 2010 results are positive as well. Both bode well for cities, in that strong investment results maintain or reduce the contributions which cities need to provide to their employees’ pension systems.

(As an aside, strong plan performance has tended, over time, to persuade cities that they could get away with lower than necessary contributions to funds. That ‘underfunding’ makes it very difficult for funds to keep pace with the actual dollar value of the returns needed to fund their employees’ retirements. In other words, good return numbers are one thing, but having the amount of funds available for the benefits due to retirees is another matter. Keep that in mind as you read on, about performance:)

In late 2009 we asked 65 TEXPERS’ members to provide their returns for 1-,3-, 5-, 10- and 15-year periods ending in September 2009. We received 55 completed surveys, 48 of which had the five-year quarterly return history necessary for inclusion in our analysis. The member systems which responded represent $20 billion in assets under management.

What we found was that, for the 15-year period ending September 2009, the respondents’ composite investment return was 8.3 percent, compared to the average actuarial investment return assumption of 8.2 percent. The systems were meeting their obligations to retirees, net of expense, which was a pretty good showing, considering the awful markets in 2001-2002 and again in 2008-2009.

And the news has gotten better, in terms of plan performance. Some of the bigger plans in Texas have showed strong market gains in the intervening months since September. For instance, for the 12-months ended June 30, 2010, here are some noteworthy increases:

• Austin Firefighters Retirement Fund 11.97 percent
• City of Austin Employees Retirement System 15.73 percent
• Dallas Employee Retirement Fund 18.74 percent
• Fort Worth Employees’ Retirement Fund 13.41 percent
• Houston Municipal Employees Pension System 12.2 percent
• Houston Police Officers Pension System 13.67 percent
• Houston Firefighters' Relief and Retirement Fund 17.30 percent

Differences in Compensation and Retirement Benefits
The message line of the day for some politicians and media organizations is that public sector employees are doing better than the private sector employees who pay their salaries. What’s important to note is that government employees earn less than private sector employees throughout their careers. Bonuses don’t exist in the public sector. Raises are usually confined to costs of living adjustments. In tight times COLAs are abandoned.

As you consider the amounts of benefits that public employees receive, consider that at least 25 percent of public sector workers don’t receive any Social Security benefits. Many do not pay into the Social Security system during their years of public employment, so the yearly benefit from their cities is the majority of their retirement pension.

We have come to learn that the average annual pension benefit for retirees in The City of Fort Worth is $30,924. According to the Employee Benefit Research Institute, the lowest income groups are defined as those who earn less than $31,000.

We’ll add more blogs that demonstrate the differences between public and private sector employment so that Texans have a well-informed view of what is going on. - Max Patterson

TEXPERS Outlook Newsletter Notes Recent Pension Legislative and Regulatory Moves

Our May issue of TEXPERS Outlook newsletter contains several stories of interest to those who follow pension activities.

I think one of the most interesting story is about new guidelines that the Government Finance Officers Association recently adopted on pension governance. The GFOA works to enhance and promote the professional management of governments for the public benefit by identifying and developing financial policies and best practices and promoting their use through education, training, facilitation of member networking, and leadership.

Specifically the GFOA’s report recommends that state and local governments establish rules of governance for their post-retirement benefits systems and define the key elements necessary for trustees and fiduciaries to fulfill their responsibilities. In my opinion I think a lot of our member pension systems already have such guidelines in place. They are available here.

As I hinted at in my previous blog, Texas pensions do a lot of this already. Just look at that 2005 document of the Lubbock Fire Pension Fund that was discussed previously. There’s a lot there and I think that’s typical of most if not all the TEXPERS members. – Max Patterson

Local Control: The Foundation of Texas Public Pension Funds

We want our readers to have a good foundational understanding of what TEXPERS is and who we represent.

TEXPERS was founded in 1989 as a voluntary nonprofit educational association. Our members are the trustees, administrators and participants of public employee retirement systems in Texas, as well as professional service providers, employee groups and associations engaged in or interested in the management and financial soundness of those systems. TEXPERS consists of 84 retirement systems, 9 employee groups, 180 investment professionals. Our members manage the money for retirement hopes of more than 420,650 active and retired participants.

It’s important that you know and keep in mind that TEXPERS does not manage money! Instead, our members, spread out across this great state, oversee the management of the money and the administration of benefits of the retirees in their cities, counties and other public entities.

TEXPERS provides fiduciary education to plan members for their administration of benefits and selection of investments on behalf of their members. Instead of a centralized organization managing the money of public employees, our state has largely chosen to give local entities control over the investment activities and benefit levels for their retirees.

This makes sense from the perspective of local control, of keeping decisions close to the people they impact most.

For instance, most if not all of the funds have boards that are comprised of several members from the community in which the organization resides. To pick one name, the Lubbock Fire Pension Fund manages the retirement money of firefighters in Lubbock. The firefighters occasionally vote not only on the members of that Board but also changes and modifications to their pension plans. The Board is then responsible for working with their elected city representatives and the Texas state legislature to make sure those changes are allowed.

To see this in action, take a look at this link which will take you to the results of a vote the Lubbock Fire Pension Fund conducted in 2005. In just reading the first page it is neat to see that some 231 of 278 members of the pension fund participated in this vote on issues directly affecting them, including the definitions of service, final average pay that determines the levels of benefits, and the maximum service retirement benefit, and many other stipulations.

At other times the members of local funds will vote on the Board members who determine those issues. And city governments usually appoint a couple of their own people to the Board as well, often the city treasurer or finance director and a member of the city council, or a former member as it may be. This structure creates a certain check and balance system that we will discuss in more detail in future blog entries.

But it’s important to know that the fireman or police officer on the street has the ability to get involved in issues affecting their own retirement money, by voting directly on matters that are presented to them or by voting on who serves on their pension plan’s Board of Trustees.
It’s a model that has proven effective and that creates a lot of theoretical and practical effects on governance. We’ll be discussing those in future entries. – Max Patterson

Introduction to the TEXPERS Blog

Welcome to the Texas Association of Public Employee Retirement Systems (TEXPERS) blog. I am Max Patterson, the executive director of TEXPERS, and I will be one of several authors contributing to this blog.

In coming weeks and months I will be joined by members of the Board, experts in pensions and investments, and other guest bloggers of various backgrounds to discuss issues of importance regarding the pension systems for public employees of Texas, particularly those employed by police and fire departments as well as municipalities and other districts.

Our joint purpose will be to provide readers with more information about the functioning and performance of Texas public pension systems. Along the way we’ll examine some of the issues that are coming out in the news, both here in Texas and in other states. Our primary focus will be Texas, of course, but so much of the national news seems to focus on problems in other states. We hope to provide a bit of a reality check on those issues, as some of those reports seem to cause confusion and anxiety here among plan members, politicians and the general public.

We don’t want confusion and anxiety when it comes to understanding the good things that are being done at Texas public employee pensions.

Our 80+ member systems work hard to educate their trustees and staff members in their fiduciary responsibilities. They work extremely hard to find the right investment mixes to assure the greatest return with the least risk. They dedicate a tremendous amount of time to the efficient management of their funds and their retirees’ benefits. We owe it to them to clarify issues that are confusing to the media and the general public.

That’s the simple intention for our blog, greater understanding about the Texas public employee pension system. We invite you to come along, learn a little and engage with us in clearing up areas of concern. We’re writing this blog for you, so we hope you’ll engage and question us when things get a little opaque, or comment when we need an extra fact or opinion. This is your blog as much as ours. All Texans win with strong public employee pensions in Texas. Come along and enjoy! --- Max Patterson