West Hartford Tackles Pensions

"The question isn't at what age I want to retire, it's at what income." — George Foreman


The Hartford Courant recently reported a story about changes happening in West Hartford and other municipalities about how pensions are being looked at and what changes we may see in their administration.

Spiraling and unsustainable pension costs are beginning to take their toll on town budgets across the state, and across the country (States are also suffering). Town managers and bargaining units are beginning to make some changes and some of the smaller unions are beginning to accept changes that will ultimately set the precedent and have to be taken on by the larger unions as well. It's a reality that has already become the norm in the private sector, and that is the switch from defined pension benefits to a defined contribution plan.

"Future pension obligations are huge issues for West Hartford and other municipalities," Town Manager Ronald Van Winkle said. "The change in the ... contract with school security guards is a change we are making a priority in talks with other union members."

A pension system that pays retirees a guaranteed monthly amount puts pressure on a town, officials say, especially when a falling economy erodes investments that pay those pensions.

...local obligations increase over time as workers retire at higher levels of pay. A decade ago, West Hartford's pending pension obligations were $13 million. Now, officials say, the figure is closer to $25 million.

It's a looming expense that West Hartford and other Connecticut municipalities are trying to retreat from, like deer running from an advancing forest fire.

As West Hartford budgets have come increasingly under scrutiny, even by members of the community, some with extensive business background, it has become quite clear that the way we do contract negotiations and the way in which we structure pensions has got to change. We have in part, had to give up some town services in order to fund and pay for employee pensions. There comes a time when there just is no more to cut from town services without affecting the quality of life, and we can no longer merely raise taxes to compensate for higher costs in current salaries as well as pay for pension benefits. As it stands, our pension funds have been underfunded for a variety of reasons, one of which is a poorer market performance yielding lower fund income. This creates an incredible liability for the town, as taxpayers have to make up the shortfall.

But changes in the way pensions are determined and administered are nothing new.

The changes sought by local government echo changes that American businesses began making in the 1980s. In 2006, almost 80 percent of state and local workers nationwide aged 25 to 64 were covered by a pension, compared with only 45 percent in the private sector, according to data from Boston College.

And 80 percent of those public sector workers with retirement coverage had a defined benefit plan. In private industry, "more than 60 percent of [pension] participants [are in a] defined contribution plan," according to the Center for Retirement Research.

So far, 28 of the state's 169 municipalities have some version of less-expensive 401(k)-type plans for workers, instead of increasingly costly traditional pensions, according to information town Finance Director Chris Johnson said he got from the Connecticut Conference of Municipalities.

Indeed, many municipalities across the country are dealing with the same issue as they struggle with unfunded mandates and shrinking state funding. Connecticut municipalities are beginning to catch on to the switch that the private sector has already embraced for the past 30 years.

Avon was among the first, switching in 1997 from defined pension benefits to a defined contribution plan for all new hires. Currently, 25 percent of the town's workforce is on the old system, and 75 percent is in the new plan.

"Really, it's a generational change," said Bill Vernile, the town's director of human resources. "The town contribution in the new system is a third of the cost of the defined benefit. Our employees contribute 7.5 percent of their pay, and the town matches that. Our expenses are predictable."

Manchester has worked since 2000 to move its employees into defined contributions plans. Some unions have agreed, but not all. Alan Desmarais, the town's finance director, said municipalities statewide are trying to change retirement plans "so the town doesn't have to deal with pensions, and costs are lower and predictable."

The city of New Haven has nine open contracts this year and will "try to make the move into defined contribution plans," said Craig Manemeit, the city's director of labor relations. "We're looking to get out of the pension business and out of uncharted fiscal territory."

In West Hartford, the 15-member guard union's contract — up for a school board vote on Tuesday — bars any new guard hired from enrolling in the increasingly costly defined-benefit pension system.

Instead, new guards will be covered by a less-expensive 401(k)-type plan that could trim town liability by at least 60 percent, makes costs predictable and shifts the investment risk to employees. Guards already in the defined-benefit plan will stay in it.

Other bargaining units up for contract renegotiation should take note and realize that the handwriting is on the wall. There are 10 contracts up for negotiation this year in West Hartford and there is no doubt that pension funding is going to be a major point for the town. With towns like West Hartford currently holding all the risk on pension plans, and revenue streams becoming more difficult, the time has come for unions to realize that the current way of doing business is simply unsustainable. Retirement plans will have to be amended if municipalities are to stay solvent and simultaneously provide for the needs of its citizens.

Additionally, it would appear that the practice of double and triple dipping needs to be addressed. West Hartford currently has two former Town Managers and a Superintendent of schools who "retired" with six figure pensions and who have now moved on to work in other communities making six digit salaries doing similar jobs that they did for West Hartford! And while that may be legal, and it may be what they bargained for and were given, it is certainly not what we can continue to negotiate.

Furthermore, the pension fund that we currently have had not been adequately funded over the years, and that occurred for a few reasons as explained below. That certainly needs to be addressed to make sure that we don't get into a similar situation, or continue on in like manner. Here's a snippet from a Town Council meeting in April 2008 when Mayor Slifka explained why we were $6 million in the hole for pensions:

Until about 2001, we had a 12-year pension holiday, meaning that the town did not contribute money to the pension fund. Why they were able to do that during that time is because for a long period the town had more employees paying into the pension fund than there were retirees to whom we were paying out. That reached a…the shift happened roughly in 2001 at the same time, that was when the stock market dipped, especially following 911 and all of a sudden we were left…we were overfunded in the pension at that point, and we went to being underfunded at that point, which meant we started having to fill that gap immediately. That was the very first budget I worked on and that has been an item that continues to be difficult to deal with. One of the quick ways that you can become one of those municipalities you don’t want to be that gets labeled as being irresponsible is to not fully fund your pension and also your…in these days, the newer item is your healthcare reserves. This year that item is on the pension is 6 million dollars.

Pension negotiation and administration ... it's the next item in municipal spending that truly needs an overhaul. It certainly looks like the time has truly come to accomplish that.