Shelby labor attorney defines township pension picture
Posted February 11, 2013
SHELBY TOWNSHIP — To kick-start progress on the township’s top priority for two years running, Shelby Township Labor Attorney Craig Lange outlined the costs of retirement plans available to township employees.
Township Supervisor Richard Stathakis said the top priority, which was agreed upon by residents, department heads and the Board of Trustees, of addressing police and fire pension funds that are $26 million underfunded is key to ensuring that the township is “a fiscally viable community.”
“The hope is that, by tackling this problem head-on, Shelby Township can avoid the hardships faced by neighboring communities that must choose between cuts in service, layoffs or tax increases to simply balance their budgets,” Stathakis said while introducing Lange at the Feb. 5 Board of Trustees meeting.
Lange defined the differences in the two plans, a defined-contribution plan held by the township’s general employees, and the defined-benefit plan, which is held by police officers and firefighters.
“I’ve been working with public sector pensions for 35 years, and over that time frame, there has been a significant number of changes in those plans,” Lange said.
Lange said the defined-contribution plan mirrors the traditional 401(k) plans common within the private sector and poses less financial responsibility by the township.
“Shelby Township agrees to contribute a particular amount of money, a percentage of pay into a retirement account on behalf of our employees,” Lange said. “Currently, that amount is 10 percent of their salary, which goes into their account. Each year after (retirement), the township’s liability and risk is ended.”
He outlined defined-benefit plans as more costly and a greater financial risk to employers.
“We guarantee them that, when the patrol officers, the command officers, the firefighters retire, they will be provided with a particular amount of pension annually, irrespective of what happens with the investments,” Lange said of the township’s current defined-benefit responsibilities.
“In other words, the risks of loss in these plans falls upon the township when investment turns south or there is underfunding costs, perhaps by assumptions that are not met. In this case, whether or not there are sufficient funds to pay these moneys that goes to the police or fire, the risk totally lies with the public employer.”
Lange said that, under the defined-benefit plan, employees contribute “approximately $1,735 dollars per year of employment” toward their retirement, which is valued at roughly $2,265,000 following 25 years of service to the community.
“The township … currently pays 42 percent of salary into the defined-benefit plan; that means, for each dollar of salary that is paid to a member of these bargaining units, the township also pays 42 cents into the pension plan,” Lange said.
He said that, if the police and fire contracts were to switch from a defined-benefit plan to a defined-contribution plan, it would trim the township’s financial commitment to an individual employee’s retirement fund from 42 percent of his or her salary to 10 percent.
“Were the township to have a defined-contribution plan in line for these fire and police unions, it would look a little different,” Lange said. “The employee contribution would still be 5 percent per year.
“Over a 25-year career, they would still put into a defined-contribution account $125,000,” Lange said, citing an example for an employee with a $100,000 salary.
“Taxpayer contribution, however, would be 10 percent of salary, rather than the current 42 percent,” Lange added. “There would be no guaranteed annual benefit to the employee.”
Lange cited statistics from the U.S. Department of Labor to outline a drop of roughly 50 percent in the number of defined-benefit plans offered nationwide between 1975 and 2010, due to cost.
“The private sector has gone a long way in terms of recognizing the costliness associated with defined-benefit plans and the substantial risks that lie on the shoulders of employers when you have such plans,“ Lange said
And he said that those same factors are at play in Shelby Township.
“There has been a real significant turn in the retirement plans offered to employees, moving away from a defined-benefit plan and into the age of defined-contribution plans, which is the direction I believe the Township Board is urging the township to take as it progresses into the future,” Lange said.
Stathakis confirmed the plan is something that the township is working to address as it negotiates labor contracts with the unions that currently receive defined-benefit plans.
“These programs have never been viable, even 30 to 40 years ago when they were first adopted,” Stathakis said. “We have to bring some sanity to this $26 million pension problem.”
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