Defined Benefit vs Defined Contribution Pension Plans

Comment Up

City Manager, Susan Stanton
Now on its 3rd Liaison, Stanton was the first liaison
to the Finance Advisory Board

Sad but true--not all members of the City Commission know what Defined Benefits and Defined Contributions are when it comes to Retirement Plans within our City. Very few residents understand it either. This is one of the biggest ticket items that the City faces in its budget and the one that has aroused Lake Worth Union employees to demonstrate at City Hall.

FAB member, Bill Thrasher, firmly believes in the Defined Contribution Plan and said to the Commission on Wednesday night, "Know the consequences of a Defined Benefit Plan," the plan that is in effect now. The Mayor said that there had to be a reason why employees were demonstrating at city hall at every meeting. Well, yeah. The City is asking them to contribute to their retirement just like employees in private industry do rather than the city picking up the entire tab that it no longer can afford.

City Manager Susan Stanton said last year that she wanted a reduction of $1,816,000 by suspending the General Employee Defined Benefit Pension Plan and adopting a Defined Contribution Plan. This idea is still in place. She also said, "The current compensation levels as defined in the three collective bargaining agreements need to be evaluated and realigned with the community's general ability to pay for those benefits."

Recommendations have been made to suspend the general employees Defined Benefit Pension Plan and adopting a Defined Contribution Plan with the City of Lake Worth contribution rate at 5%. The Unions are screaming bloody murder and have filed multiple law suits. When they file a law suit, that is a suit against you, the taxpayer, who in a majority of cases does not even have a retirement plan of his own.

In a nutshell--

DEFINED BENEFIT PLAN

The actual total cost of a Defined Benefit Plan is not easily calculated or observable and therefore requires that regular actuarial studies be prepared and paid for by the plan provider. This study indicates how much money is necessary to adequately provide future retirement payouts to each qualifying employee. Within each defined benefit plan are factors or benefits that affect the financial solvency of that plan. As benefits are enriched, so are the necessary amounts of money that must be provided to the plan. Typically, all money accumulated for the plan is invested in various types of investment instruments. However the investment instruments perform, so goes the possible employer contributions. When the yield of the investments is very positive, the less the employer’s contributions may be. The opposite is also true. When the yield of the investments is poor, the more the employer’s contribution must be. In a defined benefit plan, the employer is the risk holder.

In a defined benefit plan, once a benefit is established, it is established for the life of the entity unless closed and capped. Also associated with defined benefit plans is a compounding of financial burden for the employer. When one employee retires, that person is usually replaced by another employee. The cycle of financial provision begins again for each employment position.

DEFINED CONTRIBUTION PLAN

In a Defined Contribution plan, there is no guarantee by the employer of the amount available at retirement. Contributions from the employer can be augmented by the employee contributions, if that employee chooses to do so. The investment risk and investment rewards are owned by each individual/employee/retiree and not the sponsor/employer. The amount of the employer’s contribution can usually be changed, up or down, by a simple majority vote of the governing body. In budget crisis the contribution percentage can be lowered. In budget comfort, the contribution percentage can be increased. It is this variable option that causes most employees to be very opposed to defined contribution retirement plans.

Also of interest is the reality that the different types of retirement plans directly affects the cost to the governing body, whether or not the retirement plan exists internally or externally. For example, if the governing body contracts for a particular service with an outside vendor that utilizes a defined benefit plan, there is a high probability that the cost of the service being provided will be higher in order to fund the vendors defined benefit plan.

See the Table that describes the Comparison of Traditional Defined Benefit with Traditional Defined Contribution Plans.

In a dire situation, (financial urgency) the City is now in the process of formulating its new Budget for 2011/2012. Our Lake Worth Budget is being cut while pension costs continue to rise and squeeze other city priorities. The shifting of costs of fire/rescue to our ad valorem is being discussed along with increasing fees to the residents in order to guarantee revenue. All the while, union members continue to protest, unwilling to take any adjustment to their cushy retirement benefit, with the resident taxpayer footing their bill.

When Susan Stanton first arrived, she mentioned outsourcing as a good idea and suggested doing it where practicable. I was against this idea then as it would affect our employees. As they refuse to cooperate and face reality, is it time to start looking at outside management companies to fulfill the needs of our City operations?

Bill 1021 that prohibits the automatic payroll deduction of union dues from government workers' pay .

True to form, Jeff Clemens voted NO on House Bill 1021.
He also introduced a Bill (HJR 1407) to allow people to use marijuana for medical purposes. If passed, it will go to the voters in 2012.