Although the progression of Detroit's bankruptcy has loomed large in the news, the issues of escalating health care & legacy costs that has driven Detroit's fiscal woes over the past several decades is not unique. Saginaw County commissioners & administration have been grappling with a projected $2 million deficit for the past two years, which this year was maneuvered down to $900,000 through the use of budgetary tools such as increasing fees, reducing or eliminating services, such as the Microfilm Department in the Registrar of Deeds office, and also amazingly offset by the 'discovery' of $577,525 of eCommerce money from 2013 by Treasurer Dodak in an online account, which has resulted in a situation whereby $300,000 will need to be borrowed from the County's 'rainy-day' fund.
However, an in-depth investigation by The Review has also revealed that this $2 million deficit also largely mirrors the amount of Saginaw County's unfunded pension & legacy obligations. Moreover, two auxiliary funds for the Prosecutor and Sheriff Departments have each experienced dramatic deficit increases, with the Saginaw County Prosecutors' office operating at double the per capital cost for other counties similarly sized; and the Sheriff's Department operating at a $556,430 deficit purportedly due to increased costs & contractual obligations.
In 2013 the general fund budget amounted to $44.27 million dollars and consisted of revenue from property taxes comprising $23 million of that figure; with legacy costs comprising around $11 million per year, or approximately 50 percent of the revenue derived from property taxes.Additionally, Saginaw County's current unfunded accrued pension liability is hovering around $60 million dollars, based on current market value according to current County Controller Robert Belleman, who previously served as Bay City Manager.
Framing much of this issue of pension & legacy costs is the issue of 'double dipping', whereby former government employees retire at relatively young ages, receive their pensions annually, and then also go on to retain further government employment and also draw taxpayer funded salaries & paychecks from other jobs.
Although there is not a plethora of data currently available, a recent investigation by the Associated Press showed that in California, New York, Texas, Florida & Michigan, at least 66,000 government retirees also received taxpayer-funded paychecks. At one state agency in Michigan the Executive Director is receiving a $123,000 per year salary and also drawing 80% of a prior salary, as he has for 8 years.
According to former County Controller Mark McGill, who is retired from Saginaw County and now working as Township Manager in Tittabawassee Township, presently there are approximately 70 people involved with Saginaw County government that are receiving pensions and also drawing salaries from other jobs. However, according to Saginaw County Board chairman Michael Hanley, Saginaw County adopted a policy several years ago that prohibits double dipping with county employees. However it is questionable as to whether this pertains to either the Judicial, Legal, or Law Enforcement divisions.
A few examples of how this works can be seen in the form of judicial bailiffs that might be former law enforcement personnel hired independently by sitting judges; or in the case of current Public Works Commissioner Brian Wendling, who formerly worked at the Road Commission, and will be entitled to a pension when he hits his negotiated age and duration of service, along with his salary as Public Works Commissioner. And this is true with any county employee that 'retires' from Saginaw County and then moves to other work in the public or private sector.
With this in mind, a simple thesis was formulated and posed as a possible solution to this structural $2 million dollar deficit: If the legislature adopted measures that prohibited this practice of double-dipping at all levels of government; and assuming the average pension is approximately $30,000 per year, in Saginaw County alone wouldn't this type of policy immediately eliminate the $2 million structural deficit for legacy costs?
Requests were sent by The Review to Chairman Hanley, Sheriff William Federspiel, Prosecutor John McClogan and each member of the Saginaw County Board of Commissioners to discuss details on these topics, with Sheriff Federspiel, Hanley, and Controller Belleman agreeing to interviews.
This is what transpired.
The High Cost of Law Enforcement * What's Driving It?
We began with Sheriff William Federspiel, whom as mentioned earlier, along with the Prosecutor's office, is one of the two County departments that this year was facing a possible $556,000 to $650,000 reduction in service, with dramatic reductions in both road patrol and the county jail; but which through concessions by the County Board of Commissioners allowing the borrowing of $300,000 from the 'rainy-day fund' and discovery of the 'missing' e-commerce funds, resulted in a maintenance of current levels of service.
The first question we posed is why his department was operating at over a half million-dollar deficit?
“It's a little complicated but the easiest explanation is to talk about general fund contributions,” explains Federspiel. “In the City of Saginaw public safety costs the city 62% of their general fund, whereas the Sheriff Department only takes 27% of the general fund. We have two special millages, one passed in 1989 for the Road Patrol and then the public safety millage that was passed a few years ago that at that time generated $4.5 million dollars.”
“Before the Public Safety millage was passed, the general fund contributed right under $2 million dollars to law enforcement; but then after this millage was passed, the general fund contribution was reduced to $416,000,” continues Federspiel. “So while my operating costs didn't change, and even though we have not instituted any raises for employees, because of this special millage, the County came back and said because you're getting this special millage money we are reducing your general fund contribution so that we can dedicate the general fund money elsewhere.”
“That's all well and good, until you come after me,” states Federspiel. “If you talk to the public or the taxpayers they voted to dedicate this additional revenue into public safety, but they did not want to see the general fund contribution go down and given to somebody else. This is where we need to take a hard look. I am not running $650,000 over budget, but by reducing the general fund contribution it makes it look like I'm asking for more money when I am not. Now if some other department in the county is running short, they should lobby and get their own millage. Granted, health care costs are going up and all unions need to work on that; but this is something that gets lost in the shuffle.”
In posing this position to Hanley and Belleman, Chairman Hanley succinctly & directly denies this allegation. “That's simply not correct,” he states. “I was there at the time and approximately 50 positions were slated for elimination in the Sheriff Department and the Board said cuts have to be made; but because these cuts involved public safety, we decided that was too important a decision to make on our own, so we put it to a vote so the public could decide.”
“When the public approved the millage, soon after that we passed a resolution saying we would maintain the same funding level, minus the contribution from the millage, so the funding level would be at $416,000 and the Sheriff knew that all along and supported it. This wasn't about increasing services, but about maintaining those services. His point now is that we shouldn't have made any reduction at all, but that's revising history.”
Adds Belleman: “The Sheriff is not comparing apples to apples. When the millage was approved there was a commitment on the Board to maintain general fund support at this $416,000 level, which was offset by the special millages; and that will increase or decrease depending upon how taxable value changes in the County. The Sheriff supported that policy and actually there are three issues driving his costs: 1) How he's negotiating 3rd Party Administration of Jail heath care, which went up $600,000 between 2010 and 2011 and the cost of which is directly associated with who the vendor is and how we're trying to accommodate physician and pharmaceutical services. We once had a cap of $130,000 on that and he always exceeded that cap, but never liked coming back to ask for more; so now with his new contract they've built that risk and shifted it from the county to the health provider, so now that cap is at $300,000. But there is a premium for shifting that risk when you do this, so we're trying to ascertain how much additional premium is being paid for asking the vendor to assume the risk, and whether its in our interest to have the vendor shoulder it.”
“Secondly, with Road Patrol, there is no general fund support because of the millage, so as that millage comes forward the Sheriff is shifting personnel from road patrol into law enforcement, which is driving up costs, so retiree health care continues to climb rapidly and is being charged out.”
Federspiel maintains while the jail will not have any reductions in beds and the road patrol numbers will not be cut, this year the $48.00 per day it costs to house an inmate will be offset by reimbursement from the prisoner if they have money or revenue coming in.
“They wanted to cut $1.1 million out of my budget, but the state puts mandates into place regarding jails,” he continues. “We have a 538 bed jail and millages are interesting because they are dedicated funds. People do millages because they don't trust politicians to spend their money properly; but to turn around say that because of this public safety millage they are going to trim my general fund contribution subverts the purpose of the millage. They need to look at non-mandated services hard and clear. The services I provide are mandated. City and Township police departments are mandated by charter, but I'm mandated by the Constitution.”
“I'm not mandated to provide over-bed services at the jail, but was able to take grant money that I fought for and use it to purchase specialty scan print machines as a service for other agencies, so they don't have to buy one. I have to fight with the budget every year, which is why I'm targeting vehicles seized from serious drug offenders. I'm not targeting medical marijuana providers, but the serious 'Breaking Bad' type drug offenders to help pay and reimburse us for the services we need. I'm trying to take our tax dollars back one case at a time.”
Federspiel says currently there are 200 officers working Saginaw County between the combined efforts of the County, City of Saginaw, and Michigan State police. “They may not all be on duty at the same time, but we also have to address other townships and villages. We're responsible for 20 townships that have no law enforcement. Personnel is the biggest cost, but our compensation is based on an average of the officers best 3-4 years and based on net pay, as is Saginaw Township. In the City of Saginaw the pension is based on gross pay, which skyrockets the cost. This is what politicians have to look at.”
Addressing the Issue of Legacy Costs
When addressing the $60 million unfunded long-term legacy costs in Saginaw County and the $2 million structural deficit associated with it, one solution posed was for Saginaw County to issue a bond for investors to retire it. However, the looming Detroit bankruptcy situation has demonstrated that bond markets are charging higher interest rates to Michigan municipalities, which is a pivotal reason why the County had to withdraw their recent offer. Given the current scenario, what steps will the County take to close the gap?
“The situation with Detroit has slowed it down, but I think what needs to happen is for the Bankruptcy court to makes some decisions,” explains Belleman. “Right now its an unknown factor and investors do not know how to price risk unless they know what that risk it, so once decisions are made by the court it will help stabilize the situation and give investors more certainly.”
“Two things happened,” he continues. “It took treasury 22 weeks to approve our application and when the Board was given approval to proceed interest rates in February were around 3.6 percent. Then they crept up to 4 percent, which would cause us to incur $6 million in additional interest cost, which we felt uncomfortable about doing. Treasury bills are slated to decrease later this year, which give us more room for investor risk and potential gain, so we're monitoring the situation and looking to go back out with the bond later in the year.”
But with a majority of market returns at 2-3% and many lower, it currently takes a $1 million investment portfolio for a person in the private sector to derive a $20,000-$30,000 pension income from their investment should they be able to retire. Obviously, private citizens have had to adjust to the realities of the current economic climate, moving forward in life without such guarantees, so why should this not be true for government employees as well? Obviously this current system is unsustainable, so what does the county propose to address this situation?
“It's a very troublesome situation and we have not had a defined benefit program in this agency for 17 years,” reflects Federspiel. “We operate on defined contributions with the county pitching in a small percentage which we can match and it goes into a 401K, so everything is funded. To suddenly say we have $60 million in unfunded liabilities I find incredibly disturbing and you'd probably have to go back to former controller Fred Todd to find out how things went sideways. Most agencies have defined benefits like we have as opposed to defined contributions; and there are no double dippers in my department. I would rather give a job to someone coming out of the Academy - a young officer without a pension then give one to a person receiving one.”
But what about the situation with the City of Saginaw that happened earlier this year when the City approached Federspiel about pulling together a combined public safety plan for the City and County that would both contain costs and avoid duplication of service?
“Two things happened with that,” he explains. “First, I didn't want to put the taxpayers in a bad spot because union contracts were in place. If the city were to arbitrarily say an officer was out of a job they would grieve it, which happened in Genesee County and an arbitrator ruled it was illegal to do. I didn't want to be a part of that. Once their current contracts expire in June we can talk about it, but the last thing I wanted to do was put taxpayers in a bad spot by adopting a possibly illegal position.”
“Secondly is the sustainability issue. Does the City of Saginaw have enough money to fund 90 officers whether they work for me or not? If we were to take on a city contract and then have the Board of Commissioners say they are going to cut my budget, I don't want to be a part of that.”
“I'm not sure how we got to this point because I didn't write the policy,” says Belleman, “and there are recent court cases regarding double-dipping that we're still digesting; but we do have a policy on it and approximately 100 active employees are still eligible for defined benefits, with 540 employees on defined contributions.”
“Plus I would like to comment that sometimes re-employing somebody with institutional knowledge and health care already covered through their prior pension is cheaper and avoids the additional costs of hiring a new person. It needs to be looked at on a case-by-case basis. Many government personnel retire at young ages and then seek secondary employment.”
“Pensions that are set by taking the highest level of salary for three or five years with overtime added in at an 80% level and set up to a .5 multiplier are more an exception than the practice,” comments Hanley, “but it all depends on what is negotiated. We have no defined benefits and its all based on defined contribution now. Bonding what transpired in the past allows us for stabilization of that number, which helps in the budgetary process.”
As for the situation with the Prosecutor's office, Belleman says that he looked at comparable counties and unlike cities there is no perfect comparison out there. “Not everybody has the same population or SEV level of property valuation, so I got a sense of where we stood with Livingston and St. Clair counties and did it per capita and based on that the cost of operation, which is almost double here in Saginaw County. Why that is I do not know.”
“My understanding is that because Saginaw County has a higher murder rate with more serious crimes to prosecute, it drives up the cost,” interjects Hanley. “We have comparison ratios for prosecutions per capita; but the next thing we need is a ratio for prosecutors to prosecutions.”
“As for the Judicial branch of government, that is all determined at the State level,” explains Hanley. “The state pays 100% of the salary for judges that work in Saginaw County, so we pay them but are then reimbursed by the State. I wouldn't be surprised if we revisit the budget again with the next year,” concludes Hanley.
Plus the District court is going to generate about $170,000 in increased fees on certain infractions and late payments, notes Belleman.
Belleman says deriving a solution is far more complex than simply banning the practice of double dipping. “Health care costs are a big inflationary driver,” he explains. “And the hard part is that retirees have contractual relationships and presently we do not have the right 20 years later to revise it. Back in the 1960s when some of these contracts were negotiated, retirees did not have inflationary compensation, so you cannot adopt an across-the-board policy but have to be surgical about it. Plus the new Affordable Health Care Package is still an unknown factor and we don't know how that will come into play; it may well help us and create a situation where we can pay retirees a specific dollar amount and have them go shop for themselves on healthcare.”
Closing Thoughts & Future Solutions
Replacement income vs. deferred compensation. Pensions were intended to provide retirement security, not pre-retirement wealth. To provide security, they should provide replacement income in retirement. Replacement income is not dual income. Pensions were not designed to be "deferred compensation" as some would argue. IRS codes provide plenty of arrangements for deferred compensation, including 457 plans common in the public sector, which limit the annual contributions and thus the total accumulations that can be withdrawn later. That said there are some parallels to consider when evaluating the double-dip phenomenon. We should always think about how we would feel if a corporate employee with a 401(k) plan begins to withdraw retirement plan assets while working for another employer. If the net financial result is the same for a double dipper, then the problem is not with the pension system. Conversely, if a pension recipient receives benefits unavailable through a defined contribution plan, including tax preferences, then suspicions should arise.
A lack of self-awareness. Most public employees feel that they have earned their pensions, but many seem to be unaware of how much earlier they are able to receive substantial benefits than their counterparts in the private sector. It is their entitlement to pre-retirement income that is disputed by the watchdogs. Many of the early "retirees" who double-dip clearly view their pension as deferred compensation and pre-retirement income, not retirement security. They also tend to overlook the gamesmanship that transpires in the pubic pension arena, where workers can transfer service credits from one employer to another and parlay benefits that could never be attained in the corporate world. Portability is one thing; triple dipping is another.
Double-dipping would be much less frequent if public employees were required to work until Medicare or Social Security age before retiring -- unless they take an actuarial reduction in their pension, just like early retirees under Social Security. Such a system would impose a financial penalty on early retirees, which would also reduce the costs of funding the system properly. Then, an employee could supplement her reduced pension with outside income from a second career or a job with a new employer.
Unfortunately, it is difficult to impose such requirements on incumbent employees who view their pension benefits as property rights. Some states have laws making their benefits irreversible once they are vested. However, there are other ways for legislatures to skin this cat, including anexcise tax on double dippers.
For retirees who have reached Medicare and Social Security age, the double-dipping issues are less prevalent. Historically, most workers quit laboring at that point. However, there are new issues that we as a society must face as Baby Boomers reject their parents' shuffleboard retirement paradigm and seek relevance in our society by working in a second career. In most cases, they will downshift to lower-compensated work that gives them personal satisfaction and a sense of involvement with lower stress. What we need to think through is whether the pension should be adjusted in such instances.
Tax the double dippers? Financially strapped states could impose an excise tax or an income surtax on double-dip income, which would be one way to restore funds to the pension system. For example, states could collect a 15 to 25 percent surtax on income received while earning more than 50 percent of the annual pension, or a similar surtax if combined pension and earned income exceeds the employee's previous five years' average income. The latter arrangement would also address excessive pension ratios.
Low-income retirees and those older than 66 should be exempted, of course. I would prefer to see the tax revenues returned to the pension systems, especially if they are significantly underfunded. This would be an example of a tax that produces in insignificant statewide revenue, but serves as an equalizer for public policy purposes.
Federal law imposes a 15 percent surtax on early distributions before age 59 1/2 in qualified defined contribution plans. I'd say that what is good for the goose is good for the gander and that a similar tax should apply to early pension payments that are not actuarially reduced or reflective of a 30-year career. An excise tax on premature pension distributions could be triggered by excessive supplemental employment earnings prior to Social Security age (for state taxes) and age 59 1/2 for federal taxpayers.
Allow a benefit-bump instead. An alternative approach to mitigating the double-dipper syndrome is to reduce pensioners' benefits while they receive outside income, and then permit them to receive a bonus payment later in the form of an increased annuity. The Social Security system has figured this out, so why haven't pension funds? For example, a pensioner entitled to a $40,000 benefit while working a second job could receive $20,000 in a reduced pension while still working, and then receive a pension greater than $40,000 after leaving the workforce altogether. The increased life pension after age 66 would be approximately one-fifteenth of the reduction taken each year, so in this example, a three-year pension reduction of $20,000 annually for double-dipping before age 66 would entitle the her to a subsequent increase of $4,000 annually for life -- thus an enriched $44,000 pension thereafter.
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Aug 29, 2013
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