What I meant at the board meeting when I said "No More Defined Benefits"

When I spoke at the board meeting last Tuesday I spoke specifically about defined benefit plans.

For those that don't know, a defined benefit plan is a retirement plan where the employer (in this case the school district) promises the employee a certain amount per year in their retirement.  No matter how much money is initially contributed and no matter how well or how poorly the investments do over time, the amount the employee gets in retirement does not change, and the employer is responsible for paying it.  These are the kind of plans that we have in the district.

The alternative is a defined contribution plan - these are often referred to in the private sector as a 401(k).  In these plans, the amount that goes in up front is known, but exactly how much the employee gets in retirement is not known.  As anyone with a 401(k) knows, how much they ultimately have at retirement depends on many things (mostly investment returns of the funds they invest in), and if they don't have enough, it is not their employer's problem.

While the private sector in this country has virtually all abandoned defined benefit (and many companies along the way have been decimated by them), in the public sector DB is very much still the norm, including in our district.  The obvious problem is that it is hard for the district to know how much it is going to need in the coming years.  Among other things, you have to make assumptions about how long people are going to live (aka longevity) as well as what the investment returns are going to be.  Often, for political expediency of otherwise, people make unrealistic assumptions about the future.  For instance, I believe that NYS assumes an 8% annual return on the district's assets to cover these pensions (I am not sure about this but I believe it to be true).  As we all know, financial markets have been and continue to be very volatile, and assuming an 8% consistent annual return can be very risky.

So, with this backdrop, I was urging the board to consider engaging with the district's employees as soon as possible, to find other mutually agreeable alternatives to these very risky DB plans.  The key part here is that I believe that under the current New York State laws, the only way to do this is to do it in a mutually agreeable way.  I am not suggesting that we take away teacher's pensions against their will.


So what am I suggesting?  Let me lay it out, bearing in mind that this is meant to be a concept to explore, not a fully vetted plan that is ready to be implemented:

1. All benefits that have been earned to date be frozen.  Whatever an employee has today, they will still get in retirement.  It would be unfair if we were to try to take away something that was already promised.

2. Offer all current employees who are eligible for a DB plan a choice - they can either keep what they currently have today in place and continue accruing their defined pension benefits, or they can switch over to a higher current cash compensation in return for forgoing any future defined benefit accruals.  If they were to switch they would be eligible for a 403(b) defined contribution account (I am not an expert on this but I believe that this is the public school teachers equivalent to a 401(k)).

I think that the key word to focus on here is choice.  No one will be forced in to one plan or the other, but will be given a choice.  Anyone who knows anything about option theory knows that having a choice, versus not having one, can only add value and can never detract from value.  I have been told by some that the various unions in PW will not allow their constituents to have such a choice, but I cannot believe that to be true.  Denying someone this option would clearly be against the best interests of the employees.

Over time the two compensation levels will become well known and well understood, and different employees will choose the one that is appropriate for their specific circumstances.  Obviously everyone's financial situations are different and what will be right for some will of course not necessarily be right for others.  Furthermore, over time, we may be able to develop other variations around these to give employees even more choices.

I fully appreciate that putting this in to place would cost more up front and would therefore require more current outlays and therefore more current taxes.  I fear that this fact will turn-off many of the people who think that the district already spends too much.  I would urge those people to consider though that this upfront investment, if managed correctly, will almost certainly lead to a more predictable and manageable future for the district.  Of the two wild cards that are sinking many school districts because of the unknown future costs (pensions and healthcare) we will be putting a huge dent in one of them.

I would love to hear other's opinions on this.