Why is wealthy Westport trying to gut police pensions?

Police in Westport, Connecticut are resisting an attempt to slash their pension and partially replace it with a 401(k)-style plan. Such a move would mess with a tried-and-true system that promotes secure and orderly retirement, in favor of an inefficient one that harms workers with no benefit to taxpayers.

Westport is a latecomer to a trend that appears to have nearly run its course. A few years ago, the Wall Street Journal praised San Jose Mayor Chuck Reed for taking an axe to police and other public employee pensions. Along with Rhode Island Treasurer (later Governor) Gina Raimondo, Reed had become a public face of the pension gutting movement, leading a statewide initiative backed by hedge fund billionaires. Reed and Raimondo, both Democrats, were lauded by conservative think tanks and the Journal for taking on public-sector unions, ignoring the fact that they were courting more powerful interests—the financial industry and wealthy donors.

Similar initiatives followed in Dallas, Memphis, and Palm Beach, among other places. But as the Journal reported last year, in an apparent change of heart, cities that slashed police pensions were later forced to restore benefits or spend millions on retention bonuses in efforts to stem outflows of experienced officers. In Palm Beach, for example, 24 mid-career police officers left in the four-year period after the city cut police and firefighter pensions and partly replaced them with 401(k)-style plans, compared with just one mid-career officer in the previous four years. The exodus of police and firefighters to neighboring jurisdictions caused the city to incur millions in additional training and overtime costs. Five years later, the city reversed course, restoring pension benefits and dropping the 401(k)-style plans.

The pension gutting movement, which relied on shock-and-awe tactics and stoking the pension envy of taxpayers, lost some momentum as EPI and others pointed out that pension liabilities were being inflated for political purposes and that switching to 401(k)-style plans was unlikely to save taxpayers money in the long run. Costs in Rhode Island actually increased after Raimondo halved the state’s already bare-bones pensions and added a 401(k)-style plan—a fact she obscured  by delaying the repayment of legacy costs. Meanwhile, Raimondo, who had co-founded a venture capital firm before becoming treasurer, loaded up on these and other alternative investments before the state was forced to reverse course due to high costs and poor performance.

In addition to providing secure retirements to teachers, police and firefighters after a career of public service, public-sector pensions can be tailored to suit the human resource needs of schools, police and fire departments. Police and firefighter pensions are designed to recruit and retain career-minded candidates for jobs that require significant formal and on-the-job training—and then to encourage these officers and firefighters to retire at relatively young ages in recognition of the stressful and physical nature of these jobs. Westport’s police pension has served these needs well. While there virtually no mid-career turnover, 85 percent of officers are expected to retire between the ages of 54 and 61.

In contrast, with 401(k)-style plans, retirement income and timing depend on the vagaries of the stock market. If Westport slashes its police pension and adds a 401(k)-style plan, it will have trouble easing out older officers during bear markets, but could experience mass retirements during bull markets when labor markets tend to be tight and hiring replacements is more difficult.

Why would Westport mess with a system that works? The police department is tiny and the town can easily afford the benefits. In the 2015-2016 fiscal year, spending on police pensions amounted to just 1.2 percent of the town’s revenues, so even drastic benefit cuts wouldn’t noticeably affect anyone’s tax bill. Westport’s property tax rate is already among the lowest in the state, though taxes are high in dollar terms as would be expected for a wealthy town in a high cost of living area.

A few years ago, however, the conservative Yankee Institute dubbed Westport “an outlier among outliers” in terms of the pension and retiree health benefits provided to police and other town employees. Though this appears to have goaded some of the town’s elected officials into action, it simply isn’t true. Pension benefits in Westport are standard for police officers not covered by Social Security, replacing 50 percent of an officer’s base salary after 20 years and 75 percent after 30 years, with police officers contributing 10 percent of their salaries toward the cost. While these benefits are better than many private-sector workers receive, they only partly compensate for lower public-sector salaries.

Some retired members received more valuable benefits, as is often the case for members of earlier “tiers” in an age of pension cuts. But further cutting the pensions of active members and new hires won’t reduce these legacy costs. And while pension critics sometimes have valid criticisms of pension “spiking” by workers who maximize overtime before retiring in order to boost pension benefits, this isn’t a problem in Westport, where overtime pay isn’t factored into pension benefits.

So how did the Yankee Institute latch on to the idea that police officers and other employees of the town of Westport receive lavish benefits? One explanation is that the high cost of living in Westport makes everything appear pricy, even though the town’s wealthy residents would face much higher taxes if they moved to a bigger and poorer city like Hartford.

Another is that Westport’s actuaries assume an unusually low rate of return on investments (6.125 percent) and unusually high health cost inflation (up to 6.80 percent). This combination inflates the cost of retiree health care by as much as 165 percent compared with estimates using more typical rate-of-return and health inflation assumptions. Lower-than-usual expected returns also inflate the estimated cost of pension benefits by roughly 64 percent compared to a valuation using a more typical rate-of-return assumption. While using conservative assumptions may seem prudent—at least in the case of rate-of-return assumptions in a market characterized by high price-earnings ratios—it’s misleading to suggest that Westport’s benefits are more generous than its neighbors’ when they’re measured using a shorter yardstick.

Moreover, combining conservative assumptions and extending them decades into the future falsely suggests that the cost of retiree health and pension benefits can ratchet up inexorably without the town of Westport (or the nation as a whole) implementing cost containment measures. In reality, employers can and do increase cost sharing and cut benefits when costs increase or actuarial assumptions aren’t met. The Center for Retirement Research at Boston College has estimated that nationwide almost all the cost of the 2008 market downturn was borne by workers in the form of benefit cuts or higher employee contributions. Similarly, state and local governments have steadily reduced their retiree health benefits through cost shifting and other means.

Though we may disagree with some of their assumptions, the town’s actuaries, who are required to adhere to professional standards, are likely acting in good faith in placing a high price tag on pension and retiree health benefits. But this isn’t always the case when attention-seeking politicians and self-styled pension reformers throw out scary numbers. Raimondo, for example, suggested that her state’s pension liabilities should be valued based on the unusually low 4.4 percent rate of return the Rhode Island pension fund earned over a 10-year period that included the financial crisis and Great Recession. If she truly believed this was the expected return on a balanced investment portfolio going forward, she had no business running a venture capital fund, let alone serving as state treasurer.

The increase in unfunded liabilities caused by the financial crisis was exploited by anti-union and anti-government ideologues. A decade later, pension benefits have been drastically pared down and the stock market has recovered, taking some of the heat off public pensions. An audit found that San Jose Mayor Reed had doubled the size of pension liabilities based on no evidence whatsoever in order to justify draconian cuts, and Rhode Island Governor Raimondo was also forced to restore some benefits in a settlement with unions.

But the ideological campaign against public employee pensions continues. The 64 members of the Westport police department, who signed on for what they thought was a career of public service that would be rewarded with a secure retirement, may still pay a price, unless the citizens of Westport realize that that the police force they have come to rely on may be torn apart by shortsighted pension “reforms.” No one likes to feel that they’re overpaying for public services, but that’s not the problem in Westport. The problem is people with an axe to grind playing games with numbers.