Northwest Economic Policy Seminar

Most American workers derive retirement income from three sources: personal savings, Social Security and employer-sponsored pension plans. Yet personal savings rates across the nation are at a low and a nearly-bankrupt Social Security administration cripples our ability to finance the retirement system. The spotlight rests on pension plans as a means to control growing unfunded pension liabilities.

Retirement plans may be classified as defined benefit or defined contribution, according to how the benefits are determined. A defined benefit plan guarantees a certain payout at retirement according to a fixed formula. A defined contribution plan provides a payout at retirement dependent of the amount of money contributed and the performance of the investment vehicles utilized.

Most public sector workers enjoy defined benefit plans, whereas defined contribution plans are more common in private industries. Recently, many argue that excessive benefit levels of public pension plans are a threat to government budgets and state taxpayers. Washington state has built up large unfunded liabilities in public sector retiree health care plans, which are rarely offered in the private sector.

Since its inception, defined benefit pension plans have played an important role in securing retirement benefits for millions of American workers. These employer-sponsored retirement packages pay a defined amount upon retirement based on length of service and final average salary. Eligibility of retirement is determined based on the employee’s age and years of service.

Initially, defined pension plans were intended to promote job stability and a career-oriented mindset because they provide a steady source of income that can protect participants from inflation in retirement. However, the recent trend of states under-funding pension schemes and lagging investment returns has given rise to public outcries for cost-cutting measures, such as privitizing services, cutting staffing levels, overhauling excessive benefit packages, freezing wages and terminating low-value government programs.

The Washington State Investment Board manages investments for 17 retirement plans for public employees, teachers, school employees, law enforcement officers, firefighters and judges. The Board also manages investments for 22 public funds that support or benefit industrial insurance, colleges and universities, wildlife protection and families with members who have developmental disabilities. In 2008, the investment fund that covers pensions of over 450,000 public employees in Washington lost 22% of its value and took a dive in 2009 as well.

Washington State Actuary Matthew Smith warned that delayed and suspended contributions, increased benefits and investment losses have exacerbated the pension problem. He recommends tripling contributions from all employers and the state general fund for the next twelve fiscal years for a 30-40 percent drop in funded status due to investment losses. He estimates it will take ten to twenty years to recover those losses, but without a plan to manage growing obligations and risks, the retirement system as we know it may not be sustainable.

Pension funds, whether state or private, operate on the assumption that investment returns and interest income will provide enough funds to cover the current payments to retirees. The worry is that investment returns will not cover those obligations in the future and the state will be forced to tap the general fund, which is already facing a huge deficit.

The Pew Center estimates that state and local governments now owe at least $1 trillion to public employee pension accounts. The Pew Center also estimates that in Washington state, health care and other post-employment benefit programs totaling $7.9 billion are unfunded. A financial services company, Credit Suisse, pegs that figure at around $10 billion.

News and reports on public sector pension plans attributes soaring retiree liabilities to the following:

Early retirement

Pension formulas

Double Dipping

Disability Claims

Excessive Benefits

Increased collective bargaining ability

These sources of potential savings will be discussed in further detail next week.

The health industry is changing and an urgent responsibility rests upon government to broaden access, improve quality, decrease cost and expand the number of options that consumers may choose from.

In 2008, the United States spent a total of $2.3 trillion on the health care industry – or 16.2% of the nation’s GDP – and shows no signs of slowing. As one of the nation’s largest industries in 2008, the sector provided 14.3 million jobs in about 595,800 related establishments . As the health-care sector expands, demand for labor will rise providing new opportunities for Americans, especially women, who are still more likely than men to choose jobs in education and healthcare .

Despite the benefits of job creation, the question remains: “How did we end up spending such a large proportion of national income to healthcare?”

The first model of mandatory health-care insurance can be traced back to 1883 when compulsory sickness insurance was introduced in Germany for the largest categories of public-sector workers. “The Iron Chancellor”, Otto von Bismarck, marked the first steps to universal health care with social legislation that included the Health Insurance Bill of 1883, Accident Insurance Bill of 1884, and Old Age and Disability Insurance Bill of 1889. Bismark opened the subject for debate in 1881 and developed a program focused on insurance which included Health Insurance; Accident Insurance (Workman’s Compensation); Disability Insurance; and an Old-age Retirement Pension— none of which were in existence to great degree at the time. Bismark provided the basic framework for mandatory health-care, which can now be found in nearly all industrialized countries. He declared:

“…the actual complaint of the worker is the insecurity of his existence; he is unsure if he will always have work, he is unsure if he will always be healthy and he can predict that he will reach old age and be unable to work. If he falls into poverty, and be that only through prolonged illness, he will find himself totally helpless being on his own, and society currently does not accept any responsibility towards him beyond the usual provisions for the poor, even if he has been working all the time ever so diligently and faithfully. The ordinary provisions for the poor, however, leave a lot to be desired…”

A key element of our health-care reforms is the belief that it is the duty of government to secure the well-being of the nation. Over time, this idea ran parallel to the notion that it is a civil right of the population to be provided with quality health care.

Most current universal health care systems were implemented in a period following World War II where radical healthcare reform measures were implemented in the spirit of Article 25 of the Universal Declaration of Human Rights of 1948. This article acknowledges:

“Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”

As of 2010, the United States is the only industrialized country with no universal health care insurance system . Based on legislation passed this year, however, universal health care will be implemented in 2014. That aside, the precise role that the public sector should play in financing and delivering health care is a controversial topic.

As the economy emerges from recession, public and private workers alike are questioning where states will acquire funds to tighten deep budget deficits. Below is a compilation of analyses, research and news articles relating to the battle between public and private compensation packages published since the start of the new year.

Analyses
Employee Compensation in State and Local Governments (Cato, Jan. 2010)

Databook
EBRI Databook on Employee Benefits(Updated Jan. 2010)

Op-Eds
Federal bonus bonanza (3/12/2010)
The Government Pay Boom (WSJ, 3/26/2010)

News Articles
Even With Economic Recovery, Some Perks May Not Return (WSJ, 4/6/2010)
Independent analysis of federal and private salary data needed (Federal News Radio, 3/16/2010)
Bureau of Labor Statistics responds to federal pay in the media (Federal News Radio, 3/11/2010)
Federal pay ahead of private industry (USA Today, 3/8/2010)
How state workers’ pay really stacks up (Seattle Times, 3/6/2010)

How do the public and private sectors compare on the wages and benefits they use to attract and retain skilled workers?

Members of the state and local government workforce are a powerful group that help maintain our systems for education, police and fire services, corrections, human services and public housing among others. Though comparable occupations exist in the private sector, attempts to directly compare the total value of worker pay in the public and private sector have come under attack, due to the fact that salary comparisons ignore state health-care plans and other benefits that on average, comprise 30% of a state employee’s compensation.

Critics are quick to point out that compensation packages between public and private employment vastly differs in structure, especially when non-monetary benefits such as medical insurance, pension plans, transportation, dependent care and sick/personal days are considered. Further, occupations available in one sector may not necessarily exist in the other, thereby complicating these sorts of analyses.

If any knowledge can be derived from these salary comparisons, however, it is that state and local governments are renowned for offering greater stability, with less non-voluntary turnover than the private sector. According to the BLS, the average quit rate in the state and local workforce is just one-third the rate in the private sector. State data further indicates that in Washington, the number of private sector jobs fell by 7.5% in February 2008, compared to 0.7% for public sector jobs. In this weakening economy, lower turnover and relatively stable pension plans are attractive recruitment advantages that state and local governments will continue to command over their private sector counterparts.

Another finding from salary comparisons of public and private workers is that the level of skill required for an occupation is related to the public/private sector wage differential — on average, the private sector paid out more in a select group of high-skill occupations including lawyers, pilots, veterinarians and computer research scientists. Yet in 180 of the 216 occupations that exists in both the federal government and the private sector, the federal pay premium held, even when benefits were excluded from the calculation.

In 2007 and 2008, the Center for State and Local Government Excellence conducted formal rolling, open-ended interviews with more than 40 state and local government leaders from all regions of the United States. Interviewees included city and town managers, department directors, and other high-level state and local government officials, who were asked, among other things, about the recruitment and retention challenges their governments face. Results indicate that state workers emphasize job security along with wages, health care and retirement benefits offered by their employer.

Competition for talent among the public, private and nonprofit sectors remains high. In interviews, executives noted that the ability of state and local governments to provide better health insurance, pension plans, and other non-salary benefits to both active and retired employees as a strong point. In addition, they placed importance on the ability to communicate more effectively the value of these non-salary benefits to potential employees, especially to younger job seekers.

Historically, generous benefits packages and job security were offered to entry-level employees in the public sector as a trade-off for lower government salaries. However, with the recession eating away at state budgets, lawmakers are proposing several ways to reduce this “benefits benefit” and reduce deficits with funds from the generous compensation packages of the nation’s 20 million public workers. After all, the $1.1 trillion spent on public employee wages and benefits accounts for half of the total spending by states and local governments.

As Medicaid and state debts rising rapidly over the next decade, the public sector will need to find ways to cut costs by adjusting staffing levels, prioritizing agency programs and overhauling excessive benefits packages. Keeping up with the public sector’s aging infrastructure and changing demographic requirements pose another challenge as state and local governments compete for talent with private firms. Although salary comparisons reveal that one sector does not appear to consistently offer better compensation packages across the board, it is still important to develop a better insight to the composition of these packages offered in order to ensure appropriate staffing levels and effective management of public assets.

To gain an accurate picture of the total cost of Washington state employee benefits, it is important to first define the elements that make up a state employee’s compensation: pay, benefits, pensions and special employee programs.

Salaries for Washington’s state employees are public information available through the OFM website and Loius Bloom. The state’s Office of Financial Management issues a bi-annual review of state salaries called thePersonnel Detail Report. This report lists the name, job titles, salaries and related data of all state employees. However, the report only presents regular scheduled salary amounts and does not include any additional compensation or administrative supplements such as overtime, callback, standby or assignment pay.

A report published by the Center for Economic and Policy Research in May 2010 (CEPR) indicated state and local government employees pay a wage penalty of
about four percent for working in the public sector, relative to those at the
same age and education level in the private sector

Benefits

The State Investment Board manages investments for public employee retirement plans. Pension funds, whether state or private, operate on a relatively simple principle. Investment returns and interest income provide enough funds to cover the current payments to retirees. The problem with the two funds in question is the worry that investment returns will not cover those obligations in the future and the state will be forced to tap the general fund. With the state already facing huge deficits, tapping the general fund is the last thing anyone wants to do.

My search for the total dollar amount spent on public employee benefits began at the Health Care Authority’s Public Records Requests department.

For those unfamiliar with the Health Care Authority (HCA), this agency oversees seven health care programs relating to public health and provides access to quality health care for Washington residents. The HCA also oversees the Uniform Medical Plan (UMP), a state-administered, self-insured preferred provider plan that is available to active and retired state employees, as well as groups such as K-12 school districts and employer groups.

Of the agency’s seven programs, I was directed to the Public Employees Benefits Board (PEBB), which provides information on medical, dental, life, and long-term disability coverage through private health insurance plans to eligible state and higher-education employees. PEBB also offers the option to enroll in a medical Flexible Spending Account (FSA) and the Dependent Care Assistance Program (DCAP) to state employees.

To-date PEBB offers a range of 14 health care plan options to its members. These plans differ in price based on factors such as whether it is an individual or family plan, includes prescriptions, vision care and other benefits. The annual deductible and out-of-pocket maximums also vary by plan, which can be compared online.

PEBB also extends 3 dental plan options to its members: Uniform Dental Plan, DeltaCare and Willamette Dental. The provider network of each plan differs by county and coverage for each plan can also be compared online.

Funding for PEBB ultimately comes from the State Legislature, which establishes how much state money is available to spend on employee benefits. The Health Care Authority (HCA) purchases benefits within the amount of money funded by the Legislature, contracts with insurance companies and manages its own self-insured plans (the Uniform Medical Plan, Aetna Public Employees Plan, and Uniform Dental Plan) to provide a choice of quality health care options to its members. It is up to the Public Employees Benefits Board (PEBB) to meet regularly, review benefit issues, establish eligibility requirements and approve the benefits plans.

How much does Washington state pay for public employee benefits?

A simple question doesn’t always come with a direct answer. In fact, such a comprehensive inquiry requires that smaller questions be asked, such as what is considered a public employee? What benefits are being considered? What time frame does this apply to?

In this series of posts called “Washington Benefits”, I will examine the total cost that state taxpayers contribute to the health insurance, dental, pension, dependent care and transportation benefits of state employees. As needed, I will address discrepancies in the data collected, as well as explain findings and post research along the way.

My research will primarily come from the following resources:

– Employee benefits research institute (EBRI)
– Bureau of Labor Statistics (BLS)
– National Conference of State Legislators (NCSL)
– Public Employment Relations Commission (PERC)
– State of WA Office of Financial Management (OFM)
– WA Health Care Authority (HCA)
– Public Employees Benefits Board (PEBB)
– Washington State Legislature

Should you have any inquiries or insights along the way, you are welcome to post a Comment.

In a legal fiasco between the Save the Plastic Bag Coalition v. City of Manhattan Beach, the court found that Ordinance No. 2115– which prohibits the use of plastic bags in specified circumstances– may cause increased use of paper bags. As a result, the city is required to write an environmental impact report prior to taking further action on bag legislation. No details were provided in regards to funding the report or resolving the debate over taxing or banning plastic bags, paper bags, both or neither.

Legal battles are expensive. Arguably, enforcing and administrating policies are even more so. Take Washington D.C.’s two bag-related bills HB351 and SB462 as an example. These documents make the bag fee seem simple enough to enforce: All grocery stores and retail food establishments are to charge five cents a bag (plastic or paper) starting January 1, 2010. Yet when the fee was finally in place, controversy emerged over what constitutes a food store and a number of merchants were left unsure whether the fee should apply to their line of business.

The Baltimore City Council has taken a different but equally frustrating route in its own disposable bag legislation. Grocers and restaurants are restricted from offering plastic bags at checkout unless they enroll in the city’s ‘plastic bag reduction program’. The program would begin on September 1st and businesses that sign up for the program after that date must pay $500 to enroll. These participating merchants must provide plastic bag recycling bins, offer reusable bags for sale and post signs that say they’ll only issue plastic bags upon customer requests. In addition, participating merchants must submit and semi-annual report on plastic, paper and reusable bag activity.

Couldn’t public funds be put to better use? Voluntary in-store recycling and education programs directly sponsored by merchants would better serve consumers and merchants alike. Requiring plastic bag recycling bins while concurrently reducing or banning plastic bags will hardly yield positive recycling results because people re-use plastic bags in their home as waste liners, lunch containers, pet pickup and more. Offering paper bags as a free alternative to plastic is also regressive because paper is heavier to transport, costlier to produce, prone to water damage and is often double-bagged. Ignoring the technological advances in biodegradable or super lightweight plastic bags is a major fault of most state policies. Further, the time spent tracking, reporting and enforcing policies for a material that takes up less than 1% of landfill space will not yield the extreme environmental gains that some may expect.

The Manhattan Beach City Council argues that protecting its marine habitat was the primary reason behind its bag policies. However, its hasty decision to eliminate bags ignores the problems outlined in its Ordinance:

– Plastic and paper bags each have negative impacts on the environment. It is well known that paper bags require more energy to manufacture and recycle and generate effluent during these processes. It is also known that paper bags are bulkier and heavier than plastic bags.
– However a primary and significant problem with plastic bags is that they do not biodegrade and are extremely light and easily caught in the wind. In a coastal city like Manhattan Beach even plastic bags which are properly discarded can find their way into the marine environment where they do not break down and essentially remain indefinitely.
– The Pacific Ocean contains a huge accumulation of debris known as the `Great Pacific Garbage Patch’ which consists mostly of plastic debris. Some scientists estimate the density of plastic in this garbage patch as one million pieces of plastic per square mile. While plastic does not bio-degrade it does `photo-degrade’ breaking down into smaller pieces which can make their way into the food chain [via] such animals as jellyfish.
– While the exact numbers are unknown there are many reported instances of marine animals being injured or dying from ingesting or choking on plastic debris in the ocean. It is reasonable to conclude from such information that the presence of plastic debris in the ocean provides a hazard for marine life.
– Because there is a strong possibility that plastic bags discarded in Manhattan Beach can end up in the ocean where they will last indefinitely and create an aesthetic blight and potential hazard to marine life (and paper bags will not do so because they biodegrade and are less likely to be blown out to sea) it is in the best interests of the public health, safety and welfare to adopt the proposed ban on distribution of plastic bags at point of sale within the boundaries of the City of Manhattan Beach.

Rather than imposing an outright ban or tax on disposable shopping bags, the city would be wise to read about the ‘Great Pacific Garbage Patch‘. Although discarded plastic drifts to this location, most drifting plastic debris takes the form of bottle caps and discarded nets. Given its remote location and the depth of the floating garbage, a cleanup of the gyre would require a vast amount of petroleum and would likely do more damage to marine life than good. Meanwhile, the next-best solution is to prevent drifting plastic at its source and promote litter cleanup and recycling programs, such as those implemented in New York and California.

The Ocean Conservancy’s recommendations for addressing marine debris include:
a. Expand public and private partnerships to monitor and reduce marine debris
b. Fund increased research on the source and impacts of marine debris
c. Reduce, Reuse, Recycle
d. Seek better technological solutions
e. Support the inclusion of comprehensive ocean management in all climate change initiatives
f. Engage in community efforts like the International Coastal Cleanup

Seattle is a green place, both physically and ideologically. Environmental issues matter more to Seattleites than the average American. So it makes sense that we’re trying to take initiative and set a standard for eco-friendly policy. Our latest green plan was the bag fee.  This project had appealed to many Seattleites, but proponents ultimately failed to persuade the voting public.  This failure is an example of why, in the 21^st century, green policy needs to evolve.  It needs to be supported with logic and research, not just emotion and ideology.

The green movement, as we know it, finds its roots in the 70’s, when it seemed as if our civilization had become incompatible with the natural world.  There was a serious dearth of control over our own illustrious march towards progress. Europe was divided by an imaginary line, studded on each side with enough firepower for a tenfold apocalypse.  In 1969 the Cleveland River actually burned because local factories had so grossly polluted it.  The green movement emerged in this context to emphasize care for a world that we increasingly tread upon. This movement was driven by a moral, aesthetic and logical clarity in our collective disgust with the environmental defacements of the 20^th century.  As a result, we’ve been successful in establishing a culture that demands a measure of consistent respect for nature.

In the 21^st century, the clarity of environmentalism has faded.  We recognize that there are still pressing problems, but these are of a more chronic, dissipated nature.  We have checked civilization from its most negligent assaults on nature, and now we face more complicated problems.  If the social movement that seeks to respond to these issues cannot learn to nuance its focus in a logical way, it will fail.  It needs to sort out the various disparate concerns that make up environmental consciousness. Conservation, carbon emissions and waste reduction are all critical concerns, but at times they work against each other.  For example, you may hear that plastic bags are not biodegradable, and decide to switch to paper in order to reduce your personal waste stream.  But you’ll be simultaneously expanding your “carbon footprint,” and exacerbating your contribution to deforestation by consuming paper.

The bag tax was an attractive idea—it gave all of us a chance to make a small, visible sacrifice for the environment.  It has a symbolic appeal; a quick, 20 cent penance for our consumptive sins.  Because both paper and plastic bags have environmental drawbacks, city legislators included both types in their proposed bag tax.  But we still have cause to question if this is a worthwhile step towards our relationship to the environment.  The vast majority of the waste we produce ends up in well-maintained landfills.  Of this waste, very little (less than .3% by weight) is composed of plastic bags.  Seattle does not have a serious littler problem, and it is unlikely that our bags end up killing wildlife or floating in the notorious litter buildup in the north pacific.  The petroleum used in plastic and paper bag production is a tiny fraction of our total gas consumption.  All in all, the bag-tax was a meaningless gesture towards environmentalists, without significant impact or political mettle.

To be green the right way, progressive cities like Seattle need to establish a more nuanced paradigm for evaluating green initiatives.  As the Referendum 1 campaign went on, the environmental issues which it sought to address were continually added to.  Voters picked up on the fact that less plastic bag consumption simply meant a marginal amount of garbage would avoid the landfill.  There’s is no evidence that our bags end up in the north Pacific gyre, or that they’re killing wildlife, or causing floods.  These are all part of the global plastic bag problem, but there are better ways of approaching it than simply trimming our own consumption.

For example, King County has already focused on using the makers of “BioBag” as a preferred vendor.  The “BioBag” is fully compostable (should leave no trace in less than a year) and requires no petroleum to manufacture.  It is, however, significantly more expensive.  But with increased business and an opportunity to increase efficiency and prove itself on the market, the BioBag might become a more feasible alternative.  This could really set off meaningful change, unlike a symbolic “waste minimization effort”.

The intervention of the American Chemistry Council and “Big Plastic” bothers us.  We’re justifiably tired of feeling like businesses can buy there way out of good policy that will hurt their profits.  Nevertheless, we need to make our policy decisions based on the effects of those changes, not on our judgment of who is supporting or opposing the policy.

It would be nice to see Seattle take the lead in environmental policy with a well-informed and effective measure.  But the bag-tax isn’t it.  Aside from being green, Seattle voters are also smart.  If the city wants to take a green measure, it will need more than symbolic value.  Its eco-friendly impact will need to be large given the degree of sacrifice that citizens are asked to put forth.  Let’s rethink how our politicians and active environmentalists can best effect meaningful and worthwhile change with their political clout and fundraising efforts.

In last month’s ‘State of Healthcare Reform’ address, President Obama said that voters and legislators “prefer the devil they know to the devil they don’t know.” Judging by the disappointing news on recent healthcare reform, Congress does indeed seem to prefer ‘the devil they know’—and it’s in the details. Specifically the details of the Internal Revenue Code, Section 106, P.L. 83-591. This says that healthcare benefits that employers provide are not to be taxed. This ‘tax break’ is inequitable and distorts our system in many ways, yet Congress is trying to ignore it.

Over half of Americans receive this employer-provided health insurance. Thanks to the tax break, they’re saving about $1,200-$4,000 a year, depending on what kind of policy their job provides and what tax bracket they’re in. People who don’t get insurance from their job or government healthcare are expected to pay for health insurance with “after-tax” dollars, while over half of the country doesn’t. For this, the government loses roughly $200 billion in potential tax revenue per year.

The average family that benefits from this tax break saves over $100 dollars a month. According to recent census analysis from the Employee Benefit Research Institute, nearly three-quarters of those families make above-average income. An official report on the exclusion commissioned by Congress last November said: “When these tax savings are viewed purely as an economic subsidy, this pattern seems unfair if not wasteful. It is unlikely that an insurance subsidy program using appropriated funds would be designed in this matter.”

The tax break also functions as a “hidden subsidy” for the health industry, particularly insurance. Doug Elmendorf, the nonpartisan Congressional Budget Office’s director, recently declared that “widespread support among health analysts” was for “changing the preferential tax treatment of health insurance.” What Elmendorf calls “bending the curve,” is the most serious task as medical costs are projected to soon represent one-fifth of our national spending dollar. Last month Senator Kent Conrad, a Democrat of North Dakota, said “virtually every economist that’s come before us has said you’ve got to reduce that tax subsidy as part of an overall strategy to really contain costs.”

Our legislature looks to ignore this chorus of rational voices. Now it appears as though this tax break will survive healthcare reform completely untouched, with the Senate recently shelving the idea of capping the exclusion for high-value plans. Despite strong support from the Finance Committee’s director, Max Baucus, the proposal has been dropped. President Obama and Democratic Party leaders have taken pains to indicate that they will not accept any withdraw of the exemption.

Why quash an idea that every expert is backing? One reason is the fierce lobbying effort put forth by unions; they’re trying to protect better-than-average health benefits they’ve accumulated over years of negotiation. But for President Obama, and the rest of the Democratic Party, there’s an even simpler, bleaker reality. If this exemption were removed, 62% of the additional tax revenue gained would come from families earning over $100,000. These upper-middle class Americans are the mainstay of tax revenue. And, to the Democrat’s misfortune, the mainstay of America’s voting public. Making the right call on this issue would require Obama to break his campaign promise of not raising taxes for families that make under $250,000 dollars a year. Even more daunting would be the project of asking over half of all Americans to begin forging a new relationship with their healthcare.

It’s an ugly prospect for congressmen facing mid-term elections next year and for our president, who needs to remain popular for his early years in office. But if we hope to manage the serious issues in our healthcare system, we’ll need them to step up and re-examine this tax policy.