Defined Contribution Plans – 8/3/2009

Posted by Bob on August 3, 2009 under Daily Blogs | Be the First to Comment

Many employees and citizens have inquired as to the early retirement package offered to the Chapter 90 supervisor’s union which was accepted by six employees.  There is a misperception that the Borough is offering early retirements.  Representatives from Chapter 90 approached the Borough with an early retirement plan which offered several concessions to the Borough including a wage freeze in year one (1) of the contract extension, the removal of certain positions from the bargaining unit, and a stipulation that all future members are enrolled in a defined contribution pension (“DCP”) plan.

The DCP concept has been the norm in the private sector for some time, mainly in the form of a 401(k) retirement plan.   Governmental entities, however, have historically offered lucrative defined benefit pension (“DBP”) plans rewarding retiring employees by calculating the employee’s pension as a percentage of the employee’s wage after a certain number of years of service.  A concise article comparing the two (2) plans is posted at by linking here.

All municipalities should be negotiating with the DCP concept as a priority.  While taxpayers will not see an immediate benefit, future budgets will incur pension savings.  The temptation to not properly fund pension plans during difficult economic times will be removed as a pay-as-you-go system will be in place.  Budgetary authorities will know exactly what will be required to fund the pension plan, and employees will no longer have any incentive to maximize overtime to increase their pension calculators.  While employees will need to be more aware of the financial structure of their individual plans,  employees will have control over their funds.

Some may ask why this should be important to the Borough.  First, this is the model in the private sector.  While government certainly has different purposes and processes than private industry, basic business principals are similar and should be practiced.  The private sector long ago abandoned the huge costs of DBP plans in favor of the the DCP model.

More importantly, however, moving to a DCP plan will result in huge savings to the Borough in future years.  While pension plans are often ignored by the public during budget discussions and/or political campaigns, the cost and maintenance of DBP plans are significant.  The Borough accumulated significant unfunded pension liability over the years which was eventually funded by bonding in 2003.  While the Joint Boards of Finance and Mayor and Burgesses have been diligent to properly fund the liability in recent years, the cost is still significant to taxpayers.

While it will take time to achieve the savings associated with a switch to the DCP model, it is about time that we thought about the future.  Had previous administrations recognized changes in the pension models occurring in the private sector, we could have bargained accordingly and be enjoying the savings of such DCP plans today.  We must stop negotiating contracts simply in a short-term context; but look to the ramifications of the terms years down the road.  We can not do things the same way we always have and expect a different result.

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