How Public Employees get to run government


Say you have a business in the private sector.  Would you let your employees name their salary and benefit levels and oblige you to pass on the cost to your customers?  Absent a captive market your customers will likely be gone and so would your business.

But from what I’ve witnessed in New Jersey (specifically Union County) that’s exactly how government runs and, with the help of one recent example, I’ll try to explain how it’s done.

The Union County freeholders this year amended their employee benefit structure to subsidize retiree health benefits 100% for new retirees (they were, and still are, 41% subsidized for prior retirees).  Normally you would raise benefits to attract or retain employees but these are county government jobs that most people would gladly accept without further inducement.  Why sweeten the pot and why now?

Lawrence Caroselli retired as the Union County finance director on May 1, 2011 just in time to take advantage of this largesse.  He had kind words for the freeholders:

This public proclamation seemed out of place at the time and confused me.  Who goes up to their bosses and compliments them like that?  Then it hit me.  Caroselli was the boss and he was congratulating his lackeys.  They work for his benefit and always have.  It’s an ‘Admirable Crichton’ situation where these part-time politicos are lost on an island and come to depend entirely on Crichton/Caroselli (CC) for their survival and must trust him entirely, not being able to manage themselves.

However, it would be unseemly for CC to appear to be in charge so a buffer is needed in the form of an ‘independent expert’ who will represent that the provision of these benefits are really for the public good.  In this case that expert is an actuary.

Today I got a copy of the actuarial study that justified this benefit giveaway. It’s gibberish.*  The idea was to equate the cost of this additional benefit to the forgoing of a couple of years of salary increases.  It doesn’t and one real life example should suffice.

Lawrence Caroselli earned $132,772 in salary from Union County in 2010.  Forgoing a 3% raise for the four months of 2011 that he worked cost him $1,328.  For that he got 100% of his future health benefit costs paid FOR LIFE instead of only 41%.  The value of that can range from $150,000 to $2 million depending on who you ask.  Understanding the real cost would likely preclude getting that benefit which is why a compliant expert had to be called in to make up phony numbers complicated enough to deceive an ignorant governing body.  In Union County all those factors were at hand.

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.

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* For those of a numerically adventurous bent I would suggest you first read the report and then look over my rough notes below to grasp the chicanery:

  • The county, before this change, would have subsidized 41% of health benefits for these retirees.  Now they will subsidize 100%.
  • 541 current employees involved.  Not clear whether it would apply to new hires but it likely would.
  • They get their 2011 savings ($968,375.45) by taking 541 (employees) X $59,666 (average salary) X .03 (3% raise foregone) and projecting it.  However, if this only applies to those 541 employees then in the 25th year when they expect a savings of $3,996,071 from this they’ll actually get more like $0 since a vast majority of those people would be gone (mindless projection here that would likely get past a lay person, which is why some actuaries do it).
  • For 2011 they start with a total cost of $881,082.  They were subsidizing $360,945 (41%) and the remaining $520,137.84 is what this change will cost.  That $881,082 may have something to do with the average rates they listed on page 4 but it’s not clear from the report.  Also, considering that they’re paying $60 million for insurance for everybody (3,000 current employees plus 600 retirees) that $881,082 that they start their projections with seems like a ridiculously understated number.
  • If this change applies only to new retirees then the chart should have assumptions as to the retirement dates of the population.  That is, in the first year Caroselli might be the only retiree that this change applies to and that cost would be relatively low but as others become eligible the costs would go higher though it wouldn’t be a steady increase since retirees would leave at different times.
  • If the 600 current retirees don’t get the fully subsidized benefit then Caroselli (and Childs?) might be the only ones getting their health benefits for free and those other 600 retirees are still picking up 59% of the cost which, if true, might be something to bring to their attention.
  • Last number on page 11 is $102 million which is the accumulated cost of all this (under selected assumptions).  Using this report that could be the headline:  Union County gives away $102 million over 25 years for lifetime health benefits.  I wouldn’t go with that now since the whole report is bogus but that is one possible interpretation.
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20 responses to this post.

  1. Posted by Anonymous on June 14, 2011 at 12:35 am

    who needs ANY numbers ……..why would anyone ever allow this !!!!!

    Reply

  2. Posted by Tough Love on June 14, 2011 at 1:42 am

    If you strongly believe the actuarial expert was CLEARLY deceiving the Council …. then report him (with your evidence) to the AAA’s ABCD.

    Reply

    • Actually this was to deceive the public since it could be argued that the freeholder board was in cahoots. However, my experience with the ABCD (though 10 years ago now) has not been positive. If I get a string of actuarial reports like this maybe but I don’t see any help from the ABCD on this.

      Another piece of data to consider is the cost of this report. I’ve put together similar reports (with good numbers though) and this would have taken me about 4 hours all told and I would have charged around $1,000. After all, it’s only a plan summary and a few excel spreadsheets. It cost $9,000 which was paid on May 25, 2011.

      Reply

      • Posted by Tough Love on June 14, 2011 at 12:16 pm

        You should raise your rates. Even the guys do the legwork (not the engagement partner) now bill at $400-$500/hr. at the well known firms. …. although it may be a lower rate for Public Sector Clients.

        Reply

        • You’re right as far as these studies go but one of the things I’m most proud of in business is that since I took over running this place in 1996 I have not raised fees. I figure since I do mostly recurring annual work the case gets 5% easier each succeeding year so I get my raise that way.

          Lawyers in the public sector (in Union County anyway) seem to bill $125 an hour but they also seem to put in a lot of hours on each case.

          I have run across actuaries who bill ridiculous amounts for their calculations but that’s out-and-out thievery (i.e. I was quoted $3,500 to get a list of accrued benefit values for 100 people, all already on their computer system). It may have made sense when each calculation had to be done by hand and it would take tens of man-hours to develop a cost (which is how this place was doing it back in 1989 when I started working here) but now we have computers where if you want to value a benefit at 8% instead of 7% it takes a few seconds depending on the speed of the processor.

          Reply

  3. Posted by bpaterson on June 14, 2011 at 1:47 am

    John, the freeholders were already under the “bogus” assumption from some previous action that if no raises were given back in the past years that they could give health benefits for life. They stated this many times during the earlier freeholder meetings this year that the savings from 3 years of “0%” raises equates to healthcare for life. What this means is that they had also prevously given “free lifetime health benefits” to other factions of county workers, possibly under collective bargaining or union negotiation, since this 2011 largess was for only non-contractual workers.

    So easy assumptions can be determined in what happened in the past: 1) there could be at least another 1000 union county govt workers with “free lifetime health benefits” since they crowed about so many contracts in the past had 0% raises; and 2) there must also be another initial study done in years past since they were so sure that what they did this year was a cost effective action.

    It would be interesting to find out the headwater study and just how many other union county workers have “free lifetime health benefits.” It could just possibly encompass all 3000 county workers on the payroll.

    And your right about the freeholders being pretty stupid; another thing that makes them appear pretty incompetant is that if they have been giving away “free lifetime health benefits” because there is such a labor savings, then why are the county portion of taxes going up 5 to 7% every year; and to the total tune of a 22% county tax increase just in the last 4 years.

    Reply

  4. Posted by bpaterson on June 14, 2011 at 2:41 am

    john, I just perused the report and you are right. that B2 table says the “free lifetime health benefits” impact will cost the taxpayers $102 million in accumulated extra expenses. And this for an immediate salary savings of $968k x 3=$3 million. So $3 million costs the taxpyer $100 million. Its plain as day. Are they daft??????????????? And it really wasnt a savings to the taxpayers anyway since the taxes went up approximatly $40 million in the last 3 years this took place. They gotta be kidding! My prevous reply’s last paragraph still is true. They just don’t get it.

    I question some numbers but have to defer to these actuaries; such as only 61% will be married when they retire and 39% will be single and will select the health benefit as such; the county workers will get only 3% raises every year from now on; and the cost of health benefits will go up only 4% from now on. That sounds a little too detached from realtiy and is very conservative for thier study. My guess which would be higher health costs and higher raises would then put the “free health benefits for life” impact to the tax payer closer to probably $150 million by 2036. The freehodlers just don’t get it. Thats the result of putting people on the ballot based on being a good poltical soldier to the bosses versus someone with intelligence and energy that wants to do good.

    The last decent freeholder on the ticket for them was Mapp and he started to question the county finances and vote no, so they tossed him off the ticket on re-election. They can’t have integrity and inteeligence, right?

    There is another smart one who just got on, Freeholder Carter, but unsure how much butt she is kissing to stand up to these political bosses. But it is just one, the others we see how they are, such as freeholder kowalski talking about draining birdbaths in the summer……………..pathetic.

    Bottom line, yes the study is proven bogus, the freeholders are duped because they are stupid, the county system is corrupted, and the taxpayers is screwed. Some legacy they are creating, huh? Somewhere in the future this idiotic system will have to be unwound when good leaders take over, but when will that be and will there be anything left to salvage.

    Reply

  5. Posted by larry.littlefield@gmail.com on June 14, 2011 at 8:28 am

    Speaking of private businesses, you know what this exactly like? Executive pay, voted for by cronies on the board, knowing it will serve as a precedent for their own pay through the use of pliable pension consultants.

    The absurd rise of executive pay, with the claim that those executives created “shareholder value,” has coincided with a decrease in dividends paid out to a return of just 1.8%. And, after the stock bubble of 2000 deflated, a loss of capital gains — although there are rebubbles from time to time as the monetary authorities desperately try to reflate.

    There is even a tie back to the OTHER thieves. A presumed rate of return on investments that had no chance of occurring was used as a justification for retroactive pension enhancements. And you can choose not to invest your savings in companies being drained by overpaid executives, but as a taxpayer the public employee pension funds put you on the hook anyway.

    Organized, selfish interests have gained control of our public AND private institutions, both of which are in decline. So strong is their grip, that one doubts they can be saved. Bring on the institutional collapse, so perhaps younger generations will be able to rebuild after Generation Greed.

    Reply

    • Posted by larry.littlefield@gmail.com on June 14, 2011 at 8:29 am

      I meant through the us of pliable executive pay consultants. Who work exactly like public employee pension actuaries.

      Reply

  6. Posted by muni-man on June 14, 2011 at 10:44 am

    This crap only happens in monopolistic environments. Gooberment is the ultimate monopoly, but boards of directors are too. They also share the common trait of having their membership devolve into a thoroughly sickening ‘mutual admiration society’ as in (Hortense, I just want to congratulate you and the entire school staff on successfully raising our math scores .00073 from 416.99981 to 417.00054 [Sidney]). (Well, Sidney without the marvelous cooperation from you and your staff I’m positive the town could never have achieved an increase in recyclables from 67 pounds to 78 pounds in JUST ONE YEAR [Hortense]). Three town meetings with this type of BS bouncing off the walls was all I could take and I haven’t been to one of these sugar-coated, love fests in years now.

    Economic forces regularly squash companies if things get out of control, and that’s what’s gonna happen to gooberments across the land too. Just a matter of time, but it’s definitely coming.

    Reply

    • Posted by larry.littlefield@gmail.com on June 14, 2011 at 11:39 am

      Well you’d think after years of self-dealing and inadequate returns at the corporate level, they’d have to cut executive pay and increase dividends, as after the recession.

      But this time the executives has an ace in the hole that keeps giving them someone else’s money in stock purchases in exchange for promises of higher returns, because the pretense of such future returns and not the reality is what matters to them.

      Public employee pension funds.

      Reply

      • Posted by muni-man on June 14, 2011 at 12:34 pm

        If the company craters, those executive stock options are gonna be worthless. Likewise,
        tax bases are/will continue to crumble in the years to come and with it many gooberments
        will find themselves shrinking enormously. Can’t square a circle. They’ll find out soon enough.
        The healthcare cost-shifting boogaloo everybody’s been playing for decades is fast approaching an end too. Start thinking what things were like pre-Medicare. Uncle Fred (age 93) won’t be getting his 4th pacemaker implant on the Fed’s dime too much longer. That’s why I believe life expectancy has just about peaked and will actually start heading south by mid-century if not a good deal sooner. Less healthcare availability (i.e. due to affordability) coupled with much greater stress in earning a living doesn’t bode well for longevity, especially for the younger crowd. Massive social changes, and unrest, lie ahead as far as I’m concerned.

        Reply

        • But Uncle Fred votes even if he has to be wheeled to the polls by his local political organization to do it.

          Of course it’s unaffordable but as long as we have young people entering the work force who are dumb enough (or made to feel guilty enough) to keep turning over a portion of their paychecks to pay for those pacemakers for 93-year-olds nothing will change and life expectancies for those on the government dole will keep rising. Though as I approach Uncle Fred’s age I don’t see that as necessarily a bad thing.

          Reply

          • Posted by muni-man on June 14, 2011 at 1:15 pm

            JB, I guess I disagree a bit with you. I just see the wheels coming off the turnip truck within
            this decade sometime. Something’s gonna trigger a financial contagion that I believe is gonna make 2008 look absolutely tame. Time will tell. For the first time in over 35 years as an active investor, I’m 100% in cash. Bleak economic conditions have me totally stumped because this time I think it’s a true, secular phenomenon that will hang around for many years.

  7. Muni-man your cash will not matter if the fabric of this great experiment (society) collapses. Unless you also have the necessary firepower and money to buy others for your protection. I mean after all we are still primates, which is evident with all the killing for ideas, power, land, racism, etc. still going on in this neat little world of ours….lol

    Reply

  8. Posted by Anonymous on June 22, 2011 at 12:44 pm

    I looked at the website of the actuaries who prepared the report (note that the report is not signed). Their website http://www.osullivanassociates.com states that their practice is limited to multiemployer plans and that they do no work for corporate or public sector clients. How then, could a public sector agency hire a firm with no qualifications for such a study, and how could the firm accept such an assignment?

    Reply

    • Posted by Tough Love on June 22, 2011 at 1:13 pm

      2 of their employees are “Enrolled Actuaries” which (assuming they have the experience and knowledge in the particular field of Public Sector pensions) would make it quite acceptable to work for Public Sector Plans and write such a report.

      Not signing such a (published) report IS somewhat odd (and questionable) for an actuary.

      Reply

      • Posted by Anonymous on June 22, 2011 at 2:10 pm

        Enrolled actuaries provide consulting on defined benefit pension plans. The study was for changes in a retiree medical plan.

        Reply

        • Posted by Tough Love on June 22, 2011 at 2:35 pm

          Sorry, I wasn’t paying attention. EA credentials are associated with pensions. Any actuary (or non-actuary) experienced and knowledgeable can do such work.

          Actuarial reports are often prepared in drafts form for client review before release. It looks like a draft report (supplied to the client from review and comment) was the one linked. I’m quite sure the final report (if there was one) was signed. It would be improper not to do so.

          Reply

  9. [...] There needed to be decrements to take into account those who leave which would likely result in $20 million as a more accurate projection than the $52 million provided.  Alternatively, each participant could have been valued separately with their salary increase forgone compared to the benefits received.  For example, one of the first beneficiaries would have been newly retired Finance Director Lawrence Caroselli who gave up $1,328 in salary for about $250,000 in benefits. [...]

    Reply

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