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 subsidise retiree health benefits 100 per cent for new retirees (they were, and still are, 41 per cent 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. They 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 per cent raise for the four months of 2011 that he worked cost him $1,328. For that he got 100 per cent of his future health benefit costs paid FOR LIFE instead of only 41 per cent. 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.
* 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 per cent of health benefits for these retirees. Now they will subsidise 100 per cent.
- 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 per cent 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 per cent 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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