Critical Issues in the Transition From the Defined Benefit to the Defined Contribution Pension Model
| Author | Howard A. Frank,Gerasimos (Jerry) Gianakis,Hai (David) Guo,Yongqing (Carrie) Cong |
| Published date | 01 December 2015 |
| DOI | 10.1177/0734371X14533572 |
| Date | 01 December 2015 |
| Subject Matter | Articles |
research-article2014
Article
Review of Public Personnel Administration
2015, Vol. 35(4) 333 –351
Critical Issues in the
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DOI: 10.1177/0734371X14533572
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Benefit to the Defined
Contribution Pension Model:
Perceptions From Florida
Municipal Finance and Human
Resource Directors
Yongqing (Carrie) Cong1, Howard A. Frank1,
Gerasimos (Jerry) Gianakis2, and Hai (David) Guo1
Abstract
The dramatically increased costs of maintaining many public pension systems after the
recent economic downturn have spurred a number of state and local governments
to reassess the sustainability of traditional defined benefit (DB) pension plans and to
explore reforms. To relieve this fiscal burden, some municipalities have considered
implementing defined contribution (DC) plans for some portions of their workforce.
This article explores critical issues attendant to implementing this paradigm shift.
Utilizing a survey, the authors examine the perceptions of municipal finance and
human resource managers regarding this potential transition. Findings indicate that
these groups hold virtually identical positions on these issues. Reforms undertaken
to bolster sustainability of the DB-centered model may bear unanticipated
consequences—both positive and negative—that are largely unexplored given their
recentness. Practitioners should prepare for these eventualities.
Keywords
public pension reform, pension paradigm switch, Florida municipalities, two-tiered
retirement system
1Florida International University, Miami, FL, USA
2Suffolk University, Boston, MA, USA
Corresponding Author:
Yongqing (Carrie) Cong, Florida International University, Modesto A. Maidique Campus, PCA 250B,
11200 SW 8th Street, Miami, FL 33199, USA.
Email: ycong001@fiu.edu
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Review of Public Personnel Administration 35(4)
Introduction: Preserving the Status Quo Versus
Readiness for a Paradigm Shift
The funding difficulties facing thousands of state and local public pension systems in
the United States have been well documented by the Pew Research Center (2012) and
others (Mead, 2012; Munnell, Aubry, Hurwitz, & Quinby, 2012). Funding shortfalls
and their concomitant budget implications continue to make headline news in terms of
potential and actual service cuts, labor relations, and taxpayer resentment. For exam-
ple, Illinois is facing a combined US$100 billion shortfall in five public employee
retirement systems, which has resulted in a series of bond rating downgrades and pen-
sion reforms (Long & Garcia, 2013; McKinney & Buchheit, 2013; Pearson & Garcia,
2012). Detroit’s recent bankruptcy is largely attributable to multi-billion dollar
unfunded pension liabilities (Snell, 2013; Turbeville, 2013). Researchers portray a
defined benefit (DB) pension structure that faces serious challenges in coming years
as a result of many economic, political, and administrative factors (Clark & Sabelhaus,
2009; Coggburn & Kearney, 2010; Giertz, 2003; Novy-Marx & Rauh, 2009; Rauh,
2010).
The typical reaction to the pension problem has been the preservation of the DB
model that has been a defining element of public employment. This contrasts with the
private sector, where DB plans have been largely abandoned in favor of defined con-
tribution (DC) plans, cash balance plans, or indeed the abandonment of pensions alto-
gether, with less than half the U.S. labor force covered by any pension (Bloom &
Freeman, 1992; Employee Benefit Research Institute, 2004).
The recently enacted pension reforms may impact recruitment and retention of pub-
lic employees in local governments. Furthermore, these changes are taking place in an
operational vector that entails aspects of both human resource (HR) and financial man-
agement, an intersection that has received little or no attention in the academic litera-
ture. At this exploratory stage of research, we are not testing a theory of DC plan
diffusion. We are, however, raising more fundamental questions: Do HR and finance
professionals see the current DB-based model as sustainable? Do these officials per-
ceive organizational benefits costs to this transition? Are their organizations ready to
address potential consequences attendant to this transition?
Our study focuses on Florida’s pension reform for the following two reasons: First,
prior research has recognized Florida as a political and demographic trendsetter for the
nation (Naisbitt, 1982; Shrestha & Heiser, 2011; Watson, 2005). Second, focusing on
Florida ensures that our survey respondents are operating under a uniform legal and
administrative framework.
In Florida, and in many other jurisdictions, pension solvency concerns have resulted
in tweaks to the DB model. These incremental changes include, but have not been
limited to the lengthening of years required for full benefits or retirement, increasing
the years factored into pension multipliers, reducing pension multipliers, lengthening
vesting requirements, and limiting the practice of “back-loading” via overtime. A cor-
ollary undertaken in Florida and elsewhere has been curtailment of deferred retirement
option plans, which typically allow a participant to earn a second lump sum retirement
Cong et al.
335
payout in exchange for tendering his or her resignation and accepting a lower benefit
multiplier in the calculation of primary pension earnings.
Of note in Florida is that at least some of the changes adopted by the state in 2011
and by political subdivisions with their own plans apply to new hires rather than cur-
rent employees, effectively establishing a two-tiered retirement plan within a jurisdic-
tion. This structure is relatively foreign to the public sector, but has occurred with
some regularity in the private sector. This has occurred most frequently within the
airline, steel, and automotive industries (carmakers and parts suppliers) that have
required pension bailouts from the Pension Benefit Guarantee Corporation (PBGC)
during bankruptcy restructuring (Edid, 2004; Keating, 2006). The upshot is that DB
plans remain the retirement system mainstay in the public sector. While some jurisdic-
tions have opted for DC plans as their default, and many public universities have had
DC plans for faculty and administrators for decades, actions taken in recent years sug-
gest a proclivity to preserve DB as the “go-to” model, particularly in the realm of
protective services.
Some observers have argued that DB plans in the public sector are simply unsus-
tainable, both fiscally and politically. From this vantage, the incremental changes
made to DB plans in recent years have been “palliatives” (H. Frank, Gianakis, &
Neshkova, 2012, p. 376) for a terminal patient that may prolong DB plans as the
default model for years but not decades. It could also be argued that traditional DB
plans make government an even tougher “sell” for a younger, better-educated work-
force that has grown accustomed to frequent job changes (Eversole, Venneberg, &
Crowder, 2012; Kearns, Larson, & Venugopal, 2007; Lewis & Frank, 2002; U.S.
Department of Labor, 2012). This study follows from these two basic assumptions.
Survey Methodology
The research findings presented below are based on a survey of Florida local finance
and HR managers. The survey was mailed or emailed to 176 Florida cities with popu-
lations of 5,000 or greater, followed by telephone or fax follow-ups. The survey
yielded a response rate of 33.0% split between 57 finance and 56 HR directors. The
survey was part of a larger triangulated effort including interviews and quantitative
analysis exploring the drivers of pension solvency in local pension plans. Our popula-
tion included cities covered by local plans as well as those participating in the Florida
Retirement System (FRS). Respondents were directed to frame their responses in the
context of the DB system as the default retirement model to avoid confusion with
optional DC plans or deferred compensation (457) plans. We also restricted our ques-
tions to civilian, non-uniformed employees, knowing full well that some respondents
might hesitate to address pension models in the context of the contentious collective
bargaining often manifested in protective services.1 We attempted to create a common
“frame of reference” for the respondents to minimize the potential influence of corol-
lary issues. The same effort caused us to limit our initial research to professionals that
shared the Florida experience with pension issues.
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Review of Public Personnel Administration 35(4)
Our response format was a 5-point Likert-type scale, ranging from strongly dis-
agree to strongly agree with selected items with a neutral midpoint. For the purposes
of this study, we have treated our data as interval and conducted comparisons of means
as an initial analytic. This may preclude a more granular assessment of responses, but
in many ways the comparison of means highlights the similarities and differences of
our two groups. In addition, the use of a median score provides a straightforward indi-
cator of how responses are distributed.
As noted earlier, we are not testing a theory of DC plan diffusion. We are instead
raising more fundamental questions: Do HR and finance professionals see the current
DB-based model as sustainable? Do these officials perceive organizational...
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