DETROIT -- City employees soon will be allowed to switch their retirement money to a new defined contribution fund from the $3 billion defined benefit plan of the Detroit General Retirement System.
Mayor Dennis Archer has long sought a defined contribution fund, which he said is needed to attract talented, high-level mayoral appointees, such as deputy mayors, to public service. An appointee's tenure with the city is often too short to vest in the defined benefit plan. The portability of a defined contribution fund would give appointees a pension benefit that reflects the time spent working for the city.
Opponents, however, claim the new plan is a back-door attempt to substitute the defined benefit plan with a defined contribution plan. The City Council voted down a defined contribution plan last year that would have been offered exclusively to non-union employees.
Some opponents and supporters are concerned city employees will move their defined benefit money to the defined contribution plan and withdraw it for personal use.
Representatives of the American Federation of State, County and Municipal Employees, the largest union representing city employees, have agreed in principle to having a defined contribution option included in the collective bargaining agreement now under negotiation.
Wider availability predicted
Upon the contract's approval, Detroit Deputy Mayor Freman Hendrix predicts the defined contribution option will be made available to all city employees.
"AFSCME has all but signed on to a DC plan," Mr. Hendrix said. "Once you get the largest union in city government to say yes, you set a pattern."
"I don't know how many locals will approve it," said a defiant but unconvincing Councilman Clyde Cleveland, an opponent of the defined contribution option.
Mr. Archer "sneaked" the defined contribution plan through the "back door" by making it part of the collective bargaining agreement, Mr. Cleveland said. Although the City Council ultimately approves labor contracts, it will be unable to stop the defined contribution plan this time, he said.
"Once the contract is negotiated between the unions and the administration, our role is strictly pro forma," said Mr. Cleveland, a position corroborated by Mr. Hendrix.
Ronald Gracia, vice chairman of the board of trustees of the Detroit General Retirement System, initially opposed the defined contribution plan because, he said, it would have impaired the defined benefit plan if it were mandatory, and if there were no reversion rights.
In his capacity as union president of the Senior Accountants, Analysts & Appraisers Association, Mr. Gracia signed a memorandum of understanding agreeing to the defined contribution option because Mayor Archer agreed to make the plan optional and to give defined contribution participants reversion rights.
When a defined benefit plan is closed, the population of the retired employees increases over time while the population of active employees declines, Mr. Gracia said.
"Depending on the assets of the system, there is less money coming in from the employees," he said. "You get to the point where the employer's contribution rate will have to go up because more money is going out than coming in."
The draining of the retirement system isn't a current concern because it will happen 10 to 15 years later on someone else's watch, Mr. Gracia said.
"Then someone will ask, 'How did we get here?' No one wants to take a long-term view," he said.
Mr. Cleveland also is concerned about short-term thinking. He is worried the participants will transfer their defined benefit money to the defined contribution fund and use the money for personal reasons.
Albert Garrett, president of Michigan Council 25, the local AFSCME bargaining unit, is also concerned about the effects the new fund will have on the defined benefit fund and the penchant for participants to treat retirement money as found money.
"We do it (approve the option) with considerable concern," Mr. Garrett said. "We are a debtor society. Now we will make something accessible that has been inaccessible."
Mr. Hendrix doesn't believe a run-on-the-bank mentality will result by giving participants the option.
A 20-year veteran of city government, Mr. Hendrix said he wouldn't choose the defined contribution option.
"It's not for me," he said. "I am vested. I don't want it."
Neither would most city employees, claims Mr. Hendrix. The average tenure of a city employee is about eight years, he said.
"If you look at the profile of a city employee, most are not white collar," Mr. Hendrix said. "They are semi-professionals and non-professionals. They go into the civil service for the stability."
The Archer administration also has no intention of shutting down the defined benefit plan. "Absolutely not," Mr. Hendrix said.
"It would be virtually impossible for the mayor to do it," he said. "It is a matter of collective bargaining and if they (the unions) don't agree to it, I don't see that it could happen."
According to a study by the U.S. Government Accounting Office, 21 state pension funds that considered converting their defined benefit plans to defined contribution during the last legislative session cited cost reduction and savings as the reason for considering the change.
The Michigan Department of Treasury, which oversees the pensions for state employees and teachers, converted its defined benefit plan to defined contribution in 1997 in order to save money.
The Archer administration wants a defined contribution plan to serve as an incentive to recruit and retain high-level employees for public service, Mr. Hendrix said.
Elected officials and political appointees don't often serve in office long enough to become vested in the city's defined benefit plan. The vesting period is 10 years; the political appointees of Mayor Archer claim they will be in office for only eight years.
"When they come to interview for a job, they say 'How soon can I vest?' " Mr. Hendrix said. "When I say 10 years, they say 'See you, I'm gone.' . . .
"A DC plan with a short vesting period would give them something."