Ingham County vs. the FOP in 1997: a Public Act 312 story
October 5, 2016
Public Act 312 is the state law that provides for binding arbitration for public safety workers in local government. It's been on the books since 1969. To illustrate the problems with this law, we will examine a 1997 arbitration between Ingham County and its sheriff supervisors bargaining unit, represented by the Fraternal Order of Police (FOP).
The bargaining unit for Ingham's sheriff supervisors consists of sergeants, lieutenants and captains. Since 7/1/1993, sheriff supervisors had had a 2.25% pension multiplier. They could retire at age 50 with 25 years of service or at 55 with 15 years of service. Members contributed 6.4% of their pay to the pension system. Then, effective 1/1/1995, after a 1994 arbitration conducted by the Michigan Employment Relations Commission (MERC), the pension multiplier was increased to 2.5%. Members could retire at any age with 25 years of service and the final average compensation (FAC) period was reduced from 5 years to 3 years (which increases FAC). To pay for these increased pension benefits, the member contribution was increased to 10.45%.
In August 1996, the FOP again petitioned MERC for binding arbitration. Between October of that year and July 1997, approximately eight prehearing, evidentiary hearing and post hearing conferences were held on a number of issues. For pensions, the multiplier was increased to 3.2%, limited to 80% of FAC. To persuade the MERC arbitrator to grant these enhanced benefits, the union promised to pay the full cost as determined by the actuary, increasing the member contribution by 9.16% to a total of 19.61%. This is on top of income tax withholding and Social Security tax.
With a 3.2% multiplier, limiting the pension to 80% of FAC has the same effect is limiting the amount of service in the pension calculation to 25 years (.032 x 25 = .8). Staying on the job past 25 years would no longer increase the pension.
The MERC arbitrator predicted that by offering higher pensions and taking away any incentive to stay on the job longer than 25 years, unit members would retire as soon as they were eligible and the County would create a "young and vibrant police force" with their replacements. He was also persuaded that with new officers coming in at a lower point on the pay scale, the savings would far out distance the $6,000 start up fee and the $1,000 annual fee that the County would have to pay the Municipal Employees' Retirement System (MERS) to administer the new benefits. You can read the section of the arbitration report that deals with retirement here. The entire report is here.
This was not the first time unions have argued for retirement incentives by pointing out that savings occur when veteran employees are replaced with lower-paid new employees. That argument is at odds with their push for longevity payments and step wage increases.
What the MERC arbitrator apparently did not anticipate was that several members of the 30-member sheriff supervisor unit would enjoy those enhanced retirement benefits without helping pay for them. They retired as soon as they were eligible after the October 1, 1997 effective date of the new contract. In fact, the 3 listed below may have deliberately stayed on the job past their earliest retirement eligibility date so they could benefit from the enhanced multiplier.
Five more were gone within 12 months:
We can assume that most of them went on to new careers. We know that Taylor and Carnegie immediately went to work for the County on contract as process servers. Tom Reich worked for the state lottery from 1999-2012 and then became Eaton County sheriff in 2013. Tom Krug, who along with Richard Dral was on the FOP's negotiating team during the arbitration, is now Executive Director of the Capitol City Labor Program, Inc., formerly known as FOP Capitol City Lodge #141.
FOP Executive Director Thomas Krug - Photo from 10/9/2013 Lansing City Pulse story
Increasing the pension multiplier from 2.5% to 3.2% was a big jump. For a retiree with a $60,000 FAC, the pension went from $37,500 to $48,000, an increase of $10,500 a year. A 50 year old male can expect to live to age 82, another 32 years. (life expectancy calculator) At $10,500 a year, the increase alone will cost the County $336,000. And some of them retired as young as 45. Tom Reich went to work as an Ingham sheriff deputy the same year he graduated from high school.
Although the member contribution rate (for those remaining on the job) went up to 19.61%, it wasn't enough to pay for the generous new pension amounts. Page 33 of the 1997 actuarial valuation report says the County's required contribution for 1999 for sheriff FOP supervisor pensions was $25,467 per month, or $305,604 per year, and this takes into consideration the new member contribution amount and enhanced benefits.
Thirteen years later, according to page 8 the 2015 report, the required employer contribution for 2017 was $137,120 per month, or $1,645,440 per year, an increase of nearly $1.4 million a year over 1997, and this takes into consideration changes the County got the union to agree to in 2012. Sheriff supervisors hired on or after January 1, 2013 are enrolled in a "hybrid" pension plan consisting of a defined benefit (DB) component with a 1.5% multiplier and a defined contribution (DC) component:
The $1,645,440 employer contribution is more than 81% of the $2,015,741 active member payroll for 2015 (page 38).
Related story: $10M per year pension change hits Ingham County - Steven R. Reed, Lansing State Journal, October 10, 2016
The illogic of Public Act 312
Act 312 arbitrators aren't just referees. The Act provides that economic issues be decided with final-offer, or "last-best-offer" arbitration. This means that each side puts forth its best offer and the arbitrator chooses between them. There is no compromise; it is either one or the other. In the above case, Ingham County wanted to leave the multiplier at 2.5%. The union wanted 3.2% and offered to pay for it with a 9.16% increase in the member contribution. The arbitrator, with his vast knowledge and superior judgment, decided in favor of the union.
The problem with Act 312 is not just that an agent of state government is interfering in a local government matter, usurping the power of elected officials. It is also the unfairness of final offer arbitration. The employer is at a disadvantage in that he must offer enough to maintain his workforce. He cannot offer wages and benefits so low that he loses employees and can't recruit new ones. The union, on the other hand, is limited only by the arbitrator's good sense. The union loses only if they ask so much that the arbitrator goes for the employer's offer. And even an outrageous offer is not guaranteed to lose, because arbitrators have to go with the union at least half the time or it would look like they were favoring employers.
A history of collective bargaining in the public sector in Michigan is presented in the book Collective Bargaining in the Public Sector: The Experience of Eight States. This is an excerpt from a section that addresses Public Act 312:
How to make a bad law worse
As I've said here before, the Public Employment Relations Act (PERA) is bad law not only because it diminishes Michigan citizens' right to govern themselves through their elected representatives, but because it is crappy law-making. It drew heavily from the National Labor Relations Act, which was designed for the private sector, not the public sector, and it provided no guidance for the many instances in which it would come into conflict with existing Michigan statutes.
Public Act 312 made it much worse by allowing a state government arbitrator, if he so chooses, to force a local government to accept the demands of a union. This came about because although PERA prohibited strikes by public employees, police and firefighters - believing themselves above the law - did so anyway in the form of "job actions," ''blue flu," and "work to rule." (source) In other words, our public safety officers - sworn to serve and protect - refused to serve and protect when the public balked at giving them what their union demanded.
MSU's collection of Michigan public sector arbitration decisions is at this site.
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