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Public Service Provision

Evaluating the True Costs

Christopher Raths
By Christopher Raths
Roxbury Township Administrator

Comparing the cost of municipal service provision to the private sector has been common since municipal governments were formed. In the past, those reviews often resulted in an outcome favorable for the municipal provision of service. Due to the increasing cost of public employee’s benefits, those times may be over. This article analyzes the Township of Roxbury’s 2010 review of sanitation services which not only included annual operating expenses but added, “Legacy Cost.”

stethascope laying on pile of dollar bills

Legacy Cost refers to obligations to pay health care and pension benefits for current employees, future retirees and existing retirees. The Township of Roxbury adopted a resolution providing medical benefits to retirees in 1997. At the time these added health benefits were expected to be a small percentage of the total municipal budget. But over time, increases in healthcare premiums and modifications to the pension system resulted in Legacy Costs increasing exponentially. Legacy Costs are associated with the bankruptcy of General Motors and Chrysler Corporations.

The Township of Roxbury collected trash for approximately 40 years. The service was provided by township personnel and associate costs were included in the tax rate.

As recently as 2008, an internal review comparing municipal service with private haulers yielded a favorable result. This review did not include Legacy Costs. In 2008, the municipality “out bid” a private hauler to provide sanitation services in an adjacent community.

In the summer of 2010, the township lost its contract with the adjacent community to a private vendor. This loss of revenue, coupled with the 2 percent levy cap, compelled the Township Council to secure bids for sanitation services.

The Township Management and Council took the position that once the bids were received, current employees would be provided an opportunity to “match” the lowest bid. In preparation of that meeting, the following chart was developed.

2010
                                                                       Present Staffing
                                                             16 men                  10 trks
Labor & All Benefits                                                           $1,265,637
Uniforms, supplies, etc                                                      $15,950
Workers Comp Ins                                                            $21,991
Property Insurance                                                            $5,080
Fleet Recapitalization (12yrs)                   $1,500,400          $125,033
Fleet Maintenance                                                             $70,000
Fuel Usage                                                                       $62,583

Compost Disposal                                                             $23,629
Recycling Credit
Paper                                                                               -$89,462
Commingle                                                                        -$9,491
Bulky Waste Stickers                                                        -$27,765
Tax ($3/tn)           10,000 tns                                               -$30,000
Tipping Fees 2010        10,000 tns              $90.38/tn           $903,800

                                             Total                                  $2,336,985
                                             Private Proposal                 -$1,692,000
                                              Diff                                       $644,985

Labor and all benefits includes; salary, health, dental and vision insurance. This item also includes FICA, and cost associated with, disability and pension. Fleet Recapitalization divided the total value of six garbage trucks by 12 years.

The township’s original review, although thorough, did not include an analysis of Legacy Costs. Mayor Jim Rilee, Deputy Mayor Fred Hall, Council members, Kathy DeFillippo, Gary Behrens, Martin Schmidt, Richard Zoschak and Tim Smith raised the issue of future retiree costs. It was agreed that such costs should be analyzed and included in the township’s negotiations with the bargaining unit. Council Member Smith developed the initial analysis of Legacy Cost using the concept of Present Value. His calculation defined, the employees’ average age, age at retirement, current health care cost, and utilizing and calculated the present value utilizing and inflationary and discount rate.

The township further refined the Legacy Cost using a 2008 actuarial review performed by Aon Hewitt Health Benefits Consulting. The review was conducted as part of Statement No. 45 of the Government Accounting Standards Board—Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions (GASB-45) analysis performed on behalf of the New Jersey Health Insurance Fund.

The report developed an Annual Required Contribution calculation for the township based on a 30-year amortization of the Unfunded Actuarial Accrued Liability as a level amortization.

Fiscal Year Ending 12/31/2008                              Results in
Normal Cost                                                        $1,848,300
Unfunded Actuarial Accrued Liability                      $2,464,100
Annual Required Contribution                                $4,312,100

Based on this data the township developed ranges for Legacy expenses based upon a per-employee cost. Dividing the report’s category of Normal Cost which totaled $1,843,100 by the township’s total number of employees in 2008 of 175 yielded a per-employee cost of $10,532. This per-employee cost multiplied by the 16 employees in the Sanitation division resulted in an annual Legacy Cost of $168,512. Using the same methodology, the Unfunded Accrued Liability calculation of $2,464,100 resulted in an annual Legacy cost of $225,290 for 16 employees. In summary, in order to provide health care benefits to 16 future retirees (based on a 30 year amortization schedule) would cost between $168,512 and $225,290 tax dollars a year.

Once the Legacy Costs were included in the township’s prior cost analysis, the difference between private service and the cost of the township’s provision of service increased from $644,985 to a range of $813,497 to $870,275.

As previously stated, the bargaining unit illustrated a willingness to negotiate a more competitive service by voting to re-open their contract. The township met with the unit on several occasions. Both parties presented numerous savings options. The township sought contributions of 50 percent of health care cost for future retirees of the unit. Ultimately an agreement could not be reached and sanitation services were outsourced.

Realizing the significant impact of Legacy Costs on municipal services and tax-rates, the township has further refined Legacy Costs by each bargaining unit. This analysis is detailed in the chart on the previous page. This information will be used in future negotiations with bargaining units.

In conclusion, the Township of Roxbury has developed an analysis of Legacy Costs and will use those costs when analyzing service costs. I would encourage communities to analyze and use Legacy Costs in a similar fashion. I strongly recommend that if an analysis of your township’s Legacy Costs has not been completed that one be conducted. If one has been conducted, take it from the shelf, dust it off and use it.


Roxbury Public Works Director Richard Blood contributed to this article.

Originally published in New Jersey Municipalities, Volume 88, Number 6, June 2011

 

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