Saturday, October 3, 2009

The Lid Blows OFF in Alberta

Over the past couple of weeks in Alberta there have been several new reports on the compensation packages of senior government officials.

The compensation levels for many public sector employees at the top have been skyrocketing. As in all Canadian provinces the biggest spending areas in Alberta are Healthcare taking 36% of the provincial budget and Education using 26% of the budget.

It is in these areas that Alberta had trouble controlling spending on employee compensation.

Last week we spoke about a $4.57 Million package that was given to the President of the University of Calgary after 9 years of employment. The President was just the leader of the posse that collected a huge increase in compensation over the past few years.

Although these headlines appear alarming they are just the tip of an iceberg. The annual salary costs pale in comparison to the pension compensation that is created by these huge increases in salaries.

It is not only in the education sector that Alberta senior servant compensation is out of whack. There are troubles in healthcare and right across the civil service.

The Tip of the Iceberg
In order to explain the real costs let me share an email I got last week from my friend and pension expert Leo Kolivakis from the Pension Pulse
For a male age 65 in 2009 with an annual Retirement Pension of $70,000 indexed at 2.5% with a 60% survivor component the present values are:

(1) using a discount rate of 5% : $1,254,426
(2) using a discount rate of 6% : $1,131,461

Both scenarios assumes that the pension payment occurs on January 1st of the given year. Mortality follows male mortality as assumed under the 23rd CPP Actuarial Report.
This refers to the cash value of a defined benefit pension. The present value refers to the amount of money that is required to be in the pension plan for a typical government gold-plated pension plan.

For a defined benefit pension plan a cash value of 16 to 18 times the annual pension payments is required.

So What
This shows clearly what happened in the case of the U OF Calgary pension. The President was earning $440,000 and was entitled to a 70% or $308,000 per year pension. In order to fund this he needed a pension cash value of $4.9 million, which the taxpayers happily provided. The Calgary Herald reported $4.75 million. 

The President earned his pension cash value over a 9 year period. That was an average into his pension plan of $544,000 per year. More than his annual salary. Yet his compensation was "officially" only his salary.

Most senior government executives have set-up specially protected plan in their own names. They call them Supplementary Pensions Plans. Check you local government's annual reports and likely you will see one of these listed. It is for any government official making more than the annual CRA (Revenue Canada) allowance for pension contributions. Yes they have made special rules for themselves!

Annual compensation increases are the killer because every increase gets amplified in the pension by 16 times.The taxpayer has to pay for both. It is a misrepresentation of the true compensation of these employees. Yet all of the pension contribution is a tax-free payment to a government employee. You and I would have to a pay tax on the portion of pension contribution received over and above our annual RRSP limit.

The Lid Blows Off!
In the article today about the Premier of Alberta's office staff we saw huge increased last year.

Lets look at one situation the Premier's Chief of Staff. His salary last year was $253,000. If it was up 16% last year it was $218,000. This is an increase of $35,000.

The cash value of his pension is another matter. Remember that the pension is 70% of final average salary. Last year the cash value required for his pension was $2.4 Million. With his salary increase the cost of his new pension is $2.83 million. That is an increase of $430,000.

Here is a good video of a similar situation earlier this year in Vancouver. Vancouver's CFO gets gold-plated pay package

More reports on the disaster in Alberta
Auditor general questions hefty salaries, severance for senior executives
Government 'restraint': Do as I say, Not as I do
Alberta pays out $44M in bonuses
Public Soundsoff

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