Finally, LIPA has issued a formal Brattle report on its restructuring study just less than 2 weeks before its Board is going to make a decision on a new structure. Even though the results of the study have been discussed in open meetings, a quick reading of the full report reveals at least one bombshell.
Suddenly coming to light in the final report, it appears that LIPA had started to pay down the $600,000,000 underfunded pension and other employee benefits in 2009. Payments for 2009 and 2010 show that LIPA paid National Grid approximately $118,000,000 or approximately 20% of the total amount that may be owed. The question is why? Was there some backroom agreement with National Grid? Why has LIPA started to pay now?….what changed?…Will this give an advantage to National Grid in the competition for the operating contract if the ServCo model is chosen?
Brattle states that:
“We did not have direct access to National Grid personnel during the course of our study. It is our understanding that LIPA staff reviews and discusses such adjustments to benefits and pension charges to ensure that they are appropriate under the terms and conditions of the MSA”.
“Discussions with LIPA accounting personnel indicate that these expense charges appear to be adjustments, as opposed to standard plan increases”
“Appear to be adjustments” as opposed to “standard plan increases”?…..this is critical and must be clarified before LIPA goes any further in deciding its future. If nothing else, it raises serious concerns about Brattle’s initial assertions that personnel costs would be higher for the full municipalization structure.
Time is running very short on LIPA’s schedule for making decisions. But to arrive at any acceptable outcome the utility must carefully analyze all of the ramifications of the pension issue before it places ratepayers on the hook for its cost.
From the New Brattle Report:
3. Pension and Benefits Costs
The total cost of labor-related expenses also includes the costs associated with benefits, pensions, and other post-employment benefits (OPEBs). The total benefit and pension expense (for LIPA and National Grid combined) in 2010 was roughly $138 million. When added to the cost of direct labor (approximately $158 million), the total of labor-related expenses in 2010 was approximately $296 million. The accounting underlying benefits is straight forward as employees have prescribed packages of benefits, such as dental, medical and vision care, as well as paid vacation time. Accounting for pensions and OPEBs is somewhat more complex, however, because defined contribution plans requires actuarial analyses. LIPA and National Grid have different retirement plans. Furthermore, the National Grid portion of the work force is composed of a combination of bargaining unit and management personnel, which fall under different separate plans. Both LIPA and National Grid record annual benefit and pension (including OPEBs) costs as separate expense items in its accounting records. Thus, we were able to observe the ratios of:
1) benefits to direct labor costs; and 2), pensions (including OPEBs) to direct labor costs, as well the combined ratio of total benefit and pension costs to direct labor costs.
Benefit and pension cost data by functional area for LIPA and National Grid are provided in Appendix C. The appendix also derives the ratio of benefits to direct labor costs and the ratio of pensions to direct labor costs.
The ratio for LIPA’s benefits to direct labor cost was approximately 33% in 2009. The corresponding ratio of pensions (including OPEBs) to direct labor was 25% for that year with the combined ratio of total benefits and pensions to direct labor totaling 58%. This ratio has increased slightly over time. It increased again in 2010, to 68%.The ratio of benefits to direct labor costs observed for National Grid, as reported in the company’s FDM, was 36% and the ratio of pensions (including OPEBs) to direct labor cost was 53%. This resulted in a total ratio of benefits and pensions to direct labor of 89%. Relying on a comparison of the ratios for LIPA and for National Grid’s LIPA operations suggests that LIPA’s benefit and pension costs were lower than National Grid’s. It also suggests that LIPA’s pension plan, which is part of the New York State and Local Retirement System, is considerably less expensive on an annual expense basis than is National Grid’s.
Closer inspection of the benefits and pension entries at the functional level, however, indicated there appeared to be sizable lump sum expenses (totaling roughly $54 million in 2009, adjusted to roughly $64 million for 2010) assigned to the Human Resources and Other/Corporate functions and charged to LIPA. (The areas of apparent adjustment are highlighted in the table in Appendix C.) Discussions with LIPA accounting personnel indicate that these expense charges appear to be adjustments, as opposed to standard plan increases.Given these apparent non-standard adjustments, we concluded that a ratio of total benefits and pensions to direct labor costs of 89% (i.e., 36% plus 53%) was not the appropriate ratio for the National Grid labor force for use in forward looking analyses.
10 Removing the adjustment (or “catch up” of benefits and pensions) resulted in a ratio of total benefits and pensions (including OPEBs) for National Grid of aproximately 45%. It also resulted in a ratio of benefits and pensions to direct labor costs for the combined LIPA and National Grid entity of approximately 46%. While we included the entirety of benefits and pension expenses in our baseline (i.e., $138 million), we segmented the benefit and pension “catch up” adjustment from the remainder of the “core” benefit and pension expenses. This allowed us to use the adjusted ratios (58% for LIPA, 46% for National Grid and 46% for the combined labor force) as the baseline for benefit and pension calculations.)
10 We did not have direct access to National Grid personnel during the course of our study. It is our understanding that LIPA staff reviews and discusses such adjustments to benefits and pension charges to ensure that they are appropriate under the terms and conditions of the MSA.