Should the town of Allentown, PA, outsource its pension check-writing?

For years, the City of Allentown, PA, has had its payroll clerk write the pension checks to its retirees every two weeks. The pension check-writing system is based in an older accounting system that was installed in 1983.  The only person who has been trained to use the older accounting system to write the pension checks is the payroll clerk.  The payroll clerk is in good health and has no plans to leave city employment. Other checks (i.e., payroll checks) have been moved to a new accounting system; the pension checks cannot be written using the new system at this time.

The Bank of New York Mellon, the bank that holds the pension funds, offers a check-writing service. City officials have indicated that they would like to move the pension check-writing to the Bank of New York Mellon because it would be more efficient and would also provide backups of all data (the Bank of New York Mellon has several backup plans in place.) The pension check service would cost the Allentown pension fund about $16,000 per month.

The city’s police and fire unions have opposed the outsourcing of the pension check-writing function to the bank.  The bank typically writes pension checks once a month, while retirees in Allentown’s pension system have been receiving their pension checks every two weeks.  Union officials have stated that they feel that changing pension check-writing to once per month would violate union contracts.

The bank has offered to write the pension checks every two weeks, but the cost of the pension check-writing service would be double the original cost estimate. Allentown City Council is willing to have the bank issue the pension checks every two weeks.

Union officials insist that the city can process the checks in-house for much less than the Bank of New York Mellon can and that the pension check-writing should not be outsourced.

For additional details, see original article from The Morning Call.

Questions

1. What are the advantages to processing the pension checks in-house by the payroll clerk?
2. What are the advantages to outsourcing the pension check-writing to the Bank of New York Mellon?
3. What are the probable types of costs of processing the pension checks by the Allentown payroll clerk? Are these costs fixed costs or variable costs?  How should each of these costs be treated when comparing the cost of processing pension checks in-house to the cost of processing pension checks by an outside bank?
4. Suppose Allentown decides to continue to process the checks in-house.  What would need to be done to the current process to make it more efficient and to reduce the possibility of system failure?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned.  Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.  The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)
• YouTube video (narrated article in shareable YouTube link)

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