Cincinnati Must Pay Through the Nose—and not just for crapola football and baseball teams!
In a story that I'm sure is being repeated all across America, even in cities with good sports teams, The Cincinnati Enquirer is reporting that Queen City officials must kick in a whopping extra $125 million to its municipal-employees pension fund. The reason for the huge contribution, which represents 81 percent of city payroll and 30 percent of its general budget? Massive losses in the stock market.
The city's stratospheric pension payment for 2010 is largely the result of a staggering $854 million loss suffered in last year's stock market meltdown, which saw the retirement fund's assets plummet from $2.69 billion to $1.83 billion….
Under the arcane accounting procedures used to monitor the pension system's ever-changing conditions, investment gains and losses are spread over multiple years to avoid overreaction to the stock market's cyclical ups and downs. But a loss as severe as last year's inevitably has a significant impact on the city's payment, based on an annual report examining the retirement fund's short- and long-term assets, expenses and liabilities….
The $125 million figure represents 81 percent of the city's payroll. In contrast, for 2008, council approved a $25 million payment, or 17 percent of payroll, half the "required" contribution for that year of $51 million, 34 percent of payroll.
Cincinnati will certainly find a legalistic way out of paying that sum all at once, or even ever, I'm sure. There must be tons of burgs all across this vast republic that are facing exactly the same sort of thing.
This sort of story is bad enough in the private sector where businesses end up shoveling increasing amounts of resources on retired employees. But it's really awful in the public sector, where government entities pass on extra costs to residents in the form of hiked taxes, reductions in services, and more. This sort of story also represents one of the great benefits of defined-contribution retirement plans: The money goes in every pay cycle and that's that from the employer's angle.
The big problem there, of course, will be political demands for higher-than-average returns on investments under individual control, especially during bear markets. 401(k)s only came online during the '80s due to a tax code loophole and it's clear that there is going to be a huge societal learning curve as the first folks whose retirements are solely based on those instruments start to cash out (and realize they underfunded the damn things tremendously and/or screwed up their investments). But one problem at a time.
How did Keynes pay for his own funeral?