Terrifying Picture of City Pension FUBAR Coming Soon to Your Hometown!
Here's some news from a tale of municipal (and, hence, taxpayer!) woe from the toddlin' town of Cincinnati, which just earlier this week decided it was so flush with cash that it could afford to toss hundreds of millions of dollars down the craphole on a freaking streetcar. The topic today is one that is playing out in basically every city hall in the country. And every state capitol building. And at Social Security. It's We Are Out of Money, public-sector pension edition.
Our story thus far: Cincinnati's public employee retirement system is mired in a Gulf spill-sized ocean of red ink. The powers that be spent the past nine months figuring out just how bad the situation is, and yesterday they had a public meeting about the man-made disaster. Let's listen in, via the Cincinnati Enquirer's account:
Without substantive changes, the $2 billion system could see a projected $1 billion long-term shortfall balloon to $1.5 billion within five years….
Even if the plan achieves what many see as wildly optimistic investment returns, it still could lose up to $30 million a year. Not recommendations that, to avert those doomsday scenarios, City Hall might be asked to come up with an immediate cash infusion of as much as $439 million or nearly double its annual payments….
Retirees are understandably freaked that their benefits are going to be cut, but it's worth asking how Pete Rose's hometown and so many others got in this suicide squeeze. Travel back to the 1990s, when the system was "flush with money."
At that time, the city enhanced the annual cost of living increase retirees receive, added vision and dental benefits to health coverage, raised a death payment to cover funeral expenses from $2,000 to $7,500 and increased a so-called "benefit multiplier," the percentage of salary that city employees earn toward their pensions for every year of service.
Those changes increased the pension system's costs, an issue that has become more problematic amid soaring health costs, increasing life expectancies and a shrinking city workforce that now has only one city employee paying into the system for every 1.46 retirees drawing benefits from it.
Other factors that have dug a deeper financial hole include $574 million in investment losses in 2002 and 2008, changed assumptions about prospective earnings and expenses, and inadequate city funding—the latter being, contrary to many retirees' belief, a negligible element in the overall picture.
So what you want to do, Cookie Puss? How you gonna fix the system? The first thing to note is that the city's hands are somewhat tied in terms of screwing with core pension benefits. Which means that the costs will ultimately not be borne by the retirees but by future retirees in the system and, ultimately, taxpayers.
Task force member Chris Stenger, a retirement consultant, told council members the city has "four levers available" to bolster the pension fund—the annual contributions by City Hall and city workers, benefit changes and a potential one-time cash infusion.
The task force's report offers dozens of potential options based on variances in each of the four factors. Annual city contributions, for example, could range from the current 17 percent of payroll up to 31 percent, while cash infusions could be between $53 million and $439 million. A higher cash infusion would lower City Hall's yearly payment, and vice versa….
[City council members] went to lengths at the meeting to stress that legal protections—and compassion—will insulate most retirees from reductions in their basic pension. Retirees could, however, be affected by higher health costs, reduced annual adjustments and cuts or elimination of the death benefit.
For a million different reasons, this is a horrible situation, particularly for folks living on a fixed income.
But you know what? As we've noted here, the public sector at all levels already enjoys better compensation and job security than the private sector (this is something that even former California Speaker Willie Brown understands). It's time for the public sector at all levels of government, to have its benefits come into line with those of the private sector. Which means that public sector workers need to shoulder more of the burden for their benefits. And that benefits are going to be cut. And they ought to be cut now. And city councils and state legislatures should have the cojones to change whatever laws they need to to make this happen. The alternative is to keep shoveling public money into systems that are every bit as zombified as Japanese banks. It is the height of irresponsibility for governments to squeeze taxpayers ever tighter to pay for super-sweetened benefits for the relative few.
The private sector has been shifting to defined-contribution retirement plans for decades now, ever since 403(b) and 401(k) plans came online. This is a better solution for all sorts of reasons, not the least of which is that it allows businesses to easily budget for future liabilities: They don't have any. Their contribution (if they make one at all) is made every pay period, period. They don't have to worry that five, 10, or 50 years down their line they're going to be on the hook for billions of dollars. And employees get more control and knowledge of what their retirement is actually going to look like, which lets them plan accordingly.
A number of public-sector pensions have already started doing this. There's always the question of stranded costs—what to do with folks in the existing system? The traditional answer has been to steal from the relatively poor and young, which is no way to build a forward-looking society, that's for sure. Ohio's own State Teachers Retirement System started offering a 403(b) plan about a decade ago and it diverts half of the state's matching contribution to pay for current beneficiaries. Which totally sucks for people still paying into the system. Such compromises may be inevitable and the sooner we all come to grips with the pension problem that is everywhere, the better.