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VOL. 125 | NO. 133 | Monday, July 12, 2010

Pension Bomb

Local Governments Brace for Explosion of Retirement Payouts

By Andy Meek

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For years, government pension liabilities – the lifetime retirement benefits paid to everyone from local cops to garbage collectors – have been the equivalent of ticking time bombs.

They were assembled when governments like Memphis and Shelby County, among many others, mixed together some explosive materials.

Those things included rosy projections of investment returns, the guarantee of unchangeable lifetime benefits and the ability for employees to retire early and start collecting those benefits.

The fuses were unwittingly lit long before now. And unless governments finally own up to the big retiree bills they’ve racked up, more people here and elsewhere are becoming convinced a detonation that will blast a big hole in state and local government balance sheets is getting closer by the day.

It’s partly thanks to a convergence of factors not unlike the perfect storm that battered the housing market.

Among those factors are a population that’s living longer than ever and public sector employee headcounts, some of which swelled during the same recession that kneecapped the private sector.

In some places, the growth has been a pattern for years.

Over the past decade (1999-2009), the city of Memphis’ employee headcount swelled almost 10 percent, while Shelby County’s dropped about 7 percent.

It was a decade of expansion and annexation for Memphis, which ended those 10 years with almost 700 extra employees than it had at the start of the decade.

Even when the recession hit, the city didn’t necessarily slam on the brakes.

“Definitely, there is a recession,” Memphis City Councilman Joe Brown declared during a budget hearing in the summer of 2009. “But there’s not one in city government.”

Mission: Impossible

During that same decade, Shelby County shed a little more than 500 employees. But the county may still have plenty of payroll-related pain to deal with soon.

In less than two months, around 50 Shelby County government employees who will be eligible for full or early retirement are expected to depart county government and begin collecting a pension.

That might not sound like a lot of people compared to the nearly 6,000 county employees currently on the payroll. But those 50 retirements Sept. 1 would more than quadruple the usual eight to 10 county employees who retire each month.

And there might be even more than that – a lot more.

Those 50 county employees are among the almost 670 who will get their first opportunity to retire Sept. 1 under the terms of the county’s newest and arguably most generous pension plan. And more than 700 employees who participate in the county’s other two pension plans will be eligible to retire at the same time.

That’s almost 1,400 employees in all.

The 50 retirements that appeared certain at press time are the result of employees who already have tipped their hand or started filling out paperwork, making their departure a near certainty.

Others may be holding out to see what the results of August’s county mayoral election will be – and if they’ll still have jobs afterward.

That potential for a mass staff exodus in Shelby County comes at a critical time for state and local governments, many of which are now racing to defuse pension bombs because of generous benefit promises now starting to look unsustainable.

“Whatever pension-cost surprises are in store for shareholders down the road,” Warren Buffett wrote in Berkshire Hathaway Inc.’s 2007 annual report, “these jolts will be surpassed many times over by those experienced by taxpayers.”

Tick, tock

And among the myriad factors complicating pension reform: any changes generally affect only those workers a government hasn’t yet hired. Benefits for current retirees and promises to current employees usually can’t be touched.

That doesn’t mean governments aren’t already cobbling together scaled-down plans for future workers.

A few weeks ago, Shelby County started the long march in that very direction.

The September milestone that will present hundreds of county employees in pension Plan C with their first opportunity to retire is still a few months away.

Yet, tellingly, the county has already decided Plan C’s days are numbered.

The Shelby County Commission voted June 21 to start the process of creating one or more newer – and, almost certainly, less generous – pension plans, after which Plan C would be closed to new employees.

The details have yet to be worked out, but any number of changes could be in the works. Tweaking the calculation that determines a retiree’s benefit payout and hiking employee contributions into the plan are just some of what could be on the table.

But the clock is ticking.

If Shelby County left things alone, it would require more than doubling the county’s current contribution to the plan over the next four to five years, said Jim Martin, the county’s deputy administrator of benefits.

“One of the prime drivers of the cost of our system is that we let folks out with 25 years or more,” said Mike Ritz, a county commissioner who also was part of a task force that recently spent months studying the county’s retirement system.

That task force, appointed by interim county Mayor Joe Ford, was supposed to come up with recommendations on how to shore up the retirement system.

“We could be paying out benefits for somebody for 40 years,” Ritz said. “And that’s just going to terribly burden the system if we keep adding employees and doing that.

“We’ve been sitting in this mode for a while, but this is a universal thing. Every state and municipal retirement system is in the same boat.”

A dollar short

Some are struggling more than others. A survey earlier this year from Pew Center on the States found Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia don’t have the funding for more than 30 percent of their pension obligations.

The study found 13 others are less than 80 percent funded.

As of June 30, 2009 – the most recent date covered in an actuarial study – the city of Memphis’ pension plan was about 80 percent funded. Shelby County’s was 102.6 percent funded, meaning that if every potential county retiree quit work and started collecting benefits at the same time, the county could make good on its obligations to them.

Both of those percentages are expected to fall, however, once the two governments’ next yearly actuarial studies are completed this year.

City and county governments will use the actuarial studies that come out later this year to determine how much more money they need to pour into their pension systems to keep them well-funded.

It ought to be of great concern to taxpayers, because every extra dollar that needs to go to a local government’s pension plan – for whatever reason, whether costs are going up too fast or to make up for the plan’s poor performance in the volatile market – it means one dollar less for everything else.

It means a dollar less for school funding, police and fire protection and the myriad other municipal services a local government provides.

“Public pension promises are huge and, in many cases, funding is woefully inadequate,” Buffett wrote in his company’s annual report. “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed.

“Promises involving very early retirement – sometimes to those in their low 40s – and generous cost-of-living adjustments are easy for these officials to make. In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep.”

Ripple effect

In Memphis and Shelby County’s case, the old axiom about success having many fathers is turned on its head. It’s the pension problem that has many fathers, one of which is the Great Recession.

The market downturn in 2008 rattled both local governments’ plans in a big way.

Shelby County’s pension plan lost about a third of its value that year. Likewise, Memphis’ plan lost almost one-third during that same time period.

A loss that big makes a catch-up all the more important – and improbable – because even if both plans gained back 30 percent in value the following year, it wouldn’t put them back where they started.

The losses diminished the asset base, the same way a 50 percent loss of a pie will not be recovered just because there’s a 50 percent gain in what’s left of the pie.

As of July 1, 2009, Memphis had almost 6,300 active employees paying into its pension plan. The number of retirees, disabled plan participants and beneficiaries receiving payments from the plan at that time was a little more than 4,100.

Before the recession hit, the value of Memphis’ pension plan topped $2 billion – $2.35 billion at the end of 2007, to be exact.

At the end of 2008, it had sunk to almost $1.6 billion, then inched back up to $1.8 billion at the end of 2009.

At the end of the first quarter of 2010, the city’s plan inched up further, rising to $1.855 billion, but still noticeably shy of its 2007 high mark.

Shelby County, which also has about 6,000 employees, has 2,850 retirees and other beneficiaries currently drawing benefits.

The county’s plan value dropped from a little more than $1 billion at the end of 2007 to a little more than $670 million at the end of 2008. By the end of 2009, it was back up to almost $850 million.

‘A real problem’

The problem both governments are dealing with is not unlike that of the frantic train conductor seen in movies who has a quick decision to make once he spies a gap in the tracks ahead.

He can yank hard on the brakes. Or he can not make a decision at all and see if the train sails fast enough over the gap to make it to the other side – or plunges into a ravine below.

City and county officials have decided not to wait.

The county’s pension board at its meeting a few days ago began trying to figure out what one or more new county retirement plans would look like – one for general employees, one for public safety workers.

City officials may be headed in the same direction.

“(Memphis) Mayor (A C) Wharton has a committee, and one of the things they’ll look at is the level of benefits offered to city employees,” said city finance director Roland McElrath. “It will make recommendations to ensure that we can afford the level of benefits we offer going forward.

“At this point, I don’t want to go into a lot of specifics, just because the committee has not formally made any recommendations yet. But some of the areas they’ll look at, I’m sure, will be the eligibility requirements for the plan. To ensure individuals who receive their benefits have reached what we would consider a normal retirement age. And they’ll probably look at the rate at which active employees accrue their benefits.”

Before the County Commission took its vote authorizing the creation of new county pension plans last month, Joe Saino strode to the podium in front of the body.

Saino, a member of Ford’s retirement task force and self-styled public watchdog, has long argued from the sidelines that the county’s pension system has needed reforms long before now.

“We’ve got a real problem in this county,” Saino told the body about public pension obligations, adding that Shelby County needs to get busy quickly to fix it.

The commission apparently agreed, because without any discussion they took their vote. And just as quickly, the motion to create at least one new county pension plan was passed.

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