Memphis Mayor A C Wharton Jr. will take a five-year plan for meeting the city’s $709 million unfunded pension liability Tuesday, Dec. 17, to Memphis City Council members during their executive session.
Wharton puts the city’s unfunded liability at $709 million, requiring an increase in annual payments on that liability of at least $90 million.
The administration would ramp up over five years to fund the pension gap at $100 million annually as it changes retirement benefits for new hires to city government as well as unvested city employees – those city employees who have been on the job for less than 10 years.
The five-year ramp-up peaks at $100 million in the fiscal year that begins July 1, 2018, in what the administration describes as growing the contribution “aggressively.”
It would keep the amount the city is paying at $20 million for the current fiscal year. But the amount would increase to just under $40 million in the next fiscal year that begins July 1 and increase steadily, peaking with $100 million in the fiscal year that begins July 1, 2018.
The administration has identified $140 million in “cost cuts and revenue enhancements” to increase the city’s annual required contribution by $80 million at the end of the five years.
The largest of the three pieces is $80 million in “efficiencies” that come from a five-year strategic plan. The efficiencies would mean cutbacks in city spending in other areas with those savings put toward the liability.
It is the upper end of the $60 million to $80 million impact that Wharton, Chief Administrative Officer George Little and City Finance Director Brian Collins had predicted early on would be the approximate hit to the city budget as currently configured.
The administration estimates the redesign of the retiree medical plan generates $21 million in savings with another $9 million in savings from the proposed redesign of the employee medical plan.
Wharton two weeks ago began briefing city employees on the proposal, which involves big changes in the benefits city employees who are not yet vested will receive.
Those employees with less than 10 years of service to the city would go from a defined benefits plan to one of a defined contribution. It is similar to a 401(k) plan.
It is a fundamental change in pension and retirement benefits for city employees that some on the council have been calling for over several years. It is also a change that others on the council have opposed because those affected are already on the city’s payroll.
There is little argument on the council against changing the benefits for those city employees hired after the changes are approved.
Wharton said earlier this year that the real question within his administration was whether the change would apply to unvested city employees.
Unions representing city workers, including firefighters and police officers, have quarreled with the city’s estimate of the unfunded liability.
The Memphis Fire Fighters Association, using its own independent experts, puts the unfunded liability at $301 million, less than half the city’s amount.
Little has argued even that is still a substantial number requiring the city to change the benefits retirees receive, which federal law now requires the city to account for as a future liability.
The summary also says the administration’s plan for an increasing scale of payments over several years will have to be reviewed and approved by state officials.
The administration will be watching for the reaction of Tennessee comptroller Justin Wilson in particular, who said earlier this year that the unfunded liability is one of several concerns he has about the finances of city government. Wilson has also made it clear that if the city does not come up with an adequate plan to address the unfunded liability, state leaders could very well impose their own plan on the city.
At Tuesday’s council briefing, the administration will recommend that the council close the defined benefit pension plan and adopt a defined contribution pension plan.
Through January, the administration will talk with state officials and regulators about the dollar amount goals in the plan and whether the ramp-up at those levels is acceptable to them.
From February to March, the administration will develop the final version of its long-term plan to meet the unfunded liability gap and take it to the council.
When the city budget season begins in April, the budget proposal for the fiscal year that begins next July 1 is to include the first changes in city spending along with specifics on the other recommendations.