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VOL. 129 | NO. 114 | Thursday, June 12, 2014

Council Weighs Timeline for Key Votes

By Bill Dries

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The Memphis City Council’s vote later this month on health insurance changes for city employees and retirees is critical in terms of increasing the city’s annual required contribution toward its unfunded pension liability.

Memphis City Council members weigh key votes to come this month and next month on pension and health insurance changes that are linked.

(Daily News File/Lance Murphey)

But council votes on switching new city hires and employees with less than 10 years of service to a defined contributions plan – the other part of a fundamental shift in city finances and benefits – won’t be final until the new fiscal year starts July 1.

The change in health care benefits is essential to the city’s plan for upping its annual contribution to the pension liability. Without an increase in that contribution, the city’s pension plan is financially unsustainable.

Memphis Mayor A C Wharton Jr. wants to increase the annual required contribution toward the pension liability from its current $20 million to $35 million in the fiscal year that begins July 1.

In budget committee sessions, council members have added to the $15 million increase by cutting $12.5 million elsewhere in the budget and directing that funding to the annual contribution.

“The extra $27 million to $28 million on top of the original $20 million is almost completely based on the health care cost savings,” said council Chairman Jim Strickland. “So if the majority of the council does not want to basically take away the retiree health care, that number plummets back down closer to $20 million. Almost all of the increase in the ARC funding is from the retiree health care savings.”

The calculations also point to another critical council decision to come: whether to approve Wharton’s plan for a five-year ramp-up to the annual required contribution, or to instead ramp it up over perhaps two fiscal years and complete the funding shift before the 2015 city elections.

“I think we still have a substantial conversation to have,” said council member Lee Harris. “In some ways, we have been kind of chipping at the edges.”

The timeline emerged Tuesday, June 10, as the council’s actuary firm, Segal Consulting of Atlanta, explained to council members about the latest dollar figures in the annual contribution and the unfunded liability.

Segal and PricewaterhouseCoopers, the actuary firm for the Wharton administration, settled on a liability of $551.9 million and an annual required contribution of $78.3 million.

Segal’s preliminary numbers for both had been lower, primarily because Segal projected a lower amount of pay raises for city employees in the future and the firm’s mortality estimates cut the estimated life expectancy of city workers by three years.

At the outset of the liability crisis, the administration estimated the overall unfunded liability at $709 million and the annual required contribution at $100 million.

The actuary firms settled on estimates and projections somewhere in the middle of their most recent independent estimates.

But council members still have their doubts about the future pay raises projected at an average of 3.9 percent a year.

“Every year?” Strickland asked. “It almost seems like this is compound interest.”

Eric Atwater of Segal said the pay raise projections take into account promotions and steps in pay, as well as a lack of pay raises for city employees in past fiscal years and even a 4.6 percent pay cut two years ago.

“It’s based on actual experience,” Atwater said.

He also said a switch to a defined contributions plan probably won’t have an impact on lowering the liability for three to five years after it is enacted because unvested employees typically have a lower pension liability.

Segal Consulting will return to the council likely at a special meeting later this month or early next month to brief members on various scenarios for change and the funding decisions they involve.

Strickland estimates the council will take its third and final vote July 15 on the trio of ordinances that would switch to the defined contributions plan. The first reading of the ordinances, as well as a vote on the resolution that changes the health insurance coverage and the operating and capital budget resolutions, will be at the council’s Tuesday, June 17, meeting.

Atwater told the nine council members at Tuesday’s nonvoting session that the July decisions are not as urgent in terms of when they have to be made, but are crucial decisions because of the changes they will set in motion “given that you get one bite at the apple.”

“I think you should take your plan and make sure the plans you choose you are 100 percent confident in,” he added. “We want you to make a decision when you are ready and you are comfortable given that you’re not going to (fully) fund the ARC in (fiscal year) 2015.”

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