Pension Hotspots: Cincy, Detroit and Baltimore
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By Josh Altic
The monthly Pension Hotspots Report is a monthly publication about local pension reform efforts.
This month's edition features a new initiative in Cincinnati, Ohio. Petitioners started collecting signatures to qualify this measure for the ballot on July 18, 2013. They seek to amend the city charter in order to reform the pension plan offered to new city employees.
With $862 million in unfunded pension liabilities, Cincinnati reformers launch petition drive:
In 2012, the city of Cincinnati was forced to withdraw $35 million from its general operating fund to subsidize pension payouts. In 2013, with the city's unfunded pension liabilities exploding to $862 million, the city will have to withdraw $85 million from its general operating fund to make up the difference in money going to retirees. Reformers who want to change this system have proposed a charter amendment initiative.
On July 18, the Cincinnati for Pension Reform Committee began collecting signatures for a charter amendment that proponents say will "ensure a fair and sustainable retirement system while preserving essential city services and protecting residents from payment of excessive taxes". To qualify this charter amendment for the November 5, 2013 election ballot, petitioners must collect just under 7,500 signatures before the September 6, 2013 deadline.
If approved, the initiative will change the city's public pension plan for new hires from a defined benefit plan to a defined contribution plan. It would also implement contribution caps for the city and make cost of living adjustments compatible with actual increases in the consumer price index, with a cap at 3% annually. Several other rules may also be established by the amendment, such as a stipulation that no city employee can simultaneously earn income from a city or government job and receive retirement benefits.
Supporters of this amendment argue that the current retirement benefit plan is unsustainable and is causing dire financial problems for the city. They propose that this charter amendment will provide sustainable retirement benefits for new city employees without requiring tax increases or the cutting of city services. Burr Robinson, a Hyde Park resident and a member of the Committee behind the amendment, expressed hope that the petition would be successful and that both republican and democratic voters would support the proposed pension reform. He then went on to say, "This is a common-sense approach. We can’t meet our pension obligations, and the problem only gets worse the longer we stick with this current structure." Paul Jacob, president of the Liberty Initiative Fund and an expert in local initiative and referendum petitions, said that the city "can't wave a magic wand to solve all of its problems, but this reform stops digging the hole deeper."
Opponents of the measure argue that under the proposed pension plan, city employees will not have as much security about their future. Director of the Ohio Alliance of Retired Americans Bentley Davis had this to say about the reform: "This proposed amendment is nothing short of an attempted destruction of the retirement security for our city’s workers, those who spend their years working to make our city a great place to live and work."
Leading up to the reform:
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Using a new formula that includes the pension responsibilities of cities, Moody's Investor Services downgraded the bond rating for Cincinnati in July 2013. Moody's new rating for the city's general obligation bonds moved from Aa1 to Aa2 and revised the outlook to negative, while its outstanding economic development, non-tax revenue and Convention Facilities Authorities second lien revenue debt was moved down from a Aa2 rating to Aa3, likewise earning a negative outlook.
In the face of these financial difficulties and the massive $2.87 billion in pension liabilities, underfunded by over 30%, the Cincinnati city council voted in March to approve an emergency ordinance allowing a 30 year parking contract that would bring in about $90 million. Moody's had expressed its disapproval of the city's use of one-time sources to balance its budget and this time citizens put a stop to it by successfully petitioning for a veto referendum on the parking contract. The Cincinnati for Pension Reform Committee, seeking a long term solution to the city's pension problems, began collecting signatures for their pension reform charter amendment on July 18, 2013.
A pension trend?
Even with Cincinnati's $2.87 billion retirement benefits fund underfunded by 30%, its position of distress is not unique. Chicago features a retirement benefit fund which is only 50% funded, meaning that of the over $50 billion owed to retirees, the city is short by $26.8 billion.
Both of these cities have had their credit rating downgraded. WLS-TV, Chicago's ABC affiliate, announced that, "Chicago likely will have to pay more to borrow money after Moody’s downgraded the city’s credit rating and says the outlook for the future is negative. Moody’s Investors Service lays the blame squarely on the city’s large and growing pension liabilities." And, using a new formula that takes into account pension fund liabilities, Moody's has also moved Cincinnati's credit rating down a notch, also with a predicted negative outlook.
On the other hand, Detroit finally collapsed under the pressure of its $18.5 billion in debt. Nearly a third of this debt is from the city's unfunded pension benefit liabilities. Many who have analyzed the decline of Detroit from being the fourth largest city in the nation and featuring a thriving economy to losing more than a million residents and finally filing for bankruptcy, place much of the blame squarely on the cities unsustainable pension system making promises without the money to cover them. When the city filed for bankruptcy, it had promised $5.1 billion in pension payouts to nearly 30,000 retirees and current employees without any assets to back up these promises.
These conditions are not limited to Chicago, Cincinnati and Detroit. Mike Shedlock of SitkaPacific Capital Management stated, "There is absolutely no way Chicago, Oakland, Baltimore, Philadelphia, LA, Houston, and numerous other cities can meet pension obligations without a major restructuring of promises.” In a column he wrote for Townhall, Paul Jacob, president of the Liberty Initiative Fund and an expert in local initiative and referendum, discussed a possible solution to the problem of unfunded pension liabilities seen in cities throughout the nation. "Don’t allow our governments to make promises they cannot keep," wrote Jacob. "While the law requires that those workers who have earned pension benefits receive those benefits, no law says we have to continue an unsustainable system that could lead to bankruptcy." Jacob went on to say that cities must "move new government workers to the same retirement system used by most American workers: a defined-contribution 401k-style program."
These changes from defined benefit plans, in which employees are guaranteed certain benefits independent of investment performance and available funds, to defined contribution plans, where benefits depend on the performance of an individual account, face opposition especially from unions and public employee groups and organizations. Due to this opposition, some pension system changes, such as the San Jose pension reform, result in lawsuits. In general, opponents to such reform argue that it threatens the security of public employees' retirement years and makes it harder for cities to attract quality hires.
Efforts to make such pension reforms have begun in Tucson and Cincinnati through petition initiative campaigns. Other pension changes are being implemented and discussed by local lawmakers. Baltimore's pension liabilities are currently only 67% funded with $681 million in liabilities not covered by the city's assets. Mayor Stephanie Rawlings-Blake introduced legislation on July 15, 2013 that would move new employees from the current defined benefit retirement plan to a 401(K) style plan. Officials expect this reform to be saving the city $7.8 million per year by 2022.
Tucson reform measure is all set to appear on the November ballot:
The Tucson City clerk and the Pima County recorder have verified that of the estimated 23,000 signatures gathered for the Tucson pension reform initiative petition, more than the required 12,730 were valid. This means that the measure, which seeks to overhaul the city's pension plan for new employees, will appear on the November 5 ballot.
Baltimore Mayor introduces pension reform legislation, hoping for millions in savings:
The city of Baltimore went from having a pension system with fully funded liabilities in 2003 to owing $681 million in pension promises not backed by city assets. This jump from 100% funding to only 67% funding of pension liabilities has triggered lawmakers to take certain steps to reform the pension systems in place for city employees. The latest of these is a bill proposed by Mayor Stephanie Rawlings-Blake that would move all new hires from the defined benefit plan currently in use to a 401(k) style plan, in which employees would contribute 5% of their salaries to their retirement accounts, with city contributions of 4%. This plan would include an option to invest an additional 2% of salaries, which would bump the city contribution up to 5%. City officials estimated $1 million in savings in 2014, with savings increasing annually to a projected $7.8 million for the year 2022. The proposal now awaits city council approval.
Pension reform court cases
The court case over the legality of San Jose's 2012 pension reform measure may affect the outcome of the race for Santa Clara County District 2 supervisor. The trial has highlighted the issue of pension reform, causing the differing positions of the candidates, Cindy Chavez and Teresa Alvarado to be thrown into sharp relief; Cindy Chavez opposed the San Jose Measure B pension reform while Cindy Chavez supported it. The pension reform measure is relevant to Santa Clara County voters both because part of San Jose lies in District 2 of the county boundaries and because the county itself faces pension difficulties with $1.8 billion in unfunded retiree health care liabilities and an additional $2.3 billion unfunded pension debt. San Jose State political-science professor Larry Gerston believes its possible this issue could decide this election. Gerston said, "Sometimes you get a salient issue that pops up at a critical point in an election."
List of 2013 local pension measures
- The American Interest, "Baltimore’s Pension Pivot," July 20, 2013
- LJAF SOLUTION PAPER: Creating a New Public Pension System
- Text of Tucson City Initiative
- Initiative to void ordinance 02-18
- Cincinnati City Charter
- Cincinnati City Elections Commission website
- Cincinnati Inquirerer, "No letup for Cincinnati’s distressed pension plan," January 2, 2013
- Watchdog.com, "Cincinnati’s pension costs threaten to eat it alive," June 11, 2013
- The text of the proposed charter amendment
- Source: Phone interview with initiative petition expert Paul Jacob, president of Liberty Initiative Fund
- Cincinnati.com, "Vote sought on pension reform," July 21, 2013
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- City of Chicago website: Just the Facts: Answers to Frequent City Pension Questions
- Townhall.com, "Debtroit: Coming To a City Near You," July 21, 2013
- Media Matters, "Fox Sounds Alarm Over Detroit Bankruptcy Using Outlandish Pension Liability Figures," July 23, 2013
- Fox Business, "Impact of Detroit’s Unfunded Pension Liabilities"
- The Baltimore Sun, "Rawlings-Blake seeks to switch new employees from pensions to 401(k)-style plans," July 15, 2013
- Tucson Weekly, "RoboCop Beats Kromko on Technicality," July 25, 2013
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- San Jose Mercury News, "San Jose pension reform battle could affect county election," July 24, 2013