Secret Pension Plan Revealed

A few days ago, I received an unmarked envelope.  Inside the envelope was a copy of the draft bill that the Turner administration is proposing to amend the police pension plan.

Because of the secrecy in which this process is shrouded, I am not certain that I have the most recent version.  The mere fact this process is being carried on in this cloak-and-dagger fashion is shameful and, of course, very telling about the proponents’ confidence in this plan.  Of course, we still do not have any of the financial data that backs up Turner’s claims about the plan.

You can review the police pension statute as it would be amended by this bill by clicking Article 6243g-4 – Police (w proposed changes).  The comments in the margin are mine.  Also, you can read my detailed analysis of the bill by clicking WEK Bill Summary.

But here are the highlights:

Not a Permanent Solution – At the outset, everyone should understand that Turner’s proposal is not a permanent solution to the City’s pension woes.  It does, however (1) represents about a 14% cut in the City’s costs of the pension plans and (2) establishes a hideously complex mechanism that, if enforced in good faith, would limit the percentage of payroll the City must contribute to the pension.  These improvements are not trivial, but neither are they an ultimate solution to our pension woes.  As I have said many times, there is no pathway to real pension reform that does not entail phasing out our defined benefit plans.

However, if defined contribution plans for new employees were added to this plan and the “corridor” mechanism were tightened to be both effective and enforceable, especially restricting the issue of pension bonds, we would be much closer to a real solution.

Pension Debt Not Paid in 30 Years – Notwithstanding the Turner administration’s repeated promises that the plan would retire all of the City’s pension debt in 30 years, that is clearly not true.  Any year in which the pension plans do not make the 7% investment goal as they have not in three of the last five years the losses for that year are added as an additional layer of debt that is amortized over thirty years from that loss.  For example, if the plans miss their investment goal in 2037, 20 years from now, that ensuing debt would not be paid off until 2067!

No Vote or Restriction on Issuing Pension Bonds – Part of the Turner plan is to issue $1 billion of new pension bonds without voter approval.  But worse, this bill imposes no restrictions on future pension bonds nor does it require voter approval.  The bill has provisions that may require additional bonds to be taken into account when calculating the City contribution, but it also appears to allow the City to borrow its annual contribution each year.

Future COLAs (Cost of Living Adjustment) Tied to Investment Returns – This may be the most surprising, and potentially most impactful provision of the plan, both to taxpayers and retirees.  In the term sheets, future COLAs were frozen for some retirees for three years and then tied to Social Security’s COLA adjustment.  But in this bill the COLA is set to 5% below the pension plans’ investment return.  Over the last ten years the plans have averaged about 5.5%.  If that trend continues, this provision would virtually wipe out COLA adjustments for all retirees.  While the current COLA provisions are unrealistic and need to reworked, this provision would dramatically impact older retirees, especially those who retired prior to the big run-up in pension benefits at the end of the Lee Brown administration.

Pension Debt will go Up, not Down – As we suspected from the term sheets, the bill adopts a repayment schedule that negatively amortizes the pension debt.  If the City’s contribution hits the maximum allowed by the bill, which just about every expert predicts it will, the pension debt will go up an additional $1 billion.  In addition, because of other factors (e.g. lag times, asset-smoothing, etc.), it is a virtual certainty that the pension debt will rise for the next decade or so, at least.  We could easily wake up 10 years from now with several billion dollars more in pension debt than we have today.

No Consequences if “Corridor” is not Enforced – This may be the most serious concern I have about this bill.  There is no consequence to the City if it elects not to enforce the corridor mechanism.  The bill requires the pension plans to reduce benefits if the corridor maximum is reached.  But the bill does not specify what happens if they refuse.  The only remedy would be for the City to sue.  First, do we really have confidence that an administration and City Council that accepts hundreds of thousands of dollars in campaign contributions from employee groups would really initiate such litigation?  And even if they did, the complexity of the plan and the glacial pace at which our courts move would keep enforcement action in limbo for years.  I think we have been in litigation over the drainage fee for seven years now and it still is not over.

Huge Loopholes in Bill – As you will see if you review my bill analysis, there are huge loopholes in the bill’s corridor mechanism.  Whether these are intentional or just oversights, I cannot say.  But if we are to go forward with the corridor mechanism, these problems in the draft bill must be addressed.

Conclusion – There are very significant issues with the changes to the City’s pension system that are proposed in this draft bill.  But, if it were amended to address some of these issues, it would represent a real improvement in the current situation.  The two most important changes to the plan are the addition of defined contribution plans for new employees and giving voters the right to approve pension bonds, and these points should be non-negotiable.  Anyone not prepared to support these common-sense ideas is not serious about pension reform and certainly not a fiscal conservative.

One thought on “Secret Pension Plan Revealed”

  1. This is alarming and needs to be more openly discussed. I fear not doing so will doom our great city and citizens will flee the the heavy burden of taxes leaving a collapsing urban city center similar to the 1970’s.

    Is this challenge simply too complex for our current electorates and city leaders? I fear maybe so.

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