Friday, September 13, 2013

City Will Shift to “Defined Contribution” Pension Plan for Employees, Chief Little Says

CAO says Wharton administration is committed to shift from current "unsustainable" defined-benefit plan but has not yet determined which of several alternative plans to pursue. Council has yet to weigh in on matter.

Posted By on Fri, Sep 13, 2013 at 5:06 PM

Chief Litle at Kiwanis
  • JB
  • Chief Litle at Kiwanis

George Little, Chief Administrative Officer of the City of Memphis and a recognized spokesman for Mayor A C Wharton, let a somewhat major cat out of the bag Wednesday in a luncheon talk to the Memphis Kiwanis Club at the University Club.

The secret: The city administration, on the basis of a study commissioned but not yet released, has resolved to convert city pensions to “defined contribution” plans.

At present, city employees are enrolled in “defined benefit” plans, in which factors like seniority determine a precise value of benefits paid out to retirees or their dependents or to disabled former employees and theirs, and those benefits are guaranteed on the basis of a city escrow fund funded jointly by the city and employees in a given, predetermined ratio.

“Defined contribution” pension plans, by contrast, are basically predicated on employee contributions amassed and held in reserve over the time of their employment, usually but not necessarily matched to some degree by their employer, and invested on the stock market. The money reserved for an employee’s pension will vary according to the fate of the chosen investments.

In a defined benefit plan, the essential onus is on the employer; in a defined contribution plan, it shifts to the employee.

Little told the Kiwanians that the city’s current defined-benefit plan “is not sustainable” and that transition to a defined-contribution structure is necessary “to make sure that the money is there” for current and future vested employees. He said the administration had “not made a decision about a particular approach or a particular plan.”

As many employees as possible, whether vested or non-vested, would have to be brought into the plan to make it viable, Little said.

Under the current defined-benefit plan, said Little, “we are not putting enough money into the program, particularly with the economic downturn of the last several years.” He pointed out that the city’s pension fund had been funded “at 104 percent” just before the crash on 2008, plummeted to as low as 74 percent in 2009 and had hovered at a level of just under 80 percent since.

Kiwanis member Sam Cantor asked Little if the current shortfall of $650 million would not “jump tremendously” during a transition from defined benefits to defined contributions “because the guy you hire tomorrow is not contributing to the retirement of the guy who retires the next days out….”

With a wry grin, Little confirmed the existence of such a potential problem that would need to be resolved. “No one said this was going to be an easy trip….It’s not like we flip a switch and go to defined contribution and everybody lives happily ever after. That’s only fairy tales.”

The City Council, of course, will have to vet whatever proposal the administration emerges with, and there is no guarantee that there is a majority on the 13-member Council for whatever the administration settles on.

Indeed, Council members have not yet received even as full an accounting as the Kiwanians got.

The Wharton administration evidently has a penchant for cart-before-the-horse announcements -- as witness the recent abortive agreement with sanitation workers, subject of a full-blast signing ceremony with Wharton and AFSCME representatives before the Council had even been briefed about it.

See and hear the CAO's statement on plans for defined contributions for yourself below:

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