The mayor and Memphis City Council now have six years to begin paying the full, annually required contributions to its pension program.
Tennessee Gov. Bill Haslam signed a new law Wednesday that mandates all local government entities in the state to make those full annual payments “to protect the financial stability of local government and to protect workers’ pensions.”
The Public Employee Defined Benefit Financial Security Act of 2014 gives a six-year ramp-up period for local governments like Memphis that have not been making the full, annual payments. If the governments fail to make the required contributions after that six-year period, the state can withhold money it provides to them and then use that money to make the pension payments.
“For those few that don’t pay 100 percent, this law will move them toward a more sustainable financial future,” said Tennessee Senate Majority Leader Mark Norris (R-Collierville), the law’s sponsor in the Tennessee General Assembly. “When local governments hire employees and promise them pensions, those promises need to be kept. This law will reduce the likelihood that local government pension plans will run out of money at some point in the future and help protect taxpayers from the costly burdens of potential default."
A news release Wednesday carried favorable opinions of the new law from creditors like Citigroup and bond rating agencies like Standard & Poor’s.
“This legislation is something all states should consider,” Charles E.F. Millard, managing director and head of pension relations for Citigroup said in the news release. “The health of public pensions depends upon their investment returns and plan structures, of course. But the key determinant of the health of our public plans is whether the public employer makes its full annual contribution. If everyone did this, public pensions would be far healthier than they are today.”
The law allows each government entity to choose the actuaries that will determine what those annual payments should be. So far, three actuaries have examined the Memphis pension fund. All three found different numbers on the size of the hole in the system and, thus, different numbers on the annual payments needed to plug that gap.
Memphis Mayor A C Wharton said last week that two of the actuary firms agreed the gap is $551 million and that the annual payments should be $78 million.
Wharton’s new budget proposes to ramp up to the full payment over five years with an additional $15 million going to the fund next year - for a total of $35 million. The payments would get higher and higher each additional year after that until the city is paying the fully required payment, or $78 million to the fund each and every year. Some Memphis City Council members want to ramp up to the full payments in two years.
The new law also comes with a provision that will allow some governments to work with the Tennessee Department of the Treasury if they “experience severe hardships” and can’t make the full pension payments after six years.
“Tennessee has a well-deserved reputation as one of the best financially managed states in the nation,” Tennessee State Treasurer David Lillard said in a statement. “This landmark legislation continues that proud tradition by applying a common sense approach to local government pension funding.”