The Pension Crisis 

The Can Has Been Kicked to the End of the Road. Now Memphis Has to Pay the Piper.

AC Wharton, Myron Lowery, Kemp Conrad, Bill Boyd, and Wanda Halbert

AC Wharton, Myron Lowery, Kemp Conrad, Bill Boyd, and Wanda Halbert

No one is to blame for the $709 million gap in the city's pension plan. Memphis is simply a victim of circumstance. That's how Memphis Mayor A C Wharton explained it in his State of the City address back in January.

"As I say each time I discuss this, there's no need to go out and find a bad person who did something wrong," Wharton told the crowd gathered in the University of Memphis law school auditorium. "We're where we are because of forces far beyond our control."

That's mostly true. But it's also partially false.

The city's pension fund was full and even had a bit of a surplus before the recession. Valued at more than $2.1 billion, it was invested all over the country and the world in stocks, bonds, real estate, and more. The recession hit, and in the months that straddled 2008 and 2009, the city's pension fund lost about $544 million. Gone. Poof. Vaporized. The fund went from a surplus of about $94 million to a deficit of about $450 million.

Blame for this can be set right on the shoulders of the nefarious capitalists who created what became a global recession. The recession is without a doubt the biggest thief of the city's pension fund and probably of all municipal pension funds.

But no matter how much money was lost due to the recession, the pension fund is a promise to pay city employees a set amount of money for the rest of their lives after retirement. That promise is fully kept only when the fund is fully funded. In fact, the pension plan has to grow in value each year as pensioners get older and more city employees join the fund.

But the fund continued to shrink, even after the recession hit it so hard. The troubled economy kept draining money out of the market — and kept drawing value out of the city pension fund. Many cities and counties around the country started making higher payments to their pension plans to offset the tide of money flowing out of them.

Memphis did not. 

City leaders knew that they needed to do it, but they didn't, and that inaction has made the problem much bigger.

The annual payments needed to make the fund whole went up — "skyrocketed," according to City Finance Director Brian Collins. But city leaders continued making the same payments they were making before the recession (notwithstanding a 1 percent increase in the payments in 2011). The credit card bill went up every year, while city leaders continued to make only the minimum payment.

There's a chart in one of Wharton's pension presentations to the council that tells this story in numbers. It's called "A History of Underfunding." In 2009, it shows that the city council needed to pay $71.5 million to fully fund the pension plan. They allocated and paid $17.4 million. The hole grew bigger and by 2013, $96 million was needed in that year alone just to begin making the fund whole. The council allocated $19.5 million. According to Wharton's chart, city leaders under-funded the city plan by more than $334.6 million from 2008 to 2013.

Number crunchers hired by the city could not put a dollar figure on what the lower payments have cost the city over the past five years. But most interviewed for this story agreed it's likely in the millions.

If there's any question on who has the final say on all this, consider what councilmember Myron Lowery has said repeatedly in March council sessions: "We control the dollars for this city, and it matters not what the mayor brings to us on the budget. It matters what we do with that budget. The final outcome is ours."

The city now owes about $709 million to the pension fund. It's real money and the city really has to pay it. State law says so.

Plans are in motion to fix the problem. Every option is expensive and painful. And Memphians should expect to start getting a lot less bang for their taxpayer buck.   

 

"A Multi-year Ponzi Scheme"

Why was the pension can kicked down the road? Because the new pension payments were high and the economy was in the tank, so sales and property tax revenues were down. Meanwhile, the council had to keep cops and firemen on the job, fix potholes, and maintain other city services. Diverting tens of millions of dollars could have crippled core services. The city's financial panic was heightened at the beginning of the recession because the council had just been ordered to pay a $57 million judgment to Shelby County Schools.

"There was a lot of talk in the city council about 'could we possibly raise taxes to pay for [the full pension payment]' and I think the consensus back then must have been that given the fragile state of the economy, we were going to ride this one out," Collins told councilmembers earlier this year.   

Councilmember Kemp Conrad was there when that decision was made. "Oh, yeah, the council and the administration colluded" on the issue, he said.

"We had all these one-time budget gaps because of the Memphis City Schools issue," Conrad continued. "So, we basically had a multi-year Ponzi scheme and a dishonest government — dishonest to the taxpayers, pensioners, and employees."

 

Compare and Contrast

Memphis wasn't the only city dealing with difficult financial circumstances after the recession. The pension plans of other cities, counties, organizations, and businesses also took big hits, and many of those are on their way back to full health. Not all pension plans are alike. Some are more generous than others; some cover more employees than others; and cities and other organizations use many different methods to restore their plans.  

As of 2011, the Memphis plan was 75 percent funded. Pension funds in peer cities such as Nashville, Chattanooga, Birmingham, St. Louis, and Baltimore were better funded. Plans for city employees in Atlanta, Boston, Seattle, and New Orleans were doing worse than Memphis. But all of those cities have increased their annual pension plan payments over the past few years.

Memphis never did.

Memphis has continued to pay the employer contribution rate, which is 6 percent of its payroll. As of 2010, the city was only paying 24 percent of the fully required annual payment.

Another, closer, comparison can be found right across the street from City Hall. Shelby County's employee pension plan was worth a little more than $1 billion in 2008, but the recession took away about $300 million, according to Shelby County Chief Administrative Officer Harvey Kennedy.

But, Kennedy said, the county has always paid 100 percent of the annual required payment to its pension plan. In 2010, the county government paid $19.3 million to its fund. The number went up to $23.4 million in 2012, and up again in 2013 to $30 million. Those accelerated payments are part of a 10-year project to fully restore the county pension plan from the effects of the recession.

"Yeah, it's always painful [to increase the payments] because it takes away some of your budget," Kennedy said. "But it's important to make sure your pension fund is fully funded."

Before the recession, the county's plan (like the city's plan) had a slight surplus. Now, even after making all the required payments every year, the fund is only about 84 percent funded.

Down the street, at Memphis Light Gas & Water, the recession took a more-than-$300 million bite out of the pension plan, said MLGW President and CEO Jerry Collins. The utility is in the midst of a five-year program to fully restore its plan, which was valued at more than $1.3 billion in December.

MLGW has always made its annually required payment to its plan and that has meant making higher payments in the past few years, Collins said. But MLGW has paid for them with budget surpluses, he said. So, the utility hasn't had to drastically change its business model or raise rates for electricity, gas, or water to pay for them. But when asked if making the higher payments was painful, Collins said, "Sure."

"We really didn't change what we do," Collins said. "It's just that sometimes the stock market is doing well and sometimes the stock market is doing poorly. If you just react in a manner that is consistent, then, at the end of the day, everything turns out okay."

Collins expects a new report next month will show that the MLGW pension plan is funded at about 85 percent.

 

Council Voices

It is entirely possible that the city's pension problem would not have come to light last year, were it not for a strongly worded letter from Tennessee State Comptroller Justin Wilson. Short version: Fix your pension problem or the state will fix it for you. Some city councilmembers said they were unaware of the scope of the problem, prior to Wilson's letter.

Councilmember Bill Boyd said he was surprised when he found out last year just how far the fund was in the hole. He'd heard about it over the years, but "I never really delved into it. So, I'm partly to blame."

"We should have [made the higher payments] then, but we would have lost something in the process during those years if we devoted that kind of money to the pension that we should have," Boyd said. "I didn't personally put enough emphasis on it. I feel a little responsible. I think all of us [on the council] should, if we admit it to ourselves."

Councilmember Wanda Halbert said the council is, indeed, ultimately responsible for the financial decisions of the city government, but she stressed that the council acts on the information it is given from the mayor's office. And, she said, no one in the mayor's office led her to believe the city had a looming, multi-million-dollar problem.

But that is not the administration's biggest sin on the issue, she said. While the city was under-funding the pension plan, the Wharton administration continued to request city money for "big-dollar projects." She listed the $15 million the mayor requested (and the council approved) for the Sears Crosstown redevelopment project in 2013, and the $16 million the mayor requested (and the council approved) for the new parking garage at Overton Square in 2011.  

"If the money on those projects could have been saved, then maybe we wouldn't be where we are financially," Halbert said. "So, you can't come to us and ask for that big-dollar item and then tell us after the fact that, 'Houston, we have a problem.'"

 

The Fix is On

Over the past few months, the mayor's team has been giving the council bite-sized portions of its plan to begin filling the pension gap. The platform has two major planks: changing the current pension plan for employees and making higher payments to the current pension fund.

Employees and the city both contribute to the current pension plan. The money goes into a large pool of funds (valued at around $2.1 billion before the recession). That fund is invested in national and global market funds, and fluctuates with the market. The city assumes all of the financial risk and has ultimate responsibility for the fund. When the market tanks and the fund shrinks, the city has to make it good for the employees, who are still promised a set amount of money upon retirement. 

 Wharton has proposed several different kinds of alternate plans to the current system. The one getting the most attention works much like a 401(k) plan, which have all but replaced traditional pension plans in the private sector. Employees and employers typically both contribute funds, but the employee chooses how the money is invested and assumes the financial risk.  

Memphis police and fire unions oppose the proposed 401(k) plan, saying it further erodes the benefits of those who risk their lives for the city's safety.

Councilman Joe Brown supports their position. "I wouldn't perform in a proper manner if there was some difference in the way my pension was set up," Brown said. "We all know what happened with the 401(k) hole just recently. Everybody lost money. Everybody."

The hope is that any new benefit plan will cost less and remove much of the city's financial risk in the future, Brian Collins has told councilmembers.

The council now has the new benefit plan choices before them. Debate on the issue will probably continue through the budget season, which kicks off with Wharton's budget proposal next week.

A new state law requires all Tennessee cities and counties that run a pension plan to make an in-full payment each year, beginning in 2020. It's likely Memphis will have to begin making some difficult budget decisions this fiscal year. Basically, the can has been kicked to the end of the road.

"The best case scenario is a tripling of the amount of money we have to put into the pension plan," Collins said last month. "At the minimum, the near-term budgeting issues are really substantial."

The administration has proposed paying an extra $15 million to the plan next year, for a total payment of $35 million. That first higher payment is part of a five-year ramp-up plan to make the first full payment in 2019. If the market doesn't turn around and the city doesn't change its pension benefits to employees, that first full payment in 2019 will be in the neighborhood of $100 million, Collins said. Council Chairman Jim Strickland has floated the idea of getting to the full pension payment in two years, instead of five.

Making these higher payments will likely be a major driver of the city's property-tax rate. One penny on the current rate of $3.40 per $100 property value generates a little more than $1 million annually. To put it another way: Paying for a $100 million pension payment with property taxes would account for about $1 of the city property tax rate.

Here's Wharton on the subject, in his State of the City address: "I do not mind going to the taxpayers when I can say, 'I am using the money to pave your streets or fix your potholes.' But it is a bit difficult to go to our residents and say, 'We want to raise your taxes to take care of our pension plan,' knowing full well that many of them do not have a pension plan of their own. That is, of course, a course we do not wish to take. And again it is not about bad folks doing bad things, it's about bad conditions bringing about a bad situation, which, working together, we can resolve."

If there is no tax hike, the city budget will have to be cut in order to make the higher pension payments. The Wharton team gave councilmembers a preview of his 2015 budget last week. It included major cuts to some employee benefits, which could trim tens of millions of dollars from the budget each year. Changes to employee sick leave, holidays, incentive pay, and longevity pay could also yield millions in annual savings, according to the Wharton proposal.

Other options would cut services to taxpayers. A "pay-as-you-throw" refuse program would require citizens to pay for the removal of trash not contained in city-issued trash cans. Some community centers and library branches would be closed. There could be a reduction in the number of police officers and firefighters. Paramedics could be laid off. Golf courses could be privatized.

 Trimming the budget to pay for higher pension payments isn't fair to Memphis taxpayers, Conrad said. He criticized the Wharton administration, calling its members "incompetent," for not finding or executing any cuts to the city budget in the past four years.

The Wharton administration brought the council an amended budget proposal last year that would have cut the budget by $25 million this year. That plan included cutting 300 positions through voluntary retirement buyouts and laying off 100 city employees.

Opinions vary on the size of the deficit in the pension plan. The actuaries for the city say it's around $709 million. Actuaries hired by the Memphis Fire Fighters Association say the number is closer to $300 million. The city council just hired its own actuary to find a number. All three experts are expected to issue a report to the council that definitely quantifies the problem. 

Everyone — the administration and the council — seems to now agree that change is needed and the problem needs to be addressed before it gets worse. But making that change won't be easy. The math is complicated and the target is constantly moving. The pension battle will be noisy and political and will dominate this year's budget talks. It's going to be an interesting spring at City Hall.

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