Mayor Andy Berke announced the formation of a 14-member task force in August to resolve a $149.6 million shortfall in Chattanooga’s fire and police pension fund by the end of the year.
The pension fund, like many others across the country, took a huge hit in 2008 and 2009 when the housing bubble came to an end, and the Great Recession wiped out approximately 30 percent of the investment pool that pays the retirement benefits of Chattanooga firefighters, police officers and their beneficiaries.
The current iteration of this longstanding debate began in September. Over the next two months, it is expected to grow tenser. Nooga.com put this primer together to answer five basic questions on a very complex topic.
How does the city’s pension plan work?
A pension is a defined benefit paid monthly to employees during retirement. Police officers and firefighters pay into a large fund with 8 to 9 percent of their salaries. The city contributes to the fund each year. In 2013, the city’s contribution was $11.2 million, an amount that’s expected to rise dramatically over the next 26 years. The fund also receives significant revenue from its investment portfolio.
Chattanooga employees may also get a lump sum at the beginning of retirement if they work between 25 and 30 years. The deferred retirement option plan (DROP) starts to accrue separately from the pension benefit after an employee’s 25th year with the city in exchange for a slightly lower pension benefit.
The average DROP is $99,000, according to Bill Robinson, attorney for the Chattanooga Fire and Police Pension Board, and it is often used to help ease employees into retirement.
"These guys don’t get Social Security," he said. "They’re retiring on a relatively low benefit. They can take that lump sum and pay off their mortgage. They can pay off credit card debt or a car loan, and then they can live off their monthly benefit."
What is the shortfall, and why is it a problem?
The $149.6 million shortfall is the difference between the amount of benefits owed to current and future retirees and the money that’s actually in the fund. There is enough money to pay about 52 percent of present and future benefits.
Many of the individuals involved in this debate agree that the shortfall is a problem for the public safety retirement system, but they differ on its severity.
Representatives of the pension board maintain that the shortfall, or unfunded liability, can be managed over time. After all, it encompasses the benefits for some employees who will not reach retirement for another 25 years. It’s not an immediate cost that has to be paid upfront.
"Contributions will continue to be made, and the money’s going to continue to be invested," Robinson said. "We’ll slowly get back to the point where we’re 80, 90, 100 percent funded."
Even though the liability is expected to be absorbed and paid off over time, the fund's future performance is always uncertain, according to Vijay Kapoor, director of workforce consulting for Public Financial Management Inc. PFM is the consulting company assisting the task force.
"If you’re 52 percent funded, then you’ve promised a lot of benefits that you don’t have the money yet to pay for," Kapoor said.
If actuarial assumptions about future performance are too rosy, then the risk of an additional liability increases, he said.
How did the fund get to this point?
Each year the fund’s actuary, The Segal Company, applies a series of calculations to predict how the fund will perform in the future. Those calculations determine the amount of the city’s annual contribution based on certain assumptions, like market performance.
"The city was making its full contribution," Kapoor said. Over the past decade, "Many cities were using contribution holidays, which is a nice euphemism for saying they didn’t pay their bills.
"That didn’t happen here," he said. "The city always paid its bills."
Both the pension board and Kapoor agree that the fund took a massive hit when it lost 30 percent of its value after the 2008 market crash.
But Kapoor also points to "significant benefit enhancements" that were made at the turn of the century as a long-term driver of the fund’s current troubled status.
Chattanooga voters approved a referendum in 1999 that changed how pensions were calculated to give older employees a better incentive to retire. The DROP benefit was also added then.
"After these benefits were changed, it had a severe impact on the fund. There’s no question about that," said Kapoor, who pointed out that the fund’s investments did not match market highs before the crash.
The changes in 1999 achieved the desired solution for what had become "top-heavy" police and fire forces, according to Chris Wilmore, pension board president. Older employees retired. New advancement opportunities opened up for younger ones. And the changes helped create a stronger public safety workforce.
"If we had not made the changes in ’99, we would not be providing a dignified benefit for these employees," Wilmore said, referencing one of the mayor’s goals for the task force.
Where are the lines of debate being drawn?
The Segal Company outlined several potential changes to the system last week. The proposal would increase employee contributions, modify the retirement window and make cost-of-living adjustments.
"There’s a lot of things that can be done to reduce the cost of the pension plan. And we understand that," Robinson said. "The proposal that the board has put forward reduces benefits, but we don’t want the city to come after it with a meat cleaver."
The fear, he said, is the city using the shortfall or an increase in contributions to negotiate deeper cuts to the pension system.
The board's proposal is a "good first step," but more may have to be put on the table, Kapoor said. What’s needed next is for members of the task force to start coming to a consensus on what the core issues are and figure out what’s best and fair to employees and taxpayers.
And if the task force can’t reach a consensus? It will be up to Kapoor to make a recommendation, something he doesn’t want to do.
Any recommendations by the task force or Kapoor would have to be approved by the pension board and the City Council. Otherwise, the decision would go to voters in a referendum.
"I really want and will encourage all parties to try and work together in order to come to a consensus. It’s going to be difficult," Kapoor said. "But I would think it’s better than the alternative, which would be a very public fight about this, and a referendum."
What do public safety employees think about this debate?
Police officers, firefighters and retirees are nervous about where this debate is heading, according to Wilmore and Robinson, who warned that dramatic changes to the pension plan could result in an exodus of high-ranking, experienced employees.
There are 81 public safety employees who are currently eligible for retirement, Wilmore said.
"That’s 10 percent of each department, police and fire," he said.
A number of people have told him they will leave if it looks like big changes are on the table, such as eliminating the DROP benefit.
"Some say they don’t want any changes," he said. Others think the board’s recent proposal is a good plan.
"And I’m hearing everything in between," he said.
Updated @ 1:33 p.m. on 11/6/13 for clarity.
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