Thursday, April 17, 2014 · 2:43 a.m.
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Chattanooga’s fire and police pension fund is in trouble.

This chart shows the loss in market assets for the city’s public safety pension fund. The data comes from the Chattanooga fire and police pension fund, Actuarial Valuation Reports, 1997-2013. (Graphic: Vijay Kapoor)

An estimated $150 million funding gap is expected to rise to $200 million in five years. The situation prompted Mayor Andy Berke to form a task force to study the fund and reach an agreement for resolving the shortfall by a Dec. 31 deadline.

Many questions remain unanswered. How much do retirement benefits actually cost? What solutions are on the table? How will pension cuts affect employee morale?

Even asking how the fund racked up such a large shortfall elicits conflicting responses. But most agree on at least one key point: The market crash of 2008 wiped out about 30 percent of the fund’s real-dollar value.

It’s a story that has played out in many U.S. cities over the past five years.

Pension funds’ investment portfolios took a massive hit from the collapse of the housing bubble and the Great Recession. The retirement systems in 61 major cities had a combined liability of $99 billion in fiscal year 2012, the most recent year with complete data, according to a report by The Pew Charitable Trusts (PDF).

A few cities weathered the storm better than others.

Pension funds in Milwaukee; Memphis; and Charlotte, N.C.; received good grades in the Pew report. (One of those cities has since become embroiled in its own pension fight. A study recently concluded that Memphis’ retirement system is "unsustainable.")

Some Southern cities didn’t fare well, including Atlanta; Nashville; and Little Rock, Ark.

The Atlanta City Council approved changes to its retirement system in 2011 because of a $1.5 billion shortfall.

The changes raised employee contributions and reduced the cost-of-living adjustment—two ideas recently floated in Chattanooga. Most future employees would receive a smaller pension and be put in a plan similar to a 401(k), according to Business Insider.

Public employee unions sued the city of Atlanta earlier this month over the increase in employee contributions.

Milwaukee’s best
Milwaukee’s funded status, the ability to pay current and future retirement benefits, was more than 100 percent earlier this year.

The pension system there was called a model for other cities in an October NPR report:

It’s not rocket science, says Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence. She says Milwaukee outperforms nearly everywhere else because it makes retirees a priority.

"They pay their annual required contribution very consistently," Kellar says. "So that means in good years or bad, they’re maintaining a very good discipline."

Milwaukee’s retirement system also offers a smaller benefits package than many cities. The average payout is $23,000 a year. But the city still plans to change its benefit structure in 2014. New employees will have to work more years before retirement, and overall benefits will be reduced.

Scenic City options
According to the Pew report, a city’s ability to meet its obligations depends on three factors: fiscal discipline in making its annual required contribution, the accuracy of assumptions used to determine funding status and decisions about workers’ benefits.

Why funding gaps matter

If pension costs go up, funds for other local services may go down or taxes may need to be increased, a recent Pew report states.

Chattanooga’s annual required contribution was $2.9 million in 2000, the year the current benefits structure went into place. This year, Chattanooga budgeted $14.5 million, or about 7 percent of its operating budget.

The pension board submitted a proposal last month that raises employee contributions, reduces the COLA and makes other changes. In all, those changes would lower the city’s annual required contribution over the next quarter of a century. The rub is that the city’s bills will probably remain high no matter how the numbers get sliced.

Travis McDonough, the mayor’s chief of staff, recently called the proposal a good first step but said, "There’s more work to be done." He cited additional changes to the benefit structure, such as the deferred retirement option plan, or DROP.

But Frank Hamilton, the pension fund’s administrator, thinks that the city’s contribution levels should be reviewed, too.

Even though the city’s contribution has increased year over year, he cites pressure by the previous administration to keep its bills low. Regardless of what changes are made, if the city only pays the minimum required, it’s going to take 25 years to pay off the unfunded liability, he said.

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