What Cities Are Doing About Pensions

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In advance of our annual State of the Cities report, which will be released later this year, this blog series captures speeches given by mayors in 2017. This blog is part two of a four-part series focused on mayoral dialogues and sentiments around the fiscal responsibility of the city and the retirement needs of the workforce.

When it comes to pension funding solutions, city size and geography matter. There is no effective one-size-fits-all solution for cities due to differences in their current funding status, tax and expenditure limitations, and relationship with the state. But many mayors (41%) are determined to adjust their pension payment schedule to a healthy, sustainable level.

Understandably, mayors across the nation have noted that fixing the pension system is neither easy nor readily accomplishable in the short run.

Among the 22 mayors who discussed pension-related issues in their State of the City address, 9 mayors offered potential solutions to target underfunded pensions. Six mayors discussed in detail their approaches to fully fund, or at least adequately fund, their pension system.

Although our sample size is limited, the statistics suggest that while many mayors consider pensions a major issue, only a few have a feasible plan to fix the system. The solutions covered here include pension renegotiations, strategic adjustments to projected revenues and changes to employee benefits.

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Due to the complexity and extremely high cost of pension reform, most cities have opted for relatively conventional approaches, primarily focused on cutting deals with unions for more affordable pension payments. Generally speaking, employer-sponsored retirement and health care benefits are available to approximately 94 percent of all union workers.

Perhaps the most popular

graph-mayors-pension

approach adopted by smaller communities, in particular, is city government-led pension renegotiation. The City of Hartford, Connecticut, and the Hartford Fire Fighters Association jointly signed a contract increasing pension contributions from 8% to 11%, instituting a four-year wage freeze, setting a fixed pensions cap, and raising the years-of-service requirement from 20 to 25 for new hires.

This new pension agreement, as Luke Bronin, mayor of Hartford, Connecticut, said in his State of the City address, would save the city nearly $4 million over the following year. “It is my hope that the agreement reached with our firefighters will serve as a model for what can and must be done, together,” he said.

Similarly, the City of Salem, Massachusetts, and its nine employee unions worked jointly to ratify new contracts. Kimberley Driscoll, mayor of Salem, Massachusetts, said, “We’ve…, curbed costly sick leave buy-back provisions, and have worked collaboratively on addressing employee and retiree cost factors.”

While these cities worked directly with employee unions to renegotiate pension payments, other smaller cities preferred to leave the choice to their voters. For example, the City of Upper Arlington, Ohio, relied on citizen ordinance to address pension funding for its police and fire. This action renewed the existing levy at a reduced level for the next five years.

“Thanks to the voters, who overwhelmingly passed Issue 38 in November, we will have funding for the City’s portion of the Police and Fire Retirement and Disability Fund for an additional five years at a 10 percent reduced rate,” said Debbie Johnson, mayor of Upper Arlington.

Also, in San Diego, California, the residents, rather than the city, embraced a voter-approved pension reform (i.e., preposition B) to decide the city’s employee contracts. And the city made efforts to mitigate future risk. As Kevin Faulconer, mayor of San Diego, mentioned in his State of the City address, “The City Council has funded my pension rainy day reserve — creating a safety net to help buffer neighborhood services from soaring pension costs.”

Mid- to large- sized cities have taken other approaches. For example, cities in Michigan, along with many cities across the nation, have limited ability to generate new revenue sources, as local governments are exempted from collecting sales tax and other business activities taxes.

Additionally, property tax, the major revenue source for Michigan’s local governments, is set at a low annual growth rate that is unable to catch up to the pension funding gap. The City of Lansing, Michigan, in particular, turned to outside experts like Segal Consulting for help. The firm reported that as of December 2015, the city’s unfunded liability for both the Employees’ Retirement System and Police & Fire Retirement System was $250 million, yet the city’s contribution was only $16.8 million.

The final report delivered to Virg Bernero, mayor of Lansing, offered recommendations for projected revenue adjustment rather than growth in property tax revenues, since property tax in Michigan is limited by a moderate growth rate (based on the lesser of the rate of inflation or five percent).

As another example, Sylvester Turner, mayor of Houston, plead to uphold the defined benefit plan but made changes to employee benefits to ensure a neutral budget. The city reached an agreement with its three employee pension systems (Municipal Employees, Police Officers and Firefighters) in October 2016 to reshape the current benefits package, including increasing employee contributions and cutting back cost-of-living adjustments.

The City of Houston also adopted a moderate assumed rate of investment return (7%) rather than the current rate (8-8.5%) to buffer future risk. According to the Mayor’s Office, the unfunded pension liability dropped by $2.5 billion to $5.3 billion immediately after the implementation of the new contract. As a result, Mayor Sylvester Turner proposed to pay off the remaining unfunded liability with a 30-year amortization model while making the full contribution to all three pension systems annually. The pension reform bill was approved and signed into law by Governor Greg Abbott.

In conclusion, our study findings suggest that in 2017, cities across the nation took actions to lower pension liabilities and showed that pension reform is necessary and feasible in the long term. Unfortunately, as shown in the graph, reducing the benefit package and enacting cost control to some extent was unavoidable by most. But among all approaches, pension renegotiation with unions was the most widely used, either through voters or local governance itself.

Some cities have also had to scale down their investment return forecast and reduce their cost-of living adjustments to employees. Such approaches have been popular among mayors due to their moderate negative effect on short-term budget conditions and long-term benefits for fiscal health.

anita-photo.pngAbout the Author: Anita Yadavalli is program director for city fiscal policy in NLC’s Center for City Solutions.

 

 

headshot.jpgYang You is the research intern for NLC’s Center for City Solutions. He supports the Center’s research priorities, with an emphasis on the annual State of the Cities and City Fiscal Conditions reports and Mayors Institute on Preemption. Yang holds a Bachelor of Arts in Political Science and a Bachelor of Science in Supply Chain and Operations Management from the University of Minnesota.