Observers say city pension is 'a Frankenstein's monster'

Cincinnati’s pension system is sick, and critically so, some observers say. This illness not only threatens the city’s current and retired workers, but also could hurt taxpayers, those receiving city services and even projects such as the planned streetcar.

Longer term, some even say the pension system’s ailments could grow into something worse – a bankruptcy filing like the one Detroit was forced into this summer.

A group of area organizers have placed a charter amendment on the November ballot that would freeze current benefits and force the city to create a 401(k)-style defined contribution retirement plan.

Depending on whose prognosis is believed, the amendment could either get Cincinnati out of the pension business and return the city to financial solvency – or kill the patient on the operating table.

City officials charged with overseeing the $2 billion pension plan say the language of the amendment is confusing, contradictory and would be a legal nightmare to enact. More to the point, they argue that the new system would be more expensive than the current plan.

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Under their interpretation, the amendment would require the city to pay off its $870 million liability within 10 years. That would mean payments of $87 million a year – a figure that’s nearly 10 percent of the city’s $900 million annual operating budget.

To put the pension plan’s funding hole in perspective, if every man, woman and child living in the city of Cincinnati contributed $2,000 apiece, it still wouldn’t be enough to fill the plan’s current $870 million gap.

“What has been proposed as we read it is not the proper cure,” said Cincinnati City Manager Milton Dohoney Jr. “We are talking about a major disruption in city services.

“Even if you tried not to touch public safety, which would become virtually impossible, you would be wiping out the entire backbone of city government,” he said.

Proponents of the amendment say that freezing the pension and paying down the plan’s liability would save the city $10 million a year. They have not yet provided estimates on additional financial costs or benefits to the city from an alternative retirement plan or from putting city workers into the Social Security system. (City workers do not pay into or collect Social Security, meaning their pension is their lone retirement benefit).

“By saying they can’t pay $87 million a year for 10 years ... they have confirmed they’ve created a disastrous situation,” said Gary Greenberg, a member of Cincinnati for Pension Reform, the committee that placed the charter amendment on November’s ballot. “This is not ideological or left, right, or center. ... It’s just that there is no federal, state or local law that instructs Cincinnati that it must catch up on its funding.

“So the city has to be forced by voters to catch up on funding,” said Greenberg, a Downtown-based corporate labor lawyer who lives in Hyde Park. “If it has to sell assets, or cut funding to other places, or even as a last resort has to put a tax increase in front of voters ... these promises have to be fulfilled. If they can’t, they are going to be where Detroit is.”

Underfunding puts city at 'fork in the road'

City officials and all the major candidates for the mayor’s office and City Council have lined up in opposition to the proposed amendment, and many have their own proposals of varying severity. City Council meets Tuesday in a special session to craft the actual language that will go on November’s ballot, despite voting against supporting the initiative 8-0 this month.

The current pension system is only about 61 percent funded, a measure of expected future assets against expected future expenses. Its fund has an anticipated gap of $870 million, which also includes more than $7 million in unfunded, but promised health care costs.

“This has turned into a Frankenstein’s monster ... and is on the verge of spinning out of control,” said Ohio Auditor Dave Yost. “Cincinnati is a long way from Detroit, but the city is in a fork in the road. ... And I’m concerned Cincinnati is not doing enough to avoid going down that fork in the road.”

In fact, Cincinnati’s unfunded liability and its funding percentage are both worse than Detroit’s. But that doesn’t tell the whole story. Detroit borrowed $1.5 billion in 2005 to fill its pension liability in a risky financing deal that went sour and wound up costing that city hundreds of millions more.

Cincinnati’s pension crisis has already led to at least one credit rating agency to lower its rating for the city. That means potentially higher interest rates when the city goes to borrow money to fund major projects like the streetcar. Cincinnati has already borrowed $33 million in bonds for the streetcar, and city officials have indicated they will need to borrow more to finish the project.

The city says that 75 percent of the plan’s cumulative losses since 2000 were from investment market forces, including an $859 million hit from investment losses alone due to two recessions. “The market and the economy certainly created this problem ... but it won’t fix it, that’s for sure,” said Paula Tilsley, executive director of the Cincinnati Retirement System.

In 2011, City Council overhauled the board overseeing the pension plan to include more independent and professional oversight. Acting on the board’s recommendations, City Council put 20 percent of current payroll, or about $32 million, into the fund this year.

The board is planning to recommend more actions soon, including:

• Ramping up the city’s contribution to 27 percent (about $43 million total) over the next five years.

• Lowering retirees’ cost-of-living adjustments – and also not paying the so-called COLAs for two to three years.

Those recommendations will probably wait until after November’s elections to avoid what Tilsley calls “political distractions.” City Council, which will be newly elected in November, has final word on any such changes.

That frustrates retirees such as Cheryl Meadows.

“We paid into the system and earned that money with a good day’s work,” said Meadows, who retired in 2002 as a director in the city’s employment and training department. “I wish we were in the state program like the city’s police and fire departments. That way we’re not beholden to what City Council may or may not want to do.”

Proposal echoes plans from Calif. and Mich.

The cuts outlined by Tilsley don’t go far enough for the amendment’s backers. Their proposal is one in a growing number of such ballot measures nationally. In June 2012, voters in both San Jose, Calif., and San Diego passed similar measures. Results in those cities aren’t clear so far. State workers in Michigan and Alaska have seen their pensions radically overhauled and turned into so-called defined contribution plans over the last 15 years.

Greenberg and other local proponents of the measure say that while they based the proposed amendment on other efforts, they crafted it specifically for Cincinnati.

“Did we see what was going on elsewhere? Sure. But this is something that Cincinnati needs to do,” said Burr Robinson, a retired Procter & Gamble executive from Hyde Park. Robinson, who is helping the pro-amendment committee create its local advertising and messaging plan, has been active in several local tea party groups and other conservative causes.

In essence, the proposal would freeze the existing plan and benefits for current employees. Current retirees would keep their pensions (although the amendment would change how retirees’ cost-of-living adjustments are calculated). Starting next year, the city would be required to provide some sort of investment-based retirement plan going forward, although Cincinnati’s total contribution would be capped at 9 percent of the total payroll. The city could also enroll workers into Social Security, as well as potentially enroll its workers in the state employee pension plan that now covers the city’s police and firefighters. (Cincinnati explored the latter option previously – but the state demurred, citing the current size of its plan’s liabilities.)

Preliminary details from a soon-to-be-published study by The Buckeye Group, a Columbus-based conservative think tank, indicate that merely freezing the pension and requiring the city to more fully fund the pension would save Cincinnati about $10 million in the first year, and potentially larger amounts in each subsequent year.

But the costs of the transition to a different style plan for current workers aren’t clear. And amendment proponents do not yet have an estimate for how much the city would save with the new 401(k)-style plan.

Greenberg and others like the model of the state of Michigan, which transitioned state employees from a pension system to a defined-contribution plan amid much political turmoil in 1997. A 2011 study by the conservative-leaning Mackinac Center For Public Policy found that the change saved Michigan $167 million between 1997 and 2010.

Greenberg says the ballot proposal would “market-proof” the city against another recession – and take politics out of the pension plan. But current and former retirees and even members of the pension system advisory board say this effort only makes the pension even more politicized. That includes board member and retired city water works supervisor Don Beets, who says he is “outraged” at just the concept of the charter amendment.

“These individuals proposing such drastic changes certainly accepted having their garbage picked up every week, the streets they drive on paved, the traffic lights maintained to ensure a constant and safe control of traffic flow ... and so many other services public employees provided them,” Beets said in an email.

Could amendment actually boost costs?

City officials fear the worst when it comes to implementing the amendment, should it pass.

Tilsley says because of its vague language, it could mean the city’s plan would not be able to provide the benefits common to most 401(k) plans, such as having contributions taken out pre-tax and having taxes deferred.

City budget officials also say that adding a 401(k)-style plan would not only raise administrative costs, but that its contributions per current employee would be higher for both Social Security and a defined-contribution plan than it currently pays for the pension system (employees currently pay 9 percent into the pension system, and the city is paying about 2 percent for current employees, or about $3.2 million).

“We’re talking three to four times more expensive than our costs for current employees, and that’s before even considering paying into the Social Security system,” said Cincinnati budget director Lea Eriksen, adding that running a new system alongside the existing system for current retirees would also raise administrative costs.

Greenberg says the amendment is only meant as a high-level road map, and that the city could “fill in the gaps with ordinances” to meet IRS standards.

As for the potential higher costs, Greenberg argues that any transition costs would be made up with savings from not having to continually fund an unpredictable pension plan.

“That’s why so many private companies have gotten out of the pension business, and why the city of Cincinnati needs to as well,” Greenberg said.

Replied city manager Dohoney: “We’re not trying to argue the fact that a fix needs to be made here, and that some of this is going to be hard to swallow. But this would go too far.” ■

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