Pension Impact On The Budget, Pay Now Or Pay Later

In his latest essay, fiscal watchdog John Marshall Lee, who has organized Budget Observer Bridgeport (BOB), a group of citizens attending legislative budget sessions, places a spotlight on city pensions and what the costs represent. Mayor Bill Finch has delayed pension payments, avoiding an election-year tax increase. Lee says putting off the pension payments is a fiscal time bomb. Grab a cup of joe and read the latest about a key component of the city budget.

What Does A Closed Pension Plan Cost the Taxpayer?

Last night (Wednesday) there was a hearing on the City budget 2011-12. It is the only meeting where Bridgeport residents can talk about City finances and possibly be heard by members of the City Council. Last night (Wednesday), nine of 20 were in attendance. During the past three weeks at 12 meetings most members of the Budget and Appropriations (B&A) committee have met to hear about next year’s expenses. Those meetings were open to the public for listening only and handouts for the public are not normally available. While open to all the members of the Council, generally only 3 or 4 are observed in attendance other than B&A members. That means approximately half the Council have minimal or zero contact with the B&A process.

Those people may be very financially savvy or very trusting of their fellow Council members, or they may be woefully unprepared to cast an informed, unconflicted and positive vote for the City’s Annual Budget. That would not be good for the City or the people in the Districts represented.

Three years of no municipal tax increases in an economy with big percentage increases in healthcare, for instance, from a Mayor who campaigned on but failed to deliver a promise of a $600 tax credit, has created some financial skepticism in Bridgeport. And that is how Budget Observer Bridgeport 2011 (BOB) came into being this year. About 30 people, basically any Bridgeport resident, voter or taxpayer was invited to be part of an observation group to attend every budget hearing. They were asked to sense what they could from listening, identify questions they might like to ask, and submit a one-page report. A simple concept with no expense except some copying and time away from family and personal pursuits that is no different from the investment of City Council members.

A major item in the City budget for many years to come is Pension Plan A. It pays income to 866 retired beneficiaries currently. Thirty-three still-active public safety employees will join them in the future. The plan was closed to new members about 25 years ago. Information on this plan is available in this year’s City budget document, in the Comprehensive Annual Financial Report – 2010, in the actuarial valuation report produced annually to calculate needed funding for a plan with assets, in Pension Committee minutes and a letter from the City to the State of CT OPM and Treasurer in April 2010. Has anyone on the City Council reviewed each of these sources or documents, specific to coverage of Pension Plan A? I doubt anyone wishes to answer that question, possibly because one or more of these resources has never been made available to them by the City as an opportunity to learn and become more informed in their “strainer” duty. (Lots of information on municipal finance comes before them monthly. It is their responsibility to listen, question and strain out those things that don’t belong or are unsuitable for funding.) This year the individual actuary from Segal and Company talked for over one hour on Pension Plan A. This was the first time he appeared in person, although he has worked on this assignment for over 15 years.

He brought both a single-page summary and multipage reports for Pension Plan A. The latter contained much info on what has happened over the past ten years to show us where we are with major underfunding, as well as what we will be called to pay in the years out to 2020 and beyond. There was no appetite at that meeting for opening up the multipage document and digging in to the message it delivers to the City. The Board focused on the single-page summary although some members asked how to correct our underfunded plan status without providing the minimum actuarial recommended funding. Are they facing the facts?

How did we get where we are? In 2000 a different Mayor knew the State wants to see funded pension plans at 78.6% of actuarial liability. Our City was not there. The City voted to issue $350 Million of Pension Obligation Bonds committing the City to pay about $30 Million per year for 30 years. We have paid 11 years but face 19 more years of this amount, due and payable. Look in the current Police $15,437,327 and Fire $14,831,942 budgets for the two numbers totaling $30,269,269 and you will understand these millions of bond principal and interest make our public no safer today but only meet an obligation due to bondholders who originally funded Pension Plan A. It benefits former public safety employees, 96% of whom have retired and/or died where their spouses earn a reduced benefit for their life although it does not make their benefits any more secure or funded.

Let’s think of Pension Plan A as a “grassy field purchased by the City in 2000 with a 30-year mortgage. The field is to be maintained by the City” until the last employee or spousal heir is dead. The actuary is our supervising “groundskeeper.” $350 Million was used in 2000 to provide “wonderful sod” for the field. The cost of the sod would be repaid over 30 years and if it were suitably maintained, the sod would provide the funds to pay the retirees their benefits. (That put the City in compliance with State regulations at 78.6% of actuarial liability.) They were also instructed by their actuaries to “water, feed and mow the grass regularly.” Feeding, watering and mowing the sod did not occur in any meaningful manner for six years and has been seriously underfunded in the past four years. (The fund immediately ran into the tech bubblet and significant funds were lost, perhaps as much as $100 Million according to Mayor Finch.)

The City appealed to the State in 2009 to make payments less than minimum actuarial requirements called for. The City no longer seems to care about getting to 78.6%. In April 2011 we are actually at 56.8%. Retirees are also drawing from the fund, currently at a rate of $8 Million in the most recent quarter. That’s $32 Million per year in addition to the bond repayments for the next 19 years. What does the plan have today or how does the “closed field” look today? Unfortunately, it appears like many Bridgeport non-maintained fields. Only 6 years or less of income benefits are likely to be paid with the current market values, based on assumptions and certainly with the below minimum funding levels that the City has negotiated with the State. Where we are guided to be putting away $15-20 Million per year we have been putting away only 25-33% of that amount or even less. The Mayor is looking for better investment returns to bail out this commitment. Higher than market returns encounter greater risk. The B&A was asking similar questions. The answer is that minimum actuarial funding is necessary. Pay $11-20 Million today or pay later at greater cost and greater public anger.

A final comment about Plan A: When the City negotiated with Police and Fire labor unions recently, increases in compensation to current employees still has an effect on the compensation referenced for income benefits for the 900 persons covered by Pension Plan A. Why is there not one reference about the added cost to the City to future funding of Pension Plan A from the recent union negotiations? Why not? City difficulties with finances might offer some pushback to union negotiators as to automatic increases. But if City leaders keep it secret, no one is the wiser and the concerns of taxpayers are ignored instead of providing a reason for union moderation or relief.

Pension Plan A is a significant example of having a responsibility yet failing to deal with it directly. Conflict of interest in elected office is a critical subject today. It comes into play with Pension Plan A, I believe. The Mayor and two of his key financial team are identified as Trustees. Trustees are fiduciaries and have a higher than ordinary duty to act primarily in the interest of beneficiaries. But the Mayor and his financial team as elected or appointed employees want to stay in office. Is it easier to find ways to defer paying minimum actuarial costs rather than raise taxes and pay today’s costs today? Is that decision a conflict for a Mayor? Paying what we need to as we go along must be dealt with fully today, even if it increases taxes. Mayor Vincent “Buddy” Cianci has written a new book POLITICS AND PASTA. His advice to other Mayors, “The first thing a new mayor should do when he takes office is raise taxes, and then blame it on previous administrations.” I raise Pension Plan A funding as it is one example of an avoidance of responsibility that will increase money problems in the future for taxpayers. The City Council needs to play a genuine role as check and balance or “strainer.” Now is the time to get the answers. Fear of raising taxes is a politician’s fear, the fear of losing votes. But fear of even higher tax payments in the future that include increasing interest expense should be a greater fear for taxpayers as voters.

John Marshall Lee, 30 Beacon Street, Bridgeport, CT 06605