A Review Of City Pensions, The Meaning Behind The Numbers

Public pension obligations are very much in the news on federal, state and local levels. Pension costs can be difficult for a layperson to understand. How much does the city’s pension system cost city taxpayers? How strong are the pension funds? How do they impact the budgetary process? Fiscal watchdogs John Marshall Lee and Andy Fardy, a retired city firefighter, share insight in the first of a two-part commentary: Municipal Retirement Plans: Decision Making Hidden From View.

A pension plan is a promise by an employer to pay certain defined benefits to eligible former employees at a normal retirement age and continue that stream of payments to the retiree (and often a survivor) for the balance of their lifetimes. There are many variations but essentially the pension form of retirement benefits places the risk of bad investments or a long retiree lifetime payout on the shoulders of the employer and Trustees who oversee the administration stewardship process. In this essay I am talking about the City of Bridgeport, which has three major Pension Plans in operation. And it is about the taxpayer who funds the promises who does not get to see the decisions that cause paying for the promises more expensive for the taxpayer in the future.

Pension A is the oldest plan as most of its beneficiaries (874 including 26 still working and contributing) have completed work and are receiving benefits totaling about $32 Million per year. The City for its part has not funded necessary contributions as called for over the years, rather deferring them to a later date, when they are necessarily more expensive. When this caught up with Bridgeport about 15 years ago, they borrowed $350 Million by way of a Pension Obligation Bond. We now repay bondholders annually: $14 Million from the Fire Department budget and $16 Million from the Police Department budget. FY 2012 audit showed the City contributing $7 Million to the plan while the plan paid out $33,680,000 of benefits from a fund that has decreased through benefits paid as well as investment losses over previous years. Trust assets of $134 Million were reported on June 30 2012. The Trustees of this plan include the Mayor and several City employees who serve in City financial posts. This plan is about 51% funded which is the same as indicating it is seriously underfunded.

It is important to understand that no one represents retired employees specifically at the Trustee table as stewards primarily looking out for their interests. This is a potentially troubling aspect of governmental plans. If stewards have other duties that conflict with the benefits to retirees, care must be taken to fully inform all parties relative to critical decision making.

(Andy Fardy, a pensioner under Plan A, notes about 20 of his former associates died during the past year. To the extent they leave survivors, who can receive 50% of the pension for the remainder of their lifetime, overall Plan payouts are lessened. To the extent that salary increases for current active Plan B firefighters when earned, increase benefits for all Plan A retirees is also true. With no retiree representation as Plan A Trustees, Andy has suggested reporting the number of retiree beneficiaries distinct from survivor beneficiaries as well as the benefits payable to each group in the previous year. It is one thing to trust numbers provided by City sources, but our experience teaches us how prudent it is to verify those numbers independently.)

Public Safety employees hired after the early ’80s became beneficiaries of two different plans, Pension Plan B – Fire and Pension Plan B – Police. The Trustees of these plans were the seven respective Board Commissioners of Fire and Police and two elected union employees. At the end of FY 2012 the Fire plan had about $74 Million of assets and the Police plan had nearly $128 Million. These plans were funded about 78% and 81% respectively. There are current retired beneficiaries in each of these plans.

Since 2010 City labor relations attention was paid to renewing Fire and Police contracts that also included retirement benefits. An opportunity was explored for active Plan B employees to transfer to CT Municipal Employee Retirement Scheme (CMERS) for retirement benefits. It appears each of the Unions found the State plan more favorable. One important factor seemed to be the fact the State plan allowed the highest three employee compensation years to become the base for determining dollar benefits, and both internal and external overtime earned became part of covered compensation. If you carefully look at the 2012 and 2013 monthly financial reports you will see overtime budgets for public safety employees overspent by millions of dollars each year, a serious fiscal problem for taxpayers.

The practical question of what do Trustees do responsibly in dividing Plan B assets was tackled proactively by the Fire Plan B Trustees who retained legal counsel and pension actuarial services independent of the City to prepare several different action paths. They understood that funding for those already retired was very dependent on assumptions about interest rates and mortality. They sought to bring those assumptions into line with more current experience than those used by the City actuary. They had genuine concern about the potential for being sued by retirees in the event that Plan B assets suffered investment losses plus benefit drawdowns that would leave inadequate funds. They chose in summer 2012 to send $22 Million to the State of CT along with the active employee and City future contributions. The City came back to them in 2013 looking for added transfer to the State of $20 Million. Pension Trustees met with union members and retirees to understand positions as they became aware that the State had actuarial reports, as did the City, and as did the Trustees. It seems that at no point was the public made aware of all of the assumptions and projections in writing. Two Fire Trustees resigned after pointing out their major concerns. (See Only in Bridgeport Archives /fire-commissioner-stuart-rosenberg-resigns-in-fallout-over-handling-of-pension-plan/.

(Note from authors: We acknowledge former Fire Board members Stuart Rosenberg and James Morley who were serious in understanding their fiduciary responsibility, by seeking independent actuarial research and legal opinion on the subject of plan asset division between retired and active eligible beneficiaries, and with a show of integrity by standing by their opinion when faced with counterarguments by the City who ultimately did not bother to inform the public or the City Council on the range of financial considerations. Thank you, Stu and Jim, for being notable examples of public stewardship.)