The U City Pension Problem

Our pension fund for city employees is structurally broken and unsustainable.

  • The U City pension deficit is $13.5 million. Our general budget is only $23.5 million.
  • Our deficit is projected to grow more than $1 million a year, even as we pay millions to try to slow it down.
  • Nothing has been done to actually solve the problem.
img
The graph above shows our pension deficit, or “unfunded liability,” over time. Anything below the dotted line is a surplus, anything above the dotted line is a deficit. 

Many factors have contributed to our growing deficit, including lower interest rates, the 2008 stock-market crash and bad assumptions about stock market returns and how long employees would live after retirement, which caused earlier generations of U City policymakers to badly underestimate the size of the problem.

 

The Bottom Line

That money has to come from somewhere. A $13.5 million deficit means less money to pave roads and fight crime. It means higher taxes. In the worst case scenario, it means that we won’t be able to honor our commitments to the men and women who have served our city.

Across the US, cities that waited to address their pension debts are forced to make painful decisions. Let’s confront the problem. Let’s be the city that takes action. 

 

We need political will for change

In an analysis of pension problems, the Brookings Institute writes: “Many of the problems of public pensions are symptomatic of broader dysfunction in state budgeting, and the strong temptation for legislators to spend now to please voters and powerful special interests while deferring costs into the distant future.

  • Despite sitting on the U City pension board, my opponent Steve McMahon got more than half the money for his 2014 campaign from PACs representing the firefighters Union. 
  • Later that year, McMahon and the Pension Board lobbied City Council to make a special one-time $1.9 million payment to the pension fund, in addition to the budgeted $2 million payment.
  • Even after spending a combined $4 million on pensions in one year (that’s 1/6 the size of our general fund), we fell below the State-mandated 80% funding target. We are projected to continue falling farther.
  • On his website, McMahon insists the problem is just that we “did not set aside enough money to fully fund the Police and Fire Pensions.” McMahon wants taxpayers to pay more, but has proposed no reforms to our outdated, unsustainable system.

 

My opponent is a good guy. But this just isn’t good governance.

 

There is blame to go around our dysfunctional political system. Our Mayor and City Council approved the extra spending without tying it to any actual reforms (resolutions 2015 – 5 and 2015 – 6). They all agreed to spend a huge amount of taxpayer money with no citizen engagement. Most residents don’t even know we have a growing deficit more than half the size of our general fund.

img

We can modernize our plan

One place to start: establishing a defined contribution plan for new employees.

  • U City still uses a defined benefit plan. Private sector started moving away from defined benefit plans in the 1980s, and adopting defined contribution plans instead.
  • Many states and cities are now doing the same thing. The Pennsylvania Municipal League wrote about their switch to defined contribution: “This legislative proposal is not a “quick-fix,” but one that will offer financial stability and sustainability in the long term.” U City needs to catch up.

 

Adopting a defined contribution plan moves risk off of the City. Every person has to face some risk from stock market swings and changing interest rates. But when a city takes on that risk, you get what I saw in San Jose: they lost almost a third of their police force because of their pension deficit. When a City’s financial fate is hinging on stock market returns, we are gambling with our ability to provide public safety to an entire community.

 

A defined contribution plan brings us other benefits too:

  • Allows us to more accurately budget for what we owe as a percentage of payroll.
  • Equitable contribution rate for all employees. An employee’s age does not impact the cost of providing retirement benefits.
  • No “benefit spiking” with final average compensation increases.
  • Provides portability of benefits for terminated and retired employees (to transfer to a new employer account or IRA rollover account).
  • Employees can contribute to increase their retirement savings.
  • Allows employees investment control in selecting how their retirement account is invested in professionally managed funds.
  • Eliminates the uncertainty of stock market returns, interest rate and changing life expectancy.

 

We can fix the problem

Above all, we have to bring everyone to the table. We need a balanced, rational solution. One that works for city employees, current taxpayers, and future generations. As your representative,

  1. I will push City Council to make solving the U City pension problem a top priority.
  2. I will work for an open, inclusive conversation about the issue now. Problems this big don’t get solved behind closed doors, especially while special interests are allowed to hide their spending.
  3. I will make sure that increased payments from residents are tied to structural efforts to modernize our pension system. We need a sustainable solution that gives stability to employees and taxpayers.

That’s why I’m asking for your vote on November 8th. When Special Interests spend, U City residents pay. We need new energy and an independent voice to work to find a balanced solution.

img