Wednesday, July 1, 2009
News Atlanta budget contains pension time-bomb
Posted by Scott Henry @ScottTheHenry on Wed, Jul 1, 2009 at 5:21 PM
OK, that may be a little over-dramatic, but it's essentially true.
Two days ago, the City Council passed a $541 million city budget for fiscal year 2010 — beginning, well, today, actually — which is $100 million less than the $640 million budget adopted in 2007. Now, that comparison is a little misleading because the FY2008 budget was based on some rather hinky accounting. Still, the city had to do a lot of heavy lifting to cut the budget down to $541 million, including staff layoffs, employee furloughs and a 3-mill tax hike.
Perhaps you've heard something about this. Well, what you likely hadn't heard much about is a re-amortization of the city's pension obligations, a provision buried within the budget.
I don't mean to suggest anything sneaky about the action. It was certainly discussed at length in meetings that were open to the public, if poorly attended. But it was somewhat controversial among Council members because it carries a certain financial risk.
Imagine you're financing a car purchase. If you take out a three-year loan, your monthly payments are higher, but you end up paying less in interest over the life of the loan. If it's a five-year loan, your monthly payments are lower, but you end up paying more in the end.
In effect, the Council restructured its pensions so it could pay less now and more later. The move will save the city $25 million in annual pension costs for at least the next couple of years. But how much will it cost us later?
"This will add horrifically to the back end unless it's refinanced," laments Howard Shook, who chairs the Council's Finance Committee.
But Shook, along with a majority of Council, approved the measure because it's one of the few short-term fixes that would result in substantial and immediate savings..
The only thing is, he says, the pensions will need to be re-restructured within a few years — certainly once the current budget crisis is over — or the rising costs will swallow the city. Which means the next Council will have to possess a measure of political will.
Now, I should point out that none of these actions changes the size of pension checks to former city workers — the Council can't trim employee pensions retroactively. But Shook believes that when this year's elections are over, the next Council likely will take a look at reducing pensions for future city workers.
Sounds like a plan.
Comments (4)
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At last someone's talking about a real way to dig out of the budget crisis: Reducing pension promises that were irresponsibly increased in the past few years. Shook would be more credible if he'd opposed that at the time. But this is progress. Now how about finding the missing property and sales tax revenues - or at least stanching the bleeding?
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The City needs to trim its pension plan. The City has pressing financial woes and the revenue outlook for the foreseeable future is modest, at best. Most companies in the private sector have reduced their pension plans, and many have even terminated those plans. The City should lower the cost of its pension plans as soon as possible, and reinvest a portion of the savings into salaries to ameliorate the pension value lost by employees.
Right on, Actuary Alice. ""The City needs to trim its pension plan." Some 20% of the budget is the pension expense, which is completely out of line. Council did this to us by raising the credit from 2% to 3% of salary per year served in 2001 for cops and later for the rest. Going back to the status quo ante would be a start. Now that Shook has uttered the words on pension benefit cuts, any chance the heroes running for office can be induced to tell the truth? As ugly as the pension situation is, retiree health is even worse. The city does not fund those obligations and they are piling up dangerously. Tough as it is, these benefit promises need to be cut back, too. Something like a Kaiser plan would help to keep Atlanta from being at the mercy of fee-happy specialists.
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