Tuesday, February 23, 2010

Atlanta pension peril is dire and getting worse

Posted By on Tue, Feb 23, 2010 at 1:23 PM

click to enlarge Tough choices ahead for Reed
  • Tough choices ahead for Reed

That's what you wanted to hear to start out your week, right?

Unfortunately, it also seems to be true. A two-hour PowerPoint presentation (PDF) Monday morning by former AJC publisher John Mellott to the city's new Pension Review Panel drove home the reality that Atlanta's pension situation is worsening — and will continue to do so unless dramatic action is taken.

Frankly, from what I saw, there's only one way out and it's a heavy lift, one that would require almost miraculous cooperation by state lawmakers, city council members and city employees themselves.

What we learned is that the city has only funded about 50 percent of its future pension obligations, creating a monstrous — and growing — unfunded liability. This is a little like having an interest-only mortgage: You can make all your monthly payments, but never end up chipping away at your loan principal.

We also learned that, despite taking several actions that made matters worse, the Council isn't solely to blame for the city's predicament. You may recall that, back in 2001, the city sweetened its pension offerings in an effort to curb attrition among police officers — then came back later and improved pension packages for all employees for the sake of fairness. Also for fairness' sake, these changes were made retroactive so former employees didn't feel cheated.

(It should be noted that this generosity failed to achieve its goal; police retention is as bad as it ever was. Studies show that — surprise! — most people don't consider pensions when deciding where to work.)

While the pension policy changes hurt the city's bottom line, they contributed relatively little to the current problem, according to the report. More damaging has been the god-awful performance of the pension fund itself.

The city's pension system is based on an assumed 8-percent rate of return on investment, but since 2001, the actual rate has averaged about 3 percent. Three lousy percent. Even some of Madoff's clients did better than that.

And even worse than the fund performance have been the city's actuarial guesstimates. The city assumed that only 47 percent of its cops would retire at age 55. The actual percentage has been about 90. So the numbers were only off by, lessee … 100 percent!

The city also figured that fewer than one out of 100 police officers would end up claiming disability. In reality, a full 10 percent retire with disability.

Mellott made it clear in a letter to his fellow panelists that they wouldn't be expending any effort on laying blame for the pension quagmire, but it appears that blame is fairly widespread.

Back in 2001, the city was within $400 million of having its pension obligations fully funded. Now, because of the above factors, the gap stands at about $1.5 billion. Why the Council and Mayor Franklin allowed the pension problem to spiral so far out of control that it threatens the city's very solvency remains, for now, a mystery.

Another question mark is the role played by Southern Actuarial Services and other private firms that counseled the city on its pension plans for the past few years. Did the city ignore their guidance or was their advice really that rotten? Either way, why are they still on the job?

Last year, a desperate Council voted to extend the amortization period on its pension fund — a move akin to stretching out your car loan in order to reduce your monthly note. It's a short-term gambit that gives the city some financial breathing room in the next couple of budget cycles, but will result in unmanageable balloon payments later on unless a long-term solution is found.

So what are the possible options? If you've downloaded the city's PDF, go to page 16. If not, I'll sum up the dismal choices:

  • The first option is do nothing, in which case the city goes broke. Or, as Mayor Reed put it Monday, "Atlanta becomes a second-tier city," the Detroit of the Southeast.
  • A second option is to keep the pension plan in place for existing employees, but change it for future hires. As far as I can tell, this action would do little to dig us out of our current hole: See option 1.
  • The only realistic way to salvage the city budget, however, would likely involve changing the pension plan for existing employees as well as for new hires. Such a move would require approval by the General Assembly and could face opposition — and even legal action — from employee unions.

Judging from comments made by union reps during yesterday's session, they favor raising taxes instead of cutting pension benefits. But Reed has made it clear time and again that he won't support another tax increase. So expect a battle.

One other thing: While the city can't go back and unilaterally cut pensions for employees who've already retired, the panel plans to consider the wisdom of offering lump-sum payments — similar to an employee buyout — to retirees in order to reduce its future pension obligations.

Shirley had sewers. Kasim has pensions. The merriment continues.

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