Can you hear me now?
WSJ story echoes McMenamin warnings on pensions
Springfield Ward 7 Ald. Joe McMenamin has long warned that the city is headed toward financial disaster thanks to unsustainable pension obligations.
He’s usually been a voice in the wilderness, the only “no” vote on collective bargaining agreements that contain raises McMenamin says will exacerbate an already untenable pension situation. Last month he held a press conference to blast the city’s police pension board for calculating retirement benefits based on temporary pay hikes, despite a state order to stop. No other aldermen attended.
“Joe, he beats that drum, which is good,” observes city treasurer Jim Langfelder. “But he’s a lone wolf out there.”
Now comes the Wall Street Journal, which last week made Springfield the poster child of municipal pension messes when it reported that the city is spending as much as 25 percent of its operating budget on pensions. That’s the ninth highest percentage for any city in the nation and more than twice the national average, the newspaper reported. (Pasadena, Calif., which spends 43 percent of its operating budget on pensions, ranked first – or last, depending on your point of view – according to the newspaper).
That Springfield spends nearly $20 million a year on pensions but still has funded just 46 percent of its pension obligations for firefighters and 54 percent of its obligations for cops isn’t news to city officials who can’t say just how the city will come up with more than $200 million to make the two pension funds whole.
Mayor Mike Houston says he knew the city was in bad financial shape when he took office, but he learned at least one thing from the Wall Street Journal.
“What I didn’t realize was, when you start comparing us to the largest 250 cities in the country, how bad a shape we are in,” Houston said.
Houston has called for a measured approach to an issue that didn’t become a crisis overnight. Langfelder is calling for a meeting between the city council, state legislators, pension boards, investment managers and anyone else with an interest.
“You just have an open discussion,” Langfelder said. “We’re all in this together. … I think you need to bring everybody in and have a discussion on how to address this.”
But the city has already had a discussion that culminated in a 73-page report five years ago from a blue-ribbon commission that stated what seems obvious: If pension costs and unfunded pension liabilities keep growing, the city won’t have enough money to pay for basic municipal services. Since then, unfunded liabilities in the police and fire pension funds have grown by $100 million while the percentage of the city budget spent on pensions has roughly doubled. That same year, an actuarial consultant warned that the city’s 8 percent projected rate of return on investment wasn’t realistic and should be lowered to 6.29 percent.
Five years later, the projected rate of return is 7.5 percent, and McMenamin is calling for that to be cut to 5.5 percent, which he says would require an additional $4 million a year from taxpayers. The alderman says that the city could get the money and solve its pension problem by freezing wages for 18 months and putting half of the half-percent sales tax increase approved earlier this year into pensions instead of infrastructure improvements that the mayor and council promised. It is, McMenamin acknowledges, a proposal that has no chance.
“I know that it won’t happen,” said McMenamin, said. “The mayor won’t let it happen and the other aldermen won’t let it happen. We just need a different set of aldermen and mayor. … We can take this medicine now or it’s going to get worse later.”
Not necessarily, says William McCarty, the city’s budget director.
Things are not as bleak as portrayed in the Wall Street Journal, says McCarty, who notes that the city has reduced the number of employees and stopped handing out 20 percent raises over the lifetime of five-year collective bargaining agreements.
“Be concerned, monitor it, but let’s not panic quite yet,” McCarty said.
McMenamin’s math notwithstanding, Houston said that there is no way for the city to fund pension accounts at a 5.5 percent projected rate of return without either cutting services or raising taxes.
“One of the reasons we’re doing what we’re doing is we can’t afford do anything else without raising additional money,” the mayor said.
Beyond cutting back on employees and raises, the city last year contributed $1 million more than required to police and fire pension funds, which McCarty acknowledges is a very small pebble tossed into a very big pond, but it is better than nothing.
McCarty says that much of what happens is beyond the city’s control. The state sets rules for municipal pensions, deciding such things as caps for investments in stocks (as opposed to safer securities) and benefits for spouses of deceased cops and firefighters, and so legislators need to act, he says. The economy is also a huge question mark.
“Right now, we’re starting to see a turnaround in the stock market,” McCarty said. “There were some very good returns in the last year.”
If the economy doesn’t improve, if hoped-for investment returns don’t materialize, if the legislature doesn’t enact reforms for cities staring at staggering pension obligations, the city could, ultimately, be forced to raise property taxes, McCarty says.
“The future is very murky right now,” McCarty said.
Contact Bruce Rushton at firstname.lastname@example.org.