News Column

Expert: Memphis might have to make huge pension contributions through 2040

June 11, 2014

By Daniel Connolly, The Commercial Appeal, Memphis, Tenn.



June 11--If the city of Memphis keeps its current pension system, it might have to make much larger contributions to the troubled retirement fund until at least 2040, according to a presentation prepared by experts with The Segal Company.

And even if the City Council votes on July 15 to shift to a lower-cost retirement plan for newer employees, it will have to pay much higher contributions for the next several years, Segal says.

The Segal report comes as Mayor A C Wharton has proposed boosting the city's pension contribution from about $20 million now to about $35 million for the next fiscal year, with much of the increased contribution coming from a cut in retiree health-care subsidies. A vote on the city budget is scheduled for June 17.

The City Council likely will be called upon again next year to boost the pension contribution, and possibly for many years after that. The demand for money could impact city services and property tax rates.

Atlanta-based Segal pension expert Eric Atwater went over the numbers with the Memphis City Council during a special meeting Tuesday.

The city currently contributes far less than the Annual Required Contribution (ARC), which is the amount experts recommend to make sure that the fund has enough money to cover its long-term debts to retirees. The city now faces a new state law that requires it to pay its full ARC by 2020.

Mayor A C Wharton has proposed gradually boosting the city's contribution over the next five years until it pays the full ARC, while Council chairman Jim Strickland is pushing to achieve the same goal in two years. The faster the city pays the full ARC, the less money it will owe on the back end, Atwater told council members.

If the city pays the full ARC in two years, it would have to pay about $68.6 million in 2020, for instance, Atwater's analysis says. If it pays the full ARC in five years, it would pay $73.3 million that year.

For the year 2040, if the city pays the full ARC in two years, its costs would be $85.6 million. If it pays the ARC in five years, its costs would be $90.2 million.

Council member Lee Harris said the difference between a two-year ramp-up and a five-year ramp-up didn't seem very big, especially if viewed through the accounting technique known as "present value." The "present value" concept is that money that you have in your hand today is worth more than money that you will have several years from now.

But Strickland said a two-year ramp-up to full ARC payments will save several million dollars each year. "That helps police, that helps fire, that helps the taxpayers."

The city currently offers a defined benefit pension plan, which makes guaranteed payouts for life. The Segal consultants prepared their analysis under the assumption that the city won't move to a lower-cost retirement plan, such as the 401(k)-style system that Wharton has proposed for new employees and those with less than 10 years' experience.

Municipal labor unions strongly oppose a move to a 401(k)-style system, in which payouts can rise or fall depending on the performance of stocks and other investments.

Atwater plans to return to Memphis sometime in the next few weeks for one or more meetings that focus on the implications of moving to a 401(k)-style system or another alternate pension plan.

Separately, Atwater discussed how the Segal consultants worked with another set of experts with PricewaterhouseCoopers to come to agreement on the estimated size of the shortfall in the city's pension fund. The two companies now say that as of July 1, the trust fund owed $551.9 million more to retirees than it had on hand, and that the ARC is $78.3 million.

PricewaterhouseCoopers has long worked for the city. An expert hired by the firefighters' union came up with a different estimate of the pension fund's health. The City Council members hired Segal to help them sort out competing claims.

The three sets of experts came up with different numbers. The firefighters' expert did not participate in the later discussions between Segal and PricewaterhouseCoopers. Council member Wanda Halbert said she wants the firefighters' expert to participate in future discussions. Both Atwater and Strickland said they'd be open to that.

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(c)2014 The Commercial Appeal (Memphis, Tenn.)

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Source: Commercial Appeal (Memphis, TN)