News Column

Memphis City Council gets ready for next debate: remaking the pension system

June 29, 2014

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



June 29--Nearly two weeks have passed since the Memphis City Council voted to cut most subsidies for retiree health care, a decision that prompted angry demonstrations outside City Hall. Now the council is taking on another emotionally charged fight: a proposed move to a 401(k)-style retirement system.

The move would only apply to new employees and those with less than 10 years experience.

On Tuesday, experts that the City Council hired from The Segal Company will tell members how a 401(k)-style plan and other pension alternatives would affect city finances and the size of retiree payouts. The discussion starts at 11 a.m. in the fifth floor conference room at City Hall and is scheduled to continue into the early afternoon.

A final vote on a new retirement plan would follow on July 15, unless the council chooses otherwise, council chairman Jim Strickland said Wednesday. Some council members, including Wanda Halbert, have spoken against making a fast decision.

Retirement systems typically put money into stocks and other investments. A key difference between them is how the performance of those investments affects the size of retirement payouts.

Municipal labor unions want the city to keep workers in the current traditional pension, which offers guaranteed payouts for life. By contrast, a 401(k)-style plan offers less security for the employee because payouts can rise or fall based on the performance of investments.

Advocates of a 401(k)-type plan say it would help the city avoid having to make huge contributions of taxpayer money to the pension fund when market fluctuations drive down the value of investments.

The Segal experts will also likely show the impact of a hybrid plan that includes elements of a traditional pension and a 401(k).

The city's pension fund owes far more money to retirees than it has on hand, in large part because the city has contributed less to the fund than actuaries recommended.

Experts have offered different estimates of the shortfall at different times, but the City Council's advisers from Segal have discussed the issue with another company that has worked with the city for years, PricewaterhouseCoopers, and they have agreed to peg the size of the gap at $551.9 million as of July 1 of last year. (An expert hired by the firefighters' labor union used different assumptions and pegged the gap at $301 million.)

The city faces pressure from state officials and bond rating agencies to fix the problem.

Mayor A C Wharton's administration has proposed two main measures to deal with the shortfall. The first approach is to contribute much more money to the city's pension fund. The City Council this month voted to raise the pension contribution from about $20 million in 2013-2014 to $47.4 million in the fiscal year that starts July 1.

Much of the money for the increased contribution comes from reducing subsidies for retiree health care.

The Wharton administration's second proposed solution is to change the design of pension benefits by moving to a 401 (k)-style system. Laws limit the city's power to change the pension benefits of current retirees and vested employees, so any new plan would only affect newer workers.

The city would have to keep its traditional pension fund for decades as today's vested employees and pensioners live out their retirements. At his last appearance before the council, Segal expert Eric Atwater warned that the city will likely face increasing costs for years, no matter what type of new system it puts in place.

___

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

Visit The Commercial Appeal (Memphis, Tenn.) at www.commercialappeal.com

Distributed by MCT Information Services


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Commercial Appeal (Memphis, TN)