The City pensions have puzzled me. How did the City end up with such a huge jump in pension costs?
The City’s contributions to the pension plans are eating up a sizable chunk of the City’s revenue. The unfunded portion of each of the three plans continues to mount, even though the City closed the general pension, the one for all employees other than fire and police, in 2007 and moved new hires to the Florida Retirement System.
The City’s unfunded pension liabilities total $77.5 million, according to the 2008 Comprehensive Annual Financial Report (CAFR): General $50.3 million, Fire $15 million, Police $12.2 million. The unfunded liabilities have doubled in the last 10 years, even though the City has increased its contributions nearly 400 percent.
In 2008, the IN published a story on the pension fiasco (“Feed the Beast”). Our research showed that Pensacola offered a defined contribution plan from 1980 to 1997. Employees had 457 plans, which are like a 401K plan in the private sector. Employees chipped in a percentage of their pay to an investment account
In 1996, the city had an unfunded pension liability of only $2.9 million, according a 1996 report by Garbiel, Roeader, Smith & Company Consultants & Actuaries Senior Consultant Thomas Cavanaugh.
WHAT CHANGED?
City staff recommended in 1997 that the City Council make the General Pension plan a defined benefit plan. The Fire and Police would stay the same, but the one that covered the rest of the staff, including the city manager and the senior leaders, would be changed.
A Dec. 20, 1996 report by the Senior Consultant Cavanaugh shows the city’s unfunded liability at the time was $2.9 million. Cavanaugh estimated that the new plan would only increase the unfunded liability to $8.6. He was only off by $19 million. The 2001 CAFR shows the actual unfunded liability for the new General Pension plan was $28.7 million by 9/30/97. Oops
For “Feed the Beast,” the City Finance Director Richard Barker defended the reopening of the General Pension.
“Government employees tend to be conservative in their investments and they’re not investors,” Barker says. “They were putting their money in fixed-income or money market accounts.”
Mark O’Brien wrote about this change in April 2009 and described then-City Manager Ed Hinkle as a “Champion of the Workforce” who helped convince the City Council to revive the pension plan.
I found the City Financial reports for the fiscal year ended 9/30/97. At that time the City contributions for the city employees into the General Pension and Retirement Fund were only $431,038. Two years later, the City contribution to the General Pension jumped to $1,613,059 –374 percent increase for FY 9/30/99.
According to the 2008 CAFR, General Pension costs were $6,268,750 – up 1455% from FY 1997, up 389% from FY 1999.
The Cavanaugh memo begs the question: Did the city staff and its consultants give the City Council faulty financial advice to convince them to reopen the General Pension? The answer appears to be yes.
In searching the city archives I came across a memo, dated 10/15/98, that proposed a rewrite of the General Pension Plan. The memo negates any financial impact of the changes: “Only one of the proposed changes to the general pension plan has an actuarial impact on the plan valuation. The health insurance assistance benefit will have an approximate two percent impact. However, the two percent contribution the City currently makes to the Insurance Retention Fund to pay for this benefit will no longer be required and thus will offset the actuarial impact.”
The Staff contacts for the memo are Richard Barker, Don Caton, Joyce Williams and Wayne Etheredge. It’s signed by City Manager Ed Hinkle.
The unfunded liabilities instead continued to increase. By 9/30/00, they were $36.2 million.
Before 1997, the city was covering on average about 96 percent of its share for General Pension plan but that dropped to about 74 percent.
WHO BENEFITED FROM THE PLAN CHANGE?
Those who were being paid the most, benefited the most. Some took advantage of the change almost immediately. Ed Hinkle announced his retirement in November 1998, months after the changes were approved by the City Council.
“The Champion of the Workforce” even got a sweetheart deal from the Pension Board. I came across another memo, dated 10/5/99, that was from new City Manager Tom Bonfield about questions from the city auditors over how Ed Hinkle’s retirement was calculated.
Hinkle was allowed to have included in his pension calculation all his deferred compensation – about $77,000. This increased his pension checks from $65,212.56 in 1999 to $81,421.20. By the time we published “Feed the Beast, ” Hinkle’s pension had grown to $94,275.
That little inside perk alone has given Hinkle over the past 10 years between $162,000 to $185,000 more than he should have gotten–at least $85,000 more than if we had paid him off his deferred compensation when he retired.
Read Hinkle pension
WAS THIS A BACKROOM DEAL?
The City Manager and senior City staff recommend a comprehensive, complicated set of changes to the general pension plan. They tell the City Council that there will be no financial impact or, at best, minimize its impact.
A year later the general pension contribution goes from $431,038 to $1,613,059. The unfunded liability increases by $19 million. The City Manager retires early. In the same year, the auditor questions why the former city manager, who recommended the pension changes, is given special preference on his pension.
Fortunately, the City Council quickly passed a law forbidding the other employees from doing the same. Too little, too late.
And where is the “Champion of the Workforce”? Living in east Tennessee, giving real meaning to the phrase “Take the Money & Run.”
Here is how the General Pension contributions have continued to escalate:
2001 $1,854,302
2002 $2,235,823
2003 $1,779,518
2004 $4,628,189
2005 $5,594,011
2006 $6,300,951
2007 $7,622,500
2008 $6,268,750
Note: The only City Council member still serving who voted for reopening the General Pension plan is Mayor Mike Wiggins.