Baltimore officials say they need to eliminate a long-standing benefit to thousands of Fire and Police Department retirees because the volatile stock market is forcing a huge increase in the city's contribution to their pension fund when its budget is already strained.
The police and fire pension fund is causing an extra drag on Baltimore's budget because of an unusual benefit. In addition to the regular fixed annuity that guarantees retired officers a percentage of their final salary for life, it provides increases in years when the stock market exceeds expectations.
Those increases become part of the retirees' baseline pensions, compounding their benefits over time. But the higher payments mean the pension fund has less of a cushion when the market drops.
To keep up, the city will have to boost its annual contribution to the pension fund by nearly 18.7 percent, to $81.8 million - an expense that city officials say they can't afford when they are already cutting the budget. And if the problem is not addressed, the amount the city pays each year could balloon.
That's not a sustainable way to fund the pension system, said Deputy Mayor Christopher Thomaskutty. "Unfortunately, I think that is pretty clear," he said. "If we don't fix this problem, we are going to have to pay."
Mayor Sheila Dixon's staff has drafted legislation, to be introduced Monday, that ends the bonus payments and replaces them with a 1.5 percent annual increase regardless of how the market performs.
City union leaders say they'll fight to get a better deal. Dixon's proposal breaks a promise to retirees, said Bob Cherry, president-elect of the police union.
"A lot of our retirees, they live from paycheck to paycheck, and 1.5 [percent] is not going to be enough for these retirees to survive," Cherry said. "We're not happy or pleased with the legislation."
Retirees now average $29,038 in benefits, so the 1.5 percent increase would equal about $436 a year. The bonus system has provided annual increases of 3.06 percent on average, which at current benefit levels would amount to $889 a year. Pension officials say retirees would be unlikely to get any increased benefits for the next several years under the current system because of the bad economy.
The city is making cuts to stem a $37 million budget shortfall. Dixon announced Monday that some specialized police units would be disbanded so the officers could walk patrol, reducing overtime in that area; city fire will delay training, put off equipment purchases and reduce overtime; and a hiring freeze would be extended for the next nine months.
Under current law, the bonuses kick in whenever the pension plan's investments grow by more than 7.5 percent in a year. In good times, such as the late 1980s, pensioners received increases of as much as 10 percent. But after the dot-com bubble burst, retirees went four years in a row without any increases.
Last year, the 5,881 retirees received a 5.34 percent increase. This year they will not get one, and at a meeting yesterday, pension trustees said they don't believe they'll be in a position to make an increase for a few years.
The city's fire and police pension plan is a $2 billion program that is separate from the plan that covers the city's 10,000 civilian employees. The police and fire fund's investments dropped by 17 percent this year compared with last, according to figures handed out at yesterday's meeting. A manager for the civilian plan did not return calls yesterday.
The state's pension system has also taken a big hit as markets have plunged, dropping nearly 20 percent in the past year from $40.1 billion in market value to $32.7 billion at the end of September.
R. Dean Kenderdine, executive director of the system that provides benefits to teachers, state employees and law enforcement officers, said the drop has no impact on benefits.
Separately, the state pension board is seeking a change in the way it determines the state's contribution to cover liabilities over time that would require upward of $63 million more per year. But state leaders have long debated how to calculate liabilities, even before the current market downturn, and a change would require legislation that lawmakers might find unattractive in tough budget times.
The state plan does not increase benefit levels in the good years, like the city's pension arrangement.
Other city union heads complained that the new legislation is like a bait and switch. "In effect they are changing a benefit that has been guaranteed to our retirees," said Bob Sledgeski, the president of the firefighters union. "If it is costing the city more money, that is the cost of doing business."
But both Sledgeski and Capt. Stephan G. Fugate, who heads the fire officers union, said they understand the need for the change to the pension system and will fight for a bigger annual increase rather then trying to kill the bill outright.
"Frankly, this is something that has to be done," said Fugate, who also chairs the Fire and Police Employees' Retirement System. "We'd like to see [the annual increase] close to 2 percent."
The gravity of the fund's problems was palpable at yesterday's pension meeting, where the fund's actuary, Douglas L. Rowe of Mercer, informed the board that many of their investments performed lower than benchmark targets. "I would expect this year to not be a great year," he said.
He said the board will need to ask the city for $81.8 million in contributions next year, $54.7 million more then the city had to give in 2000.
Compounding the problem, he said, is that last year was a very good year, in which the fund's investments grew by 19 percent.
"When you have the good year, you spend a fair amount of money on the variable increase," Rowe said. "When you have the bad, you don't get it back."
Baltimore Sun reporter Laura Smitherman contributed to this article.