A costly pension benefit

Our view: Ending a benefit of Baltimore's police-fire pension system should help the city better meet its financial obligations to retirees

October 23, 2008

The gravy train for Baltimore police and fire retirees is nearing the last station. For 24 years, retired members of the city police and fire departments have profited from a unique feature of their pension system that increased their benefits when pension fund investments performed well. If the investments perform poorly, retirees didn't suffer; instead, the city simply paid more into the plan.

But the city no longer can afford to keep this train running. The feature had the costly effect of increasing a retiree's base benefit that the city had to fund, which added to its financial burden. Most pension benefits are based on employees' salaries at the time they retire. Reform of the police and fire pension system is overdue.

Legislation proposed by Mayor Sheila Dixon would bring the police and fire pension system in line with the retirement benefits for other municipal workers. It would replace the "variable benefit" feature of the plan with a 1.5 percent annual increase for retirees - and provide an additional, limited benefit depending on the performance of the fund. The City Council should support the change, even if police and fire unions want to negotiate a higher benefit. Why should police officers and firefighters get a larger annual percentage increase than other city workers?

Police and fire department employees past and present may feel - as their union has argued - that a deal is a deal. The "variable benefit" was introduced in 1983 as a way of compensating retirees who hadn't received a pension increase in four years or a cost-of-living increase. The benefit, introduced during an election year, was conceived as a kind of profit-sharing, and, not surprisingly, it had enormous support among city employees.

At the time, however, the retirement systems' actuary, William M. Mercer Inc., raised concerns about the potential cost of the new benefit. Mayor William Donald Schaefer opposed it, saying, "It is unreasonable and wishful thinking to believe that large sums of money can be set aside for the variable benefit without increasing the cost of the pension system to the city." In the first year of the benefit, police and fire retirees received a 31.5 percent increase.

But Mr. Schaefer has been proved right. City officials say the fire and police pension funds have not performed well in recent years, and to cover the city's growing pension burden, its contribution would have to be $81 million, an 18.7 percent increase over last year. Next year, officials predict, things won't be any better.

The city's problems with the benefit can't be blamed solely on the stock market. The nature of Wall Street is cyclical. But the variable benefit is not the customary way to finance government pensions. The Dixon administration's decision to end this bonus is a reform whose time has come.

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