Pension time bomb

Our view: Faced with exploding pension costs for firefighters and police, the city must find a way to fund its obligations while honoring its promises to workers and retirees

May 24, 2010

Time is running out for Mayor Stephanie C. Rawlings-Blake and the City Council to come up with a compromise that allows Baltimore to meet its obligations to city police and firefighters' perennially under-funded pension plan. After a decade of economic reverses, the value of the fund's assets has slipped to only about 40 percent to 50 percent of its future liabilities, and the gap is growing wider each year. But while both the city and the unions acknowledge the current system is broken, they've yet to agree on how to fix it before the July 1 deadline when, by law, the city must make its annual contribution to the fund.

Last week, the City Council's taxation and finance committee drafted changes to the police and fire pension system that, if adopted, potentially could save the city more than $95 million in payments to the pension fund this year. The changes would increase from 20 to 25 the number of years employees must serve before becoming eligible for full retirement benefits and would replace a variable benefit tied to growth in the return on the fund's investments with a fixed cost of living increase of 1 percent or 2 percent per year. The variable benefit is one of the plan's most expensive provisions because it goes up when investments do well but doesn't decline when they lose value. The plan also calls for changing the way the final salary at the end of an employee's career is calculated; often, salaries spike just before retirement, increasing the city's obligation for the rest of the employee's life.

A spokesman for Mayor Rawlings-Blake said that without changes in the way retirement benefits are calculated, the city could be liable for up to $165 million in pension obligations this year — substantially more than the $101 million the mayor has budgeted for that purpose. To make up the difference, the city would be forced either to raise the property tax rate by 18 or 19 cents — something Ms. Rawlings-Blake has vowed not to do — or take the entire $50 million in new taxes and fees the mayor is seeking to avoid massive cuts in city services and use it just to fund police and firefighters' retirement benefits. And even that wouldn't be enough.

Clearly, runaway pension costs have made the current system unsustainable. Even if the mayor and City Council managed to come up with the entire $165 million pension tab, next year would be even worse. The city finance director estimates that if nothing changes, Baltimore could owe $185 million in fiscal 2012.

Representatives of the police and firefighters say they recognize the fiscal cliff Baltimore is facing and are willing to compromise on issues like raising the retirement age and replacing the variable benefit with a cost-of-living adjustment tied to Social Security increases — but only for future hires, not current workers and retirees. The city, they say, has a contractual obligation to honor the promises it made to those who took jobs on the understanding that they would get specific benefits upon retirement, and it's not fair to renege on that commitment just because times are tough.

While no one denies police and firefighters deserve a secure retirement after risking their lives for years protecting the public, some cuts in benefits for current workers and retirees seem inevitable if the city is to dig out of its fiscal hole. Union members are understandably angry that the city didn't contribute enough to keep the pension fund solvent over the last decade, even in years when it was running a surplus. In 1999, the fund had assets worth 120 percent of its liabilities, but during the downturns beginning in 2002 and 2008 it lost some $850 million in value that city government never made up. Still, the workers should recognize the role the variable benefit plays in that problem — extra money generated during good years for the stock market should have been used to shore up the fund to prepare for down years, but instead much of it went to permanent cost-of-living increases.

The bottom line is that you can't squeeze blood from a turnip. Everybody has been hit hard by this recession, and whatever mistakes the city made in the past can't be rectified simply by doing more of the same. The unions' threat of a lawsuit over any benefit cuts for current and retired workers isn't going to make more money magically appear, and it won't do anything to make the present system workable over the long run. If the unions succeed in forcing larger compensation for retirees, they're probably guaranteeing layoffs for current workers.

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