At the Dec. 1 Rules Committee meeting, members of the Blue Ribbon Committee (BRC) on pension funding presented their report and answered questions about the implications of their findings – essentially that a “perfect storm” of negative experiences caused “the plan funding levels [to] erode even before the recent actuarial revisions.”
In its report, the Committee confirmed that the City had an unfunded liability of $145.8 million in its police and firefighter pension funds as of March 1, 2008.
The Unfunded Liability
Even though the City had annually made the “actuarially required contribution” (ARC) to the police and firefighters pension funds, the liability had grown from about $48 million in 1997 to $97 million in 2006. In 2007, the City hired a new actuary, Gabriel Roeder Smith (GRS), to replace its actuary, Ted Windsor. Using more conservative assumptions than Mr. Windsor’s, GRS estimated the unfunded liability to be $140.1 million as of March 1, 2007.
The estimate of the unfunded liability grew to about $145.8 million as of March 1, 2008, not taking into account any losses incurred in the past nine months by the pension funds on their investments. Finance Director Martin Lyons told the RoundTable the gains or losses in the funds are assessed only at the end of each fiscal year, so that information will be available after Feb. 28, 2009.
The annual ARC, according to the report, has two parts: “First, the normal costs fund the pension benefit for the current year’s fire and police services provided to the community. Second, pension contributions also pay part of the accumulated pension obligations from past fire and police services.”
The budgeted ARC for the 2009-10 fiscal year is $7.3 million for the firefighters fund and $9.2 million for the police pension fund, according to figures presented by Mr. Lyons at a Nov. 17 budget workshop. Both pension funds must be fully funded by 2033.
In presenting the report to the Council members, Bill Testa, a member of the BRC, said of the perfect-storm analogy, “Some of it sneaked up on City officials; investments underperformed for a series of years; and there were adjustments at the state level that increased benefits.” Both he and Mark Metz, the chair of the committee, stressed that the City owes the money and has “a moral and legal obligation to pay it.”
“We came to think of it as a bill for police and fire services we’ve already consumed. There is no question that we owe it,” Mr. Testa said.
The BRC report appeared to tiptoe around the issue of responsibility for the funding crisis. Nonetheless, the report states, “What about the City Manager, Finance Director, City Council and Mayor? Were they ‘asleep at the switch?’ These professional and elected officials were being told that the plans were well-funded, the assumptions were reasonable, that the adverse trends would reverse and even out over time. … Hindsight tells us that had more questions been asked, and more information been sought, City officials might have chosen to increase funding at an earlier time to mitigate the depth of the current crisis. Yet we want to be clear that we found no evidence of any wrongdoing or malfeasance.”
Gerald Gordon, a member of the BRC who attended the Dec. 1 Rules Committee meeting, referred to a table in the report that tracks the evolution of the unfunded liability from $48.2 million as of March 1, 1997, to $145.8 million as of March 1, 2008. “This information is in the comprehensive annual report,” he said. “The City Manager, the Finance Director, the Mayor and all the aldermen are required to look at this information on an annual basis.”
The report also states, “We clearly assert that the ‘buck’ starts and stops with the City Council and the Mayor. They are ultimately responsible for managing the City of Evanston and our current pension crisis. They are accountable and must take action to implement a plan to restore the health of the pension funds.”
City Council members discussed the 27-page report and its implications for their future actions at the Dec. 1 Rules Committee meeting.
“What are the questions we should ask each year? What are the benchmarks?” asked Third Ward Alderman Melissa Wynne.
Saying his response was only his “personal opinion” and that he was not speaking for the committee, Mr. Metz replied, “Look at a three-year cycle. The funding in this case was going down over 10 or 11 years. If you have three years of that, look to see where the assumptions were wrong – in retirement age, for example – start chipping away immediately. To wait and let these things go on, believing things will work out … is seductive.”
For a complete summary of the BRC report, see the Oct. 29 issue of theRoundTable. The report is also available on the City’s website, www.cityofevanston.org.
Below are some of the recommendations by the Blue Ribbon Committee for the Council to consider in addressing the unfunded pension liabilities:
1. Consider raising funds to contribute to the pensions through the following means: asset sales or transfers; additional revenue enhancements; alternative financing solutions; budget cuts and efficiency changes in program delivery; and economic growth and development.
2. Gather and distribute more information on pension costs tied to the expansion of the employee base. The full cost of any position includes all salary and all benefits, including projected pension costs for the long term.
3. Bring in a consulting actuary every three years to review the work of the current actuary and make recommendations where necessary. If there are “”authoritative, competing actuarial estimates,”” the City and its actuary should work to reconcile those with the City’s actuary’s estimates.
4. City staff should participate in meetings and conferences and confer with their counterparts in municipalities statewide and elsewhere.
5. The City should continue dialogue with the citizens, with intermittent reports on the pension funding, and allow public review and comment upon the situation.