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Pension Headache

Think your financial future looks bad? Wait 'til you get the bill for city police and firefighters' retirement

Frank Klein
Bob Sledgeski, President of the City Firefighters' Union, says that the city should pay a little bit now and a little bit more in the future, but should keep paying what it owes the pension fund.
Frank Klein
City Fire and Police pension board Co-Chairman Edward C. Heckrotte, Fire Capt. Stephan Fugate, and Fire Chief Jim Xlack attend an oct. 13 pension board meeting.
Edward Ericson Jr.
City Fire and Police employee pension fund Executive Director Thomas Taneyhill says that lowering the expected rate of return on the pension will make it more expensive to taxpayers.

By Edward Ericson Jr. | Posted 10/14/2009

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UPDATE: As this story went to press, the police and fire pension board voted 5-2 to bill the city $164.9 million for next year’s pension contribution. This figure lowers the “assumed” rate of return on the pension funds invested on behalf of retirees from 6.8 percent to 5 percent. The $164.9 million figure also assumes no change to the so-called “variable benefit” that increases pensions in years when the fund’s investment returns exceed expectations. The City Council, the mayor, and the unions have until next July to figure out ways to reduce the bill in a mutually acceptable way.

On Tuesday, Oct. 13, Mayor Sheila Dixon was presented with a bill for about $101 million.

The bill, payable on July 1, 2010, comes as a result of last year's stock-market crash--as well as the freeze-up in the credit markets and the huge drop in the value of commercial real estate. These financial disasters cost the joint Baltimore Fire Department and Baltimore Police Department pension fund more than half a billion dollars. The staggering loss--22 percent of the fund's value--triggered provisions in the city's contract with city fire and police unions requiring larger payments from taxpayers to keep the retirement plan funded.

And next year's giant bill is only a small part of the problem.

For more than a decade, under-funding by the city and enhanced benefits paid to retiring firefighters and police officers have sapped the fund's viability. It has gone from being 100 percent funded in the late 1990s to being less than 60 percent funded by July 2009. Even as its obligations have increased to $3 billion, the fund's assets--valued at about $1.7 billion as of July--have hardly increased in value for a decade.

Christopher Thomaskutty, the deputy mayor for administration, and Capt. Stephan Fugate, president of the fire officers' union and chairman of the pension board, have each concluded that something needs to be done about the problem--right now. They disagree fundamentally on just what that something is.

Fugate thinks the city needs to pay about $25 million more into the fund each year than it has to under the current arrangement. He'd have fire fighters and police increase their own contributions into the fund as well, while trimming future benefits slightly. Thomaskutty thinks the fire fighters and police need to cut future pension benefits dramatically, because the city can't afford to make the payments it's already obligated to, and the payments are projected to increase sharply in the future.

"We have to avoid becoming a city whose principle business is providing employee benefits," Thomaskutty says, "instead of supplying services."

Fugate and Thomaskutty are but two players in the billion-dollar drama that has been unfolding quietly in City Hall for the past year or so. There are also dueling actuaries, a publicity-shy working group led by Donald Fry of the Greater Baltimore Committee, and the more than 10,000 city public-safety workers and retirees, some 200 of whom packed an obscure City Council committee meeting last spring. But Fugate, a 35-year BFD veteran with a tactful manner and a self-deprecating sense of humor, and Thomaskutty, a young star in the mayor's administration, are good representatives of the debate over a long-simmering problem that affects government pension plans across the country.

Poughkeepsie, N.Y., for example, projects it may be paying 41 percent of its police and fire payroll into the pension fund by 2015. Bloomington, Ind., has the same trouble, and politicians in Contra Costa, Calif., are considering a $120 million bond issue to borrow money to pay pension benefits. Because the interest rates on bonds are low, a refinancing of existing obligations alone would save $2 million per year, proponents say. But the debt piles up. San Diego County has issued more than $1.5 billion in "pension-obligation bonds" since 1994. New Jersey Gov. Jon Corzine called pension bonds "the dumbest idea I've ever heard."

The problem, boiled down, is that there is not enough money to pay government workers the contractually guaranteed retirement benefits they have worked for and counted on for years, in some cases decades. Now, it's bailout time. And Baltimoreans may be paying the bill for decades to come.

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