Saturday, November 8, 2008

FAQ's on the pension syste,

Pension Fund FAQs

We know many of you have questions about the Police/Fire pension fund shortall, and the 1-cent sales tax that City Manager Greg Burris has proposed to City Council to address the problem. Here's a list of frequently-asked questions we believe are important, or have heard from citizens and even City employees. Have more questions? Send them to us and we'll post the answers here.

Why is the pension underfunded?

The current underfunding has a number of causes and occurred over a long period of time. The main reasons can be boiled down to the following issues:

  • The adjustment of actuarial assumptions several years ago created a more realistic assessment of lifespan predictions, anticipated years of retirement, market returns and other variables. As a result of those actuarial changes, the future funding liability increased significantly.
  • Poor investment returns. As a relatively small, self-funded plan, the City's self-funded pension plan had less flexibility to weather the market downturn following the technology bubble burst and the Sept. 11, 2001 tragedy.
  • During four fiscal years in this decade, the City did not contribute its full recommended level of funding. This equates to about $10 million in today’s dollars for the total of those four years.
  • The fund was operating with a relatively conservative investment strategy and, therefore, didn’t fully capitalize on the boom times in the stock market in the 1990s.
Actuarial readjustment caused about a 50 million dollar shortfall. Pension is currently over $167
MILLION in the RED. Much of this can be directly attributed to past city manager Tom Finnie.

How big is the problem?

As of June 30, 2008, the fund had $128 million in assets. The future funding liability is estimated at $295 million, leaving a shortfall of $167 million. The fund itself has lost about $10 million more in value since June 30 during the recent period of turmoil in world financial markets.

Although this is true I would like to point out that the issue wasn't an issue until the audit brought to lite exactly how bad it was. Current council members now plead ignorance to the issue.

Why a sales tax?

The actuarial firm hired by the Pension Board, Milliman, Inc., an international consulting and actuarial firm, told the Pension Board that the best way to address the shortfall would be to infuse the Pension Fund with as much revenue as possible, as quickly as possible. The proposed 1-cent sales tax could generate about $40 million a year, based on past performance of our sales tax revenue in Springfield. If the system takes in this amount of revenue for several years, along with the ongoing contributions by employees and the City, it is in a better position to sustain itself over the long term by generating investment returns to maintain a healthy funding level.

A sales tax is always the easiest and fastest means to infuse cash into anything, just like robbing a bank and not getting caught is the fastest way to infuse money into your own pocket, both are quite similar in design.

Why now?

Everyone working on this issue realizes the challenges that the current economic climate poses for this issue. We believe that is offset, however, by the necessity of addressing the issue because the pension fund is, in effect, losing the equivalent of $33,000 a day. That represents the amount of investment returns that the fund would generate if fully funded rather than the current funded level.

The underfunding before this year was costing Springfield $26K a day, it was deemed important enough I guess then.

When does the tax go into effect, if approved?

If approved in February 2009, the tax would go into effect as of July 1, 2009.

IF ?? One only need to threaten closure of a fire department building or cutting staff at the police department to get the required results.

What do the police and firefighters think about this?

Officers for the Police and Fire employee groups have been involved in developing the proposal presented on Oct. 23. The Springfield Firefighters association has endorsed this proposal. The Springfield Police Officers Association has not yet held a full membership meeting to consider it.

They want what is owed them just as anyone reading this would, I would be very careful of how this gets worded because currrently the suggested wording needs to be changed.

What if this tax doesn’t get approved?

City staff will begin working before the end of 2008 to develop several scenarios for the 2009-10 annual budget. Budget scenarios will include passage or failure of the sales tax referendum. That outcome also will affect the contribution rate recommended by the actuary firm. All of that information will be used to determine the level of budget cuts that will be necessary to make. In the 2008-09 budget, the City cut an additional $5.2 million from the budget to make the full, recommended contribution to the Police/Fire Pension Fund. City Manager Greg Burris has stated that he does not believe these cuts are sustainable over multiple years without initiating programmatic cuts.

One of these cuts were NOT to hire for positions within our emergency services which were vacant. I wonder if the money for these vacant positions was actually allotted in the budget or just made up out of nothing.

Why wasn’t this problem tackled five or 10 years ago?

The worst period for the pension fund has been since 2002. After it became clear through the post 9/11 market drop and the technology stocks drop that market returns were not achieving expectations, the Pension Board and the City began addressing the issues. A number of changes were made, including the Tier II pension plan for new employees hired after July 1, 2006. Other changes that have been made include revising the actuarial assumptions; reducing investment fees by 30 percent; and changing the investment allocation policy. So, actually there have been a number of changes made through the years. It became obvious fairly quickly, however, that those changes would not be enough by themselves to turn the fund around and restore it to a healthy funding level.

The level of incompetence was not fully brought to light and worked on until the state audit was made public. Allowing people to bankroll vacation, sick leave, holiday pay, and raises is something that does not occur in the private sector nor should it have been allowed to occur in the government sector.

Where did the money go in the years the City’s portion wasn’t fully funded?

The City has not made the contribution recommended by the actuary for the four years prior to the current fiscal year. The total difference between the recommended contribution and the actual amount the City did contribute to the Plan is about $10 million in today's dollars over those four fiscal years. During this period, this General Fund revenue was used to fund other important needs in the City. For example, six new positions were funded to staff new Fire Station No. 12 and new positions were funded for Emergency Communications prior to the passage of a dedicated sales tax for 911. Money also was put toward pay-plan improvements for City employees.

"During this period, this General Fund revenue was used to fund other important needs in the City" Since the city had nothing FORCING them to make this payment, and they still don't but once every five years, this money could have gone anywhere. Trying to prove the allocation of these funds is quite difficult with the accounting of the city.

Why is the City still spending money on things like the Square?

There is some City match funding in it that was allocated from the ¼-cent sales tax for capital improvements. The Park Central Square renovation is funded primarily by federal grant money. This is NOT General Fund money that could be used for the Pension Fund. Capital Improvements Sales Tax revenue cannot legally be moved into the General Fund for the Police/Fire Pension Fund or any other use other than what voters approved.

In the General Fund, there were no budget priorities approved for the 2008-09 budget year.

"The Park Central Square renovation is funded primarily by federal grant money." So in other words instead of it being taxation on the local level that gets used Uncle Roy Blunt appropriates funds from EVERY taxpaying citizen to fund the building of Park Central Square

What about the buildings the City sold at a loss downtown?

The City believes the long-term return on the development of those properties by Missouri State University will more than offset the difference between the City’s purchase price for those properties and the sales price to Missouri State. Development of the Jordan Valley Innovation Center/Brick City/IDEA Commons center is creating new jobs, investment by new companies in our community and entrepreneurial opportunities for businesses and services serving the additional population.

From a practical standpoint, the costs the City would have incurred to either raze portions of those properties or secure the facilities to prevent further decay would likely have cost about the difference in the purchase and selling prices.

The sales proceeds do not go into the General Fund, so the revenue could not be applied toward the Police/Fire pension fund.

Before this happens again I believe cost projections of this should be made public so the people can see that YES selling property at a loss will be made up with incoming tax revenue.

What about this Commercial Street tax? Are you asking for two taxes?

The proposed Commercial Street Community Improvement District is for a self-imposed sales tax that property and business owners will vote on whether to levy within a specified area on Commercial Street. This will not be on a public election ballot and will only affect a specified area to pay for improvements within that area.

NOT entirely TRUE. Building owners have the say and NO one is allowed to opt out if it is approved. Once more it is NOT the building owners paying the tax but the unaware consumer that shops in that district.

Will there be a legal obligation going forward to keep the fund solvent?

The City has a legal obligation to pay all benefits earned by employees. Under the City Charter, City Council cannot bind future City Councils; however, the pension obligation has traditionally been treated as a debt obligation by the City and therefore receives funding priority similar to other debt obligations.

Every time a new ordinance or tax is passed you collectively bind a new city council to that ruling until at such time they have time to pass new legislation or override previous legislation. Once this pension system was approved it binded future councils to fund at a level to maintain the fund. The actions of council binded this council to fund the shortfalls.

Can’t the City sell some properties, like the Ice Park, to pay for this?

If the City chose to sell assets to raise revenue for the Police/Fire Pension Fund, any debt remaining on those assets would have to be paid before any net revenue would be realized. In the case of Mediacom Ice Park, that facility is only seven years old, so it still has a debt obligation and wouldn’t realize much net revenue from a sale. That would be presuming that there are interested buyers. We also believe that the Ice Park is an important community recreation asset and like other community amenities, it is publically owned so that prices can remain reasonable enough for everyone to participate. If a private investor bought it to operate at a profit, prices to participate in Ice Park activities would likely increase.

The City Council recently approved offering a City-owned parcel of property in southwest Springfield for sale because it has potential development interest and is no longer needed for a public purpose. This property, however, is an asset of the Sanitary Services Enterprise Fund so any sales proceeds will stay with this fund.

The City is in the process of reviewing its overall inventory of City properties. If there were others with similar potential, the City Council could consider additional sales. But there are certainly not enough of those types of assets available to sell to make any significant dent in the Police/Fire pension underfunding. The General Fund does not hold very many property parcels that could be sold with revenue returning to the General Fund.

In short the Ice park has been deemed a core essential city services. Vision 20/20 is pounding you all over the head once more.

What about selling City Utilities to private investors?

This is another area where we believe it is not in the long-term best interests of our citizens to privatize our municipal utility to solve this problem. A private owner would likely have to raise rates in order to make a profit after paying the operating costs of the utility and repaying the investment. Over the long term that would be much more costly to citizens than a temporary sales tax increase that is proposed to sunset after five years.

Since C.U. collects more than its outlays I would deem that a profit for a not-for-profit entity, perhaps keeping the ledger book even should be something that C.U. should look into.

The following questions were posted earlier, but we are adding them again in an effort to keep a complete, rolling FAQ.

What is the formula to calculate the pensions?

The calculation for a normal service retirement is equal to the years of service times the multiplier times the average final salary. The current multiplier is 2.8 percent per year of service. The final average salary is the highest three years out of the last 10. The maximum amount the retiree can recieve is 70 percent of his or her final average salary. This is for the Tier 1 part of the system that covers the majority of the current employees and the retirees.

Are any current employees allowed to use sick days or vacation days in the calculation for their pensions?

Sick leave is not used in any pension calculations. Vacation time is included due to a court case the Pension System lost in 1978 (Fraker, et al, vs. City of Springfield, et al).

Is a paid actuary involved in determining the future returns and solvency of the pension plan?

Yes, the City currently uses Milliman, Inc., an international actuarial and consulting firm based in Seattle, as the actuary for the Police/Fire Pension System. You can learn more about the firm at

Why try a 1 percent increase now, when all pensions, 401(k)s, IRA's are down due to the market, as opposed to a 1/4 or 1/2 percent increase that was mentioned previously? Based upon the fluctuations of the market, there will be a surplus or deficit at different times.

The actuary did projections based on a number of models, including the 1/4- and ½-cent sales tax rates. Either of those would take the fund significantly longer to reach a healthy funding level. The ½-cent model could take up to 20 years, for instance. That length of time creates an additional level of uncertainty, particularly regarding the stock market’s performance. That, in turn, makes it more difficult to project the fund’s performance and ability to get to a level that is both healthy and sustainable. He said the quickest way to improve the fund would be to infuse it with as much revenue as possible over the shortest time possible so that it would be in a better position to reach a sustainable, healthy funding level. We also believed that a sunset provision would be a very important factor for voters in considering the ballot measure. With the 1-cent rate, we have more confidence that the healthy funding level can be achieved in 5 years, rather than trying to project an accurate sunset period for a lesser amount of sales tax with a range of 10 to 20 years for a ½-cent level and even higher for a ¼-cent level.

The city obligated us (the taxpayers) to fund all shortfalls in the system. The plan should have always been paid for via a sales tax and in that manner a constant stream of revenue would have been going into the system that city management couldn't stop or withhold. Hind sight being 20/20 government at any level wants to make sure the dollar goes through there fingers first before being appropriate elsewhere. Just look to your social security money that has been taken out of your check since starting in the workforce. The money isn't there and as a nation were 10 TRILLION in debt.

posted by Mike Brothers, Public Information


Drew said...

Check the city's CAFR (Comprehensive Annual Financial Report. I think you will find the fund is a great deal more than funded!!

tom said...

I have copies of the past 5 CAFR's and the pension plan is hardly funded. One can not just look at the financial reports of the city without also understanding the city charter and how the various revenue streams must be dealt with in an annual basis.