Wednesday, November 20, 2013

Update: Effort to reduce Metro's unfunded pension liability fails

Last night  RESOLUTION NO. RS2013-918, sponsored by Charlie Tygerd, which would have appropriated ten million dollars from the undesignated fund balance of the General Fund to the Pension Fund for the purpose of reducing the Metropolitan Government’s $396 million unfunded pension liability, failed.

Finance Director Rich Riebeling said the resolution was "arbitrary and poorly timed."

According to the Metro Council Staff analysis:

Metro's pension fund covers approximately 13,000 current employees and 9,900 retired and deferred vested employees.  The Metro Charter requires that the annual contribution made to the pension plan at least be equal to the normal pension payment cost for that year plus 5% of the unfunded liability. Metro has consistently funded the government's pension liabilities in excess of the minimum required by the Charter, by funding the normal costs plus 7.5% of the amortization of the unfunded liability as determined by Metro's actuary. As of June 30, 2012, Metro's unfunded pension liability was $395,638,160. 
The analysis goes on to say the GSD fund balance would still be 5.6% of the operating budget and that Metro policy only requires a 5% balance.

The city had already met its Charter mandated annual contribution to the pension fund. This resolution would have appropriated an additional $10,000,0000. To me, it seemed like a wise thing to do. You may recall that last month the administration proposed borrowing $200 million to partially fund the unfunded pension liability and investing the money and hoping we would earn a profit on the borrowed money. While I thought that was a risky move, it was a recognition that we have a pension liability problem that must be addressed. That proposal got a cool reception from the Council and the mayor quickly withdrew it. We must do something however. If we don't start reducing the pension liability now, then when that pension plan payments become due, it seems to me, we will have to slash other spending to the bone or massively raise taxes to pay the obligation.

In my view, while we figure out how to address the unfunded liability, we should stop digging a deeper hole. I think we should transition from a defined benefit plan to a defined contribution plan. A defined contribution plan is much like a 401K. The city makes a contribution to a retirement plan and the employee can match it or not and within limits the employee determines his investment risk. Once the employee is vested, if he leaves Metro he can take his investment with him. At anytime, he can take his own contribution to the plan with him. With a defined benefit plan, the retirement fund belongs to the employee and if he fails to save enough or does not choose his investment wisely, it is his fault. The city provides a vehicle for the employee to have a comfortable retirement but does not guarantee a certain return on investment. The city makes the contribution as it goes along and has no liability. Most of the private sector has ended defined benefit plans or pensions and have gone to defined contribution plans, if they offer any retirement plan at all.

To read the Tennessean's report follow this link: Nashville council rejects scaled-back pension proposal.

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