What Happened?
Baltimore Mayor Stephanie Rawlings-Blake has proposed eliminating pension benefits for newly hired city employees, while replacing the police retirement system with a hybrid pension plan for all new hires. The substitute retirement system would mimic the defined-benefit plans popular with public sector employers that require employees to pay into retirement plans.
The Goal
The city of Baltimore is forecasting a ten year accumulated budget shortfall of $750 million. The mayor is looking to alter pension offerings to city workers as well as cut the public workforce by at least 10 percent in the next eight years, and increase required firefighter hours. If the city implements a defined-contribution retirement plan, public employees will start paying toward a 401(k)-type of retirement account with less benefits available after retirement.
Under the proposal, new police officers in Baltimore would be offered a split defined-benefit pension and a defined-contribution plan, while firefighters will be asked to work a median 52 hours a week, up from 42 hours currently. An independent analyst company projected the city’s expenditures is set to outpace revenue for the next 10 years unless reforms are made to healthcare benefits for retired workers.
Changes To DB Plans
Many municipalities are mirroring pension plans in place in the private sector to reduce costs and risks. A recent study from Aon Hewitt revealed many employers are reducing pension risk by offering employees with a one-time pension payout rather than a standard defined-benefit plan. Employers are looking to aggressively manage pension uncertainty in light of healthcare premium increases anticipated in 2013 and 2014.
- 39 percent of defined-benefit plan sponsors are likely to offer terminated or retired employees with a lump-sum payout in 2013
- 7 percent offered payouts in 2012
- 84 percent of employers will not make any change to benefits offered in 2013
- Of those that are, 16 percent plan to reduce defined-benefit pension perks
- 17 percent will likely close plans to new hires
- 10 percent will freeze benefit accruals
Need For Pension Reform
Evaluating underfunded public pensions, the Federal Reserve Bank of Cleveland and the Government Accountability Standards Board reported:
- 126 of the nation’s largest public pensions were unfunded by $800 billion to $4 trillion in 2010
- 54 percent of state and local plans will be unable to payout their liabilities by 2034
- 80 percent of public pensions are currently defined-benefit plans, but employer contribution is not always met
- the average share of annual required contribution from an employer since 2008 has dropped from 92 percent to 87 percent
When a pension fund would exhaust all assets depends its funding ratio, investment returns and ability to maintain contributions of both employer and employee. While cuts to benefits and increasing employee contributions to pensions will help the situation, the research indicates legislatures must live up to liabilities to offset low cash flow from investments through other spending adjustments.
Other Pension Efforts
Gov1 is monitoring public employer strategies to deploy 401(k)-type accounts and encourage early retirement to reduce unfunded liabilities.[/dw-post-more]