King: Kudos to Brown and Green

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by Bill King

At the first meeting of our new City Council on Wednesday, Controller Chris Brown and CFO Kelly Dowe made their regular financial reports.  Their reports were grim.  Brown especially should be credited with raising the alarm over the City’s rapidly deteriorating fiscal position.

But the roughly one hour discussion that followed can only be described as an exercise in rearranging deck chairs on the Titanic.  The Council members warned against cuts in services and lamented their ability to not raise property taxes by more than the 4.5% limit set forth in the charter.  Only Council Member Larry Green had the courage to state the obvious: Regardless of what budget machinations the Mayor and Council cook up for the current budget, the City’s financial future is doomed without very significant pension reform.

The annual report the City issued on New Year’s Eve could not lay out the reality in more stark terms.  Just 15 years ago, the City’s pension expense was about $100 million annually.  The annual report says the expense last year was $689 million.  The unfunded liability is now estimated at $5.5 billion.  To put that number in some perspective, there are about 43,000 participants in the three pension systems.  That means that taxpayers owe each participant, on average, $127,000 — a number that should concern both taxpayers and the pension plan participants.

It is also important to note that the situation is almost certainly even worse than the numbers in the annual report suggest.  These estimates are based on the assumption that the pension plans will earn between 7-8.5% on their invested assets.[1]  Last year they actually earned between 1.4-3.4%. 

For the first time the annual report includes a very useful section that estimates the effect of the investment return assumption being off by one percent.   According to this sensitive analysis, if the plans earn 1% less (6-7.5%) the unfunded liability balloons to $7.3 billion.  Mercifully, the annual report does project the unfunded liability at rates less than the 6-7.5% range.

The annual report does not calculate what the annual pension expense for the plans would be at a lower investment rate of return.  But since the plans currently have about $10 billion invested, a 1% drop in the assumed rate should increase the expense by about $100 million per year.  This is one of the reasons why the suggestion that the City’s deficit next year is only $126 million is nonsense.

The suggestion that the City’s massive financial challenges can be addressed with zero based budgeting or raising the property tax cap or tinkering with the TIRZ allocations is the ultimate in whistling past the graveyard.  So kudos to Chris Brown and Larry Green for having the courage to point out the graveyard.

Note:  Many of you have asked for the link to the City annual report.  It can be found here.  The auditors’ notes on the pensions can be found at pp. 97-103.

[1] Until this year all three plans assumed an 8.5% return.  This year the Police pension board lowered its rate to 7%.  The Fire and Municipal plans both still use 8.5%, but the City adjusted the Municipal assumption to 8% for the purposes of the annual report.

The article above is reprinted by permission of Bill King. Feel free to submit topical posts/essays for our consideration to [email protected]. As with our usual blog posts, the views expressed are those of the author.