Just like a binging consumer who continues using credit cards to buy new items while making only minimum payments on the bills, Cincinnati officials now face the harsh reality of a financial problem they’ve tried to ignore for the past decade.
City Council is busy trying to figure out methods for boosting the troubled pension fund for retired city employees. The Retirement System account, which covers about 5,000 municipal workers, is underfunded.
The system’s funding level is at 89.5 percent — meaning the plan has about 90 cents in assets for every dollar of accrued liabilities for current and future pension obligations.
Because of skyrocketing health care costs, the system’s current unfunded liability is $307 million, an amount that’s expected to jump to $1 billion by 2018 unless changes are made. That would mean the city’s required annual contribution would be more than $100 million, compared to the $27 million it contributed this year.
Although the amount that council must allocate to the retirement system each year is set in the Cincinnati Municipal Code, our elected officials have routinely provided only a fraction of the required amount in recent years.
That’s because council has been unwilling to make a difficult choice: Reduce services to Cincinnati residents so it can free up the extra cash to fully fund the pension system or make changes to the pension system requiring retirees to bear more of the cost for their health care.
Last year city budget planners recommended that the retirement system be funded at 21.7 percent, but Cincinnati City Council opted to underfund the system and contribute only 17 percent of the city’s payroll so it could add $9.1 million back to the budget for other purposes.
In its feeble effort to avoid pissing off either residents or the sizeable city workforce and its powerful labor unions, elected officials have essentially passed the buck and ducked the festering problem.
The Cincinnati Retirement System is one of nation’s few municipally owned and managed retirement systems and also among the most generous. Retirees pay 4 percent of their health care costs and the city pays 96 percent. That compares to current city workers, who generally pay 20 percent of their health care costs while the city pays 80 percent.
Supporters of the current retirement system typically point out that Cincinnati’s is in better shape than many other public pension systems, but that ignores larger systemic problems. Every year that the city’s required contribution isn’t met means the contribution increases for the following year.
Making matters worse is the recent stock market downturn.
The pension fund’s performance so far this year is worse than 80 percent of the other pension funds nationwide, according to the city’s actuary. That means the 89 percent funded ratio will drop to 70 percent by 2012 and to 60 percent by 2016 if current trends persist.
A task force appointed by council has recommended raising the retirement age from 60 to 65. A city council faction also wants to increase health care premiums for some retirees. Under the plan, most of the city’s retirees would move to a new PPO-style plan that would require them to pay more in deductibles and out-of-pocket costs.
But lower income retirees — those over the age of 65 whose pensions total $30,000 or less annually — would be exempted and still pay no deductibles and have lower out-of-pocket limits.
Some retirees and their union leaders believe they’re entitled to their current benefit levels due to their years of past service. In today’s economic climate, however, that’s unrealistic.
The U.S. healthcare system must be overhauled on a macro level. Until that happens, retirees who can afford it need to bite the bullet and pay more for their health care like the rest of us or risk depleting money for basic city services.
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