Local and national tea party groups are backing a city charter amendment that would semi-privatize Cincinnati’s ailing pension system. But local officials and unions are urging voters to reject the measure in November because they claim it would raise costs for the city and reduce gains for retirees.
At the center of the issue is the city’s unfunded pension liability, which grew by $134 million between 2012 and 2013 to $862 million. City officials claim future costs for the pension system were fixed by reforms in 2011, but a solution for the growing liability has remained elusive as the Cincinnati Retirement System board debates whether taxpayers or retirees should be hit worse by the next round of cost-cutting changes.
“I think it’s a fair statement to say we have a problem with our pension system,” Councilman Chris Seelbach said on Aug. 5. “We need a solution that at least five members of this Council can get behind. But the solution proposed by the ballot initiative is a really, really bad one.”
The amendment would privatize pension plans so the city and city employees hired after January 2014 would contribute to individual retirement accounts that employees would then manage by independently selecting investments. That’s a shift from the current system in which the city pools pension funds and manages the investments through an independent board. The idea is to move from a public plan and instead imitate a 401k plan that’s often seen in the private sector.
But unlike private-sector workers, city employees might not qualify for Social Security benefits. That means public employees would be treated like private-sector workers with a 401k-style plan, but, at the same time, they’d be missing out on the safety net and extra cash that private-sector employees typically get through Social Security. If a retiring employee mismanaged the plan, he or she would have nothing left to fall back on.
Even if city workers did qualify for Social Security, that could actually cost more for the city, which would then have to match employee contributions on top of paying into Social Security. Despite the higher costs, the final benefits including Social Security might not be enough to match traditional private-sector plans, according to an Aug. 5 report from the city administration.
The city administration’s report says it’s also unclear if the Cincinnati for Pension Reform plan would even work as written: “Certain provisions in the Amendment do not consider requirements imposed by federal legislation and the Governmental Accounting Standards Board. In addition, it lacks a litany of plan details that would be required to establish and administer the programs.”
The changes wouldn’t affect police and fire personnel, who use a separate pension system.
Opponents of the amendment are concerned about the mystique surrounding the reform effort. Within a couple weeks, Cincinnati for Pension Reform announced its campaign then gathered enough petitions to clear the 7,443 signature requirement. The quick turnaround came as a surprise to local leaders, including Councilman Charlie Winburn, the lone Republican on City Council, who on Aug.
5 remarked that he didn’t know anyone involved in the petition drive.
In response, local leaders of all political spectrums have joined with unions — including the AFL-CIO, the largest federation of unions in the country — in condemning the Cincinnati for Pension Reform proposal. Opponents of the amendment include Democrats such as Vice Mayor Roxanne Qualls and ex-Councilman John Cranley, who are running for mayor against each other, and Republicans like Winburn and City Council candidate Amy Murray.
Tim Burke, chairman of the Hamilton County Democratic Party and the Hamilton County Board of Elections, explains that it’s difficult to verify who exactly is funding the Cincinnati for Pension Reform campaign since such efforts typically use nonprofit organizations to mask the direct source of contributions, but a campaign finance report, which petitioners will have to file on Oct. 24, should shed light on who’s involved in the effort.
But given the evidence, Burke says the petitioners are from outside Cincinnati. Burke was approached by one of the paid petitioners a week before they turned in signatures, and, after a testy conversation, he found out the petitioner isn’t a registered Cincinnati voter and her campaign offices are based in Sharonville, Ohio — outside of Cincinnati’s boundaries.
Petition documents obtained through the city administration also show that Cincinnati for Pension Reform paid California-based Arno Petition Consultants nearly $70,000 to gather petitions, giving some credence to Burke’s belief.
“I’m not suggesting there’s anything illegal about that,” Burke says. “I just find it to be more than a bit unsettling that you would bring non-Cincinnatians in to screw up the pension programs that our city workers rely upon.”
The payment to Arno Petition Consultants also proves the group has quite a bit of cash on hand for a local campaign, although the sources of funding are so far unknown.
For now, it appears Cincinnati for Pension Reform’s campaign is getting some form of support from tea party groups outside the city and state. National tea party champion Paul Jacob is president of Virginia-based Liberty Initiative Fund and Citizens in Charge, two tea party groups attempting to reform pension systems in cities around the nation. Liberty Initiative Fund’s website in particular has a total of two blog posts, one of which is dedicated to the Cincinnati pension amendment.
The other blog post is dedicated to a similar pension reform initiative on the November ballot in Tucson, Ariz., which officials there claim will bankrupt the city by imposing extraordinary costs for the first 15 years.
According to contribution reports from the campaign, Jacob’s groups have donated about $81,000 in Tucson. The National Taxpayers Union, a conservative anti-tax group, also contributed $52,000.
Much like the proposal in Cincinnati, the Tucson initiative would place future employees in 401k-style plans, so the current pension system would no longer take in a new pool of contributing employees. As employees in the current system retire and no new employees come in with contributions, local taxpayers would be forced to pick up the cost to keep the system afloat for old and current employees.
Cincinnati would also be required to more quickly pay for the unfunded liability it’s built up by underfunding the pension system by varying degrees since 2003. That liability currently stands at $862 million, nearly two and a half years’ worth of the city’s operating budget.
The liability presents a couple major problems for Cincinnati: The city might have to pay for it by making budget cuts or raising taxes, and lenders could grow weary of the city’s unpaid promises and charge more to finance local capital projects. Those issues were particularly highlighted by a July 15 report from credit rating agency Moody’s, which downgraded Cincinnati’s bond rating in part because of the city’s unfunded pension liability.
To address those issues, the tea party-backed amendment would mandate an annual audit of the system and require the city to draw down its liabilities within 20 years, rather than 30. But city officials claim that could prove far too expensive, given the enormous costs the city has already built up.
Still, proponents of the Tucson and Cincinnati initiatives argue that changes are coming too slowly and the new 401k-style plans are needed to ensure the city takes a sustainable, pay-as-you-go approach instead of making promises it can’t keep.
“The city keeps making promises for future benefits, and then the city doesn’t fund them,” says Gary Greenberg, an attorney who helped draft the Cincinnati amendment.
For tea party supporters, opposition to the city’s public pension plan also has philosophical roots. They tend to support smaller government at every level. In the past, Jacob, of the Liberty Initiative Fund, likened Social Security and other government-supported entitlement programs to “a Ponzi scheme.” Similarly to local pension plans around the nation, tea party supporters see Social Security’s looming deficits as proof governments are making more promises than they can keep.
For AFL-CIO communications director Mike Gillis, the battle for the current pension system is also philosophical. He points out that proposals like the Tucson and Cincinnati initiatives are typically backed by Wall Street businessmen and brokers who stand to financially benefit from more people taking up individual 401k-style plans, even if it comes at the expense of the average worker.
Although Gillis calls the current pension system modest, he argues the 401k-style plans would still be much worse for city employees.
“They’re not being paid as much as they were (while) working, and they’re not getting rich by any means,” he says. “This pension is designed to give them enough money to live on in their senior years.” ©
This story was updated with the most recent numbers for contributions in Tucson, Ariz.