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September 27th, 2013 By German Lopez | News | Posted In: News, Pensions

Report: Pension Amendment Would Reduce Benefits

Conservative group finds city’s pension liability could be three times current estimate

tea party pensionsIllustration: Rebecca Sylvester

A Sept. 27 report from the conservative Buckeye Institute echoes claims made by both sides in Cincinnati’s pension debate: A tea party-backed amendment, if approved by voters on Nov. 5, would reduce retirement benefits for new city employees by one-third. At the same time, the city’s unfunded pension liability might be three times what officials currently estimate.

The Buckeye Institute’s summary of the report vaguely supports the tea party-backed amendment and touts its benefits, but the details and findings in the report are much more mixed.

The tea party-backed amendment would privatize Cincinnati’s pension system so city employees hired after January 2014 would contribute to and manage individual retirement accounts, which would also be supported by a proportional match from the city. 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.

Opponents of the amendment say it would massively reduce city benefits and actually increase costs for the city — two issues that the Buckeye Institute’s report acknowledges as real possibilities.

Officials are also concerned that the city would be forced to pay into Social Security, which would impose additional costs, if the tea party-backed system isn’t exempt from the federal retirement program. The current pension system absolves the city government from paying into Social Security.

Supporters of the amendment say the drastic changes are necessary to help solve the city’s growing pension liability, which city officials put at $862 million.

The Buckeye Institute report argues that even the city estimates are too low.

When pricing the city’s pension liabilities through fair market value — a measure widely embraced by economists — the unfunded costs actually stand at $2.57 billion. That puts the pension system at 35 percent funding, which means the city will have to make up the 65-percent hole with extra payments.

But the report also confirms a key claim for the amendment’s opposition: Future city employees would get about one-third less benefits under the tea party’s proposed system than they would under the current pension system.

The benefit reductions should save Cincinnati $19.7 million a year, according to the report. But the savings estimate doesn’t consider cost-of-living adjustments, which the report says will rise for future employees and shrink savings over time. The estimate also assumes the tea party’s proposed system will be able to keep Cincinnati’s Social Security exemption, which city officials say is unlikely.

Despite the reductions, the Buckeye Institute claims the final benefits will be better than comparable 401k plans in the private sector, but the assumption hinges on the city meeting its full contribution to employees’ individual retirement accounts. The tea party amendment allows — but it doesn’t require — the city to contribute up to 9 percent of an employee’s salary to retirement accounts. The city contributes only 2 percent of payroll under the current system, which is already strained for costs.

The report also acknowledges that, if interpreted a certain way, the tea party amendment could force the city to pay for its unfunded pension liability in just 10 years, down from 30 years. Paying the liability that quickly could prove unmanageable for a city that hasn’t passed a structurally balanced budget since 2001.

The pension amendment is backed by tea party groups, some of which may reside outside of Cincinnati and Ohio. They argue the reform is necessary to stabilize the city-funded retirement system.

Meanwhile, Cincinnati for Pension Responsibility announced its formation on Sept. 27 and promised to get voters to oppose a “risky plan” that “could cost taxpayers millions.” Mayor Mark Mallory, all current council members, the AFL-CIO, ProgressOhio and other groups have joined the opposition.

Opponents readily acknowledge the current system’s problems and unfunded liability, but they argue the city would be better off making reforms within the current system instead of adopting the tea party’s plan. Some of those reforms are expected to come before City Council in the next couple months.

Voters will make the final decision on the tea party’s pension amendment when it appears as Issue 4 on the Nov. 5 ballot.

 
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