Cincinnati pension reform

Cincinnati Mayor: Pension Deal Removes “Dark Cloud” From Over City

Cincinnati Mayor John Cranley took to the newspapers on Thursday to comment on the city’s recently passed pension reform measure.

In a column in the Cincinnati Enquirer, Cranley talks about the effects of the reforms on the city’s pension funding and the compromises made on both sides.

Cranley writes:

The historic agreement reached Dec. 30 among the retirees, unions, active employees and the city – after 10 months of negotiations and a nine-hour marathon session on the final day – will ensure a good pension remains in place for current and future retirees.

Through painful but necessary benefit cuts and increased city contributions, the pension system is now on solid financial footing.

As a result of these actions, by 2016 the pension fund will be 85 percent solvent and rise to 100 percent over the next two decades, which reverses a decadelong trend of worsening solvency. What was an $862 million liability will be reduced to zero; an independent actuary has certified that the math we are using is not fuzzy, but dependable.

This resolution will restore the city’s credit and reputation, and it will allow us to use the restored credit to address other city problems that have been ignored, such as deteriorating roads.

[…]

All parties – the city included – conceded more than they intended to, but it was a rare and wonderful case of shared sacrifice and heeding the “better angels of our nature.”

The Cincinnati Enquirer provides a refresher as to the effects of the reform measure:

Under the pension agreement, the city will:

*Contribute $38 million to the pension system in 2015. The city will pay that over the next seven years by borrowing against future revenue.

*Contribute $200 million in 2016 from the financially stable retiree heath care trust fund to the pension system.

*Make a larger contribution to the pension starting in July 2016 – 16.25 percent of the annual operating budget compared with 14 percent – and continuing for 30 years.

Employees will:

*Take a three-year cost of living adjustment holiday.

*After three years, both current retirees and active employees will receive an annual cost of living adjustment of 3 percent simple interest. Most current retirees receive an increase that is “compounded,” meaning the previous year’s increase is included in the following year’s calculation. Current employees already have a 3 percent simple COLA in place when they retire.

Photo credit: “Downtown cincinnati 2010 kdh” by kdh – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Downtown_cincinnati_2010_kdh.jpg#mediaviewer/File:Downtown_cincinnati_2010_kdh.jpg

Lawmakers Weigh In On Cincinnati Reform Deal

Cincinnati and its public worker unions last week approved a series of pension reforms that will see the city contribute millions more to the pension system annually. In exchange, workers and retirees will see cuts in their COLAs, and some workers will be held to a less generous benefit formula.

The Cincinnati Enquirer asked for opinions on the reforms from three city council members. Here’s what they said:

David Mann

“Everyone is taking a haircut, including the city. I don’t know that there was any other choice. The only issue I have is where the $38 million will come from. But in terms of the overall problem, that is relatively minor. This is really good news.”

Christopher Smitherman

“This is the biggest issue the city faces. It’s not one of the issues on the public’s radar, but it is a huge deal for taxpayers. This deal brings certainty to the problem. The mayor’s experience with the Collaborative Agreement allowed him to have the vision to apply that experience to the pension.”

Yvette Simpson

“I’m happy there is a resolution, but there are lots of questions. Why do we have to infuse $38 million when don’t know where that money is coming from? Why are we borrowing money to put into the pension system?”

Cincinnati Mayor John Cranley also gave his comments:

“It was important to do this now,” Cranley said. “”We can’t have the city’s credit — which is also the city reputation — continually at risk by not tackling this problem. State Auditor David Yost basically said he was going to look at putting the city on fiscal watch if we did not get this resolved by the end of the year. He has been in contact with judge and me all year. That would have been a catastrophic blow to our reputation nationally.”

Under the reforms, the pension system is projected to be 100 percent funded within 30 years.

The Impact of Cincinnati’s Pension Reform Deal

Cincinnati’s pension deal, struck last week, is widely considered to be a true compromise: no one is particularly happy with the outcome and every party made sacrifices as part of the bargain.

But how exactly does the deal affect the benefits of retirees and current employees?

A quick refresher on the main points of the deal, from Cincinatti.com:

* Three-year freeze on any increases to pension benefits for current and future retirees.

* Changes compound increases to a 3 percent simple increase for current and future retirees.

* Creates $200 million in savings in the health care system, and shifts those savings over the pension, which is not as well funded.

* City puts in $38 million this year and then commits to putting in 16.25 percent of payroll (currently $26 million) for each of the next 30 years. About half of that would come from the general fund.

The Cincinnati Enquirer explains the impact on retirees, including a COLA change:

Health benefits will not change for existing retirees under the fund, including a benefit that keeps health care for surviving spouses. But those retirees took perhaps the biggest hit of all the different constituencies at the table.

Most current retirees receive what is called a compound COLA, which calculates the previous years’ raises into a current year’s adjustment. That generous benefit goes away, replaced by a flat 3 percent annually like the current workers will receive. But retirees did get one bonus: That 3 flat percent will be calculated off the current levels, not those at retirement.

In addition, the city is creating its own retiree drug prescription program which it hopes will save $100 million, and is creating a Medical Expense Reimbursement Program (MERP) to pay whatever difference between an alternate plan and the city’s plan. This would be voluntary, however, and retirees can simply stay with the existing city plan.

How the deal affects current employees:

Under the deal, all current workers and retirees won’t get any raises (cost of living adjustments) to their pension payments for three years. For current workers, that means they won’t see any increases for the first four years they are retired. But in return, current employees probably got the best deal of any party to the agreement.

Under changes made in 2011, such adjustments for current workers were capped at 2 percent, but indexed to inflation, meaning in slow economies, only a minimal raise might be on the way. Now, they are guaranteed 3 percent annually for 30 years after the initial three-year holiday.

In addition, some of those workers clawed back a somewhat more generous benefit calculation formula, while older workers hired before 2006 also got the ability to retire after 30 years of service with no age requirements.

So retirees and workers will have to stomach some changes they may not like.

But in exchange, the city has promised to pay around $26 million annually into the pension system over the next 30 years.

Under the deal, the pension system could be fully funded in 10 years.

Photo credit: “Downtown cincinnati 2010 kdh” by kdh – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons