The Impact of Cincinnati’s Pension Reform Deal

Cincinnati

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

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