I have studied more than 200 state and local public pension plans going back to the early 1990s. The theme is the same: Public pensions make promises to workers that they cannot afford, and then farm out the money contained in the pensions to private investment managers who usually underperform the appropriate investment benchmarks over long periods of time.
Since all the workers in the plan are not going to retire tomorrow, the problem is kicked down the road by politicians, using accounting and actuarial schemes, to the new leader who gets elected.
Such a day is arriving in Atlanta.
In light of that, here are my solutions to this threat to Atlanta’s financial future.
Re-examine the investment performance of private companies the city employs to manage pensions. Many of the money managers the city employs have underperformed the market for long periods, according to reports on the city's Select Committee on Pensions Web site. The city could have gone with some index funds and gotten better performance at a much lower cost.
Consider increasing employees' contribution rate to their pension plans. A higher contribution would improve funding levels. Employees making higher contributions may stay longer with the city, since the cost of leaving before vesting would mean the sacrifice of a larger amount of money.
Use restraint in making future benefit promises. The city cannot make promises that are unaffordable anymore. Furthermore, the city needs to realize that promises made to one group of employees in one plan usually end up being promises they have to make to other groups as well, increasing the entire cost of all pensions.
Put new employees on a defined contribution plan, similar to a 401(k). The city would only be responsible for a contribution that is a specific percentage of the employee's salary. This would reduce future liabilities for new employees dramatically. The city needs to make sure these new employees have good investment options, including index funds.
In short, the city needs to curb the future promises and improve the performance of these pension plans. This will be a tough financial challenge that the new mayor faces, but the problem can no longer be pushed down the road.
Carter Doyle is a visiting assistant professor of economics at Georgia State University and the founder and CEO of Economics and Investments LLC.
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