Public pensions are a rock slide crashing down on local governments, threatening to bury some and alter the landscape of others.
The pension plans of five metro governments are hundreds of millions of dollars in the red. Add in the city of Atlanta’s gigantic liabilities, and the total pension deficit for the city and five core counties came to $2.8 billion in 2009, The Atlanta Journal-Constitution has determined.
The AJC studied public pension funds in Georgia for five months, finding that the market crash of 2008 deeply wounded all of them. Some other wounds, however, were self-inflicted.
The city of Atlanta, for example, raised its pension benefits twice in the 2000s without making provision to pay for those increases. The result: a $1.3 billion deficit in 2009. DeKalb County’s plan was fully funded 13 years ago, so officials declared a “contribution holiday” and for several years paid little into the fund. By 2009, DeKalb was running the highest deficit of any of the metro counties, despite boosting contributions years before.
Critics assert that some local leaders have mishandled their pension systems — offering generous benefits that they couldn’t actually afford to score political points. The critics point out that the two pension increases in Atlanta were enacted during election years.
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Now city and county governments must find more money for pensions at the same time they’re trying to plug budget deficits, leaving them with an array of bad choices: raise taxes, cut services, increase employees’ contributions to the pension plan or reduce benefits to retirees.
In some ways, they’re feeling the same pressure that pushed droves of private corporations to start abandoning traditional pensions during the past two decades. Only about 36 percent of private-sector workers still have traditional pensions, compared to 86 percent of government employees, according to Boston College’s Center for Retirement Research.
Contribution rate jumps
On Jan. 1, DeKalb County police Sgt. Jeff Wiggs and other DeKalb employees saw their contribution to the county pension plan nearly double, to 8.4 percent of their pay.
“That caught us completely off guard, and especially the amount,” said Wiggs, president of the DeKalb Fraternal Order of Police.
“The majority of the department, they’re making $38,000 or $40,000 a year, trying to raise two or three kids. That’s hard to do,” Wiggs said.
For the typical DeKalb worker, the increased contribution comes to $1,750 a year, at a time when most county workers haven’t seen a raise in years.
DeKalb’s pension plan costs are jumping this year by more than 50 percent. The pension will suck $47.7 million out of the county budget at the same time DeKalb is facing layoffs, furloughs and the closing of at least one library.
Another $23.5 million will come out of employees’ paychecks.
Region full of shortfalls
Other local governments face grave problems as well:
● Atlanta — the region’s poster child of past pension mismanagement — is now planning the radical step of a “hard freeze,” which some experts say no government has tried before in Georgia. Without the step, which freezes all employees’ future pension benefits at today’s level, city officials say Atlanta’s $1.3 billion pension deficit will eventually triple. Its $125 million annual pension bill already consumes more than 20 percent of the city’s budget.
● Cobb County’s pension fund in 2009 contained just 55 percent of the money it has promised to retirees — one of the worst cases of underfunding in metro Atlanta. The worst: Atlanta Public Schools, which has funds to cover an abysmal 17 percent of its obligations.
A widely accepted benchmark holds that, at any given time, pension funds should contain at least 80 percent of the money they have promised to pay out.
● Gwinnett County this year increased employees’ required contributions to as much as 9 percent of their total pay.
Governments in Fulton, Gwinnett and Cobb counties have also taken a page from the private sector’s playbook by closing their traditional pension plans to new hires.
“The taxpayers can’t pay everything,” said Virgil Moon, head of Cobb’s pension board. Cobb closed its pension plan in 2010, increased employees’ contributions and set up a cheaper plan for new hires.
“It would have gone bankrupt the way it was,” Moon said. “Every government in this country is going to do what we’re doing.”
So far, however, many haven’t.
Retroactive benefit hike
By law, governments must pay out pension benefits that workers have already earned.
This unambiguous rule is one reason that public pensions are facing such hard times: In better days, some cities and counties decided to raise pension benefits as a way of attracting or retaining workers. They are now stuck with those decisions.
Atlanta, for instance, retroactively increased benefits by 50 percent for its police in 2001. That ignited an expensive arms race for higher benefits among firefighters and general staff, who had separate pension plans.
“It’s like having three children. One gets it, the other two are coming,” said Michael Bell, former chief financial officer at DeKalb for 15 years, and before that, Atlanta. He now teaches public finance at Georgia State.
Still, public pension officials and other experts say the main reason pension plans are underfunded is the heavy losses they incurred during the financial crisis that began three years ago. Relief, they say, will eventually come from improved financial markets and recent cost-cutting moves.
Profits on investments usually pay most of a pension plan’s benefits, but “it’s the only one over which you have absolutely no control,” said Clark Weeks, an Atlanta actuary with several local governments as clients. “We’ve just had Armageddon.”
Just as individuals’ 401(k) accounts have recovered most of the ground they lost, so pension funds have made up a lot of their losses. But during the three down years when millions or billions of dollars vanished from their funds, the plans had to keep paying out benefits as if they had never lost a dime.
For example, DeKalb’s pension fund in 2008 lost $342 million when the stock market cratered. The same year, however, DeKalb paid its retirees $78 million in pension benefits.
The news on pensions may not be much better when local governments report updated numbers beginning next month. Experts say it could take years for the region’s pension plans to recover.
Switch to 401(k)-style plans
Some governments decided years ago that they didn’t like where their pension plans were going. Fulton County, for example, closed its pension plan to new employees in 1999 and replaced it with the equivalent of a 401(k).
401(k)-style plans are often cheaper and less risky for employers because the employer doesn’t have to promise a certain retirement income for life — as traditional pensions do — no matter what happens to the plan’s investments.
Cobb and Gwinnett counties took similar actions, creating “hybrid” systems that include reduced pension benefits as well as a 401(k)-style plan.
DeKalb and Atlanta still have full-size traditional pension plans, and both are showing significant stress: DeKalb’s pension deficit in 2009, nearly $500 million, was the largest among the five counties, and Atlanta’s was three times greater than that.
Pension contributions generally equal less than 8 percent of the counties’ operating budgets. By contrast, Atlanta’s is about 20 percent of its budget.
The state of the pension systems in metro Atlanta’s largest counties appears below. (A separate article about the city of Atlanta appears on Page A14.)
About Clayton County: Clayton officials did not respond to repeated requests for information from the AJC. Based on public filings, the AJC was able to determine that Clayton’s pension assets totaled $293.1 million in 2010, against liabilities of $407.6 million. The deficit was $114.4 million, and the funding level was 72 percent.