Atlanta has been rocked by the deep recession of the past two years, like most cities. But the city has a huge financial problem caused not by the global downturn, but by its own leaders.
In 2001 and 2005, the Atlanta City Council approved substantial increases in pension benefits for city workers — but didn’t figure out how to pay for them. Those decisions are not only hobbling city finances now, they threaten to cripple the city budget for years to come.
In the 2002 fiscal year, when Mayor Shirley Franklin took office, the city paid $43 million to its employee pension plans. As of June 30, that cost had more than tripled, to $136 million, according to official City Council pension reports.
As a result, Atlanta has had to shovel tens of millions of dollars more into worker pensions, even as the city’s revenues have declined and officials have laid off hundreds of workers. And residents have paid ever larger chunks of their property taxes to city worker retirement plans.
During the last fiscal year, at least 17.5 percent — $100 million — of the city’s general fund budget went to pension costs. That’s money that didn’t pay for more cops on the street, fixing potholes or picking up trash. Whatever the cost is this fiscal year — it will be set by actuaries later this year — it will be much larger than the $56 million the city expects to raise through a 3 mill property tax increase approved by a divided City Council this summer.
In 2001 and 2005, the City Council dramatically increased pension benefits — in some cases increasing them 50 percent — for city workers. The city has no Social Security for its employees and pay is generally less than surrounding areas. The city saw its pension program as a way to attract and keep employees, especially cops and firefighters.
It hasn’t worked; police and firefighters still are leaving at about the same rate. What has changed is Atlanta’s bottom line.
Howard Shook, the City Council’s finance chairman, said those votes, which he supported at the time, were mistakes.
“When you make pension decisions in haste, you unleash something that is going to be around with you for years,” he said.
Shook said the council has realized it needs to address this problem, so it set up a select committee, which he co-chairs, to look at the pension crisis. The committee, in a recent report, estimated the city’s pension obligation — what it estimates it now owes for the benefits of all current and future retirees — is at least $1.2 billion. All three pensions — for police, fire and general employees — were well below proper funding levels (90 percent or higher). And that was before the recession hit pension fund investments, reducing the funds’ value and increasing what the city will have to pay now to fill the gap.
Cecelia Corbin Hunter, who chaired a city advisory committee on pensions in 2005, said the council has “a history of enhancing benefits without understanding the cost.”
If the next administration and City Council don’t curb costs, the pensions will damage Atlanta’s fiscal health even further by draining dwindling resources and threatening the city’s financial reputation with banks and borrowers.
This spring, Fitch, the bond rating agency, downgraded Atlanta’s bonds with an outlook of “negative.” Standard & Poor’s also downgraded the city. Fitch cited “uncertainty” over future pension costs, noting that those costs doubled as a percentage of the city budget from 2002 to 2008. Later this year, Fitch gave up on rating Atlanta’s bonds altogether. With low or no ratings, Atlanta will have to pay more in interest to borrow money, since lenders will consider such loans riskier.
While the city likely will have to scale back benefits for future hires, the benefits already given can’t be touched. So it will have to continue to pay tens of millions more annually into existing pension plans until the current plan members die off decades from now.
“Almost all of the recent concerns about the city’s financial condition are tied directly to increased pension costs,” said Greg Giornelli, the city’s chief operating officer.
John Sherman, president of the Fulton County Taxpayers Association, said the city paying more than $100 million a year to retirement benefits of employees instead of city services is “absolutely insane.”
City Hall numbers crunchers are looking at how to slash costs. One idea is to set up retirement programs similar to a 401(k), which requires only a flat payment by the city. City officials set up something similar for general employees in 2001, but pensions remained popular with city workers.
Franklin said her staffers are looking over the select committee’s report and the city is hiring a firm to study ways to revamp its retirement plans. “I expect to make recommendations to the council on the pension plans before the end of the year,” the mayor said in an e-mail to The Atlanta Journal-Constitution.
Franklin said she has supported regular reviews of pension packages during her eight years in office, and has tried to limit expenses. She said she neither supported nor opposed the council’s 2005 vote. The 2001 vote took place before her tenure.
The city is even considering paying into Social Security, the federal retirement system, for the first time. When Social Security started in 1935, it was optional for local governments. Most later signed up, but Atlanta did not.
City union leaders have long argued workers need good pensions because no city employees get Social Security.
James Glass, chief financial officer, is the no-nonsense accountant-engineer Franklin brought in last year from the private sector. Glass immediately homed in on pensions as a key problem. His conclusion: He could not undo what the City Council granted. The city is obligated to provide benefits promised to current pension plan members.
But, he said, the city has to change plans for future hires. Future workers will get less and pay more.
“Everything I’m trying to do is to lay a groundwork for stabilizing the finances of the city of Atlanta,” Glass said.
Workers, retirees worried
Such talk from an outgoing administration in an election year has city employees and retirees worried. They see Atlanta’s pensions as one of the few incentives for workers who argue they have been underpaid for years.
Jim Daws, president of Atlanta Professional Fire Fighters, the city fire union, said pensions were “a damned good deal for the city” if the city had properly funded them over time. He said all city workers want is a “dignified retirement.”
Today Atlanta city workers get up to 80 percent of their pay when they retire. It’s a larger pension than some places, but city workers also pay more into the pension than many other places.
One sergeant, who recently retired at age 56 with 27.5 years on the force, is now getting $61,000 annually. When he dies, his spouse will get the checks — 75 percent of his pay — until she dies.
Gina Pagnotta, president of the Professional Association of City Employees, which represents about 350 city workers, said her union planned this year to lobby City Council for an increase in pension benefits. Now, she said, she is hoping to stave off cuts for future workers. Pagnotta expects political fireworks.
“I am feeling sorry for the next mayor of the city of Atlanta,” she said.
Pensions evolved in the last century as a way for companies and governments to keep workers by providing retirement benefits. Both employers and employees paid into the pension funds. The funds were invested in the stock market, real estate and bonds. When employees retired, they were guaranteed certain benefits. As long as the pensions had enough money to cover future payments to retirees, the system worked.
Pensions ran into trouble as retirees started living longer, workers pressured employers to sweeten benefits and investments sometimes did not bring needed returns. Some businesses and governments did not properly fund their pensions. In time, shortfalls compounded to become billion-dollar headaches.
State laws require certain levels of funding for public pensions, and financial standards organizations call for pensions to have as much as 90 percent of their liabilities — what they owe retirees now and in the future — already paid into the fund to be considered healthy.
Some governments were better funded than others, so when economic or other problems arose, payments were manageable. For example, DeKalb County’s pension was 117 percent funded in 2004, according to the Atlanta City Council’s just released special report on the pension crisis. By 2008, it dropped to 82 percent, but it was still much better funded than Atlanta’s.
The Atlanta firefighters’ pension funding level decreased from 77 percent funded to 64 percent for the same years, while the police pension dropped from 71 percent to 66 percent and the general employees’ fund dropped from 61 percent to 55.9 percent in 2008.
In recent decades, many private companies replaced pension plans with 401(k)s to control costs. Under such plans, companies contribute to retirement but do not guarantee benefits at retirement, so costs are set. Many governments, like Atlanta, kept their pensions largely intact as a benefit for government workers, who were often paid less than they would be in the private sector. But then costs skyrocketed.
With Atlanta underfunding its pensions for years, the funds had insufficient money to invest and earn interest to cover growing costs.
Compounding that problem, in 2001 the council voted to increase pension benefits 50 percent for police officers and to award those benefits retroactively. They also increased firefighters’ pensions, but not as much.
Hunter, the former member of the advisory committee on pensions, said the increase in 2001 was “devastating to the system.”
Four years later, the council voted to raise firefighter pension benefits to the level of police. General employees, the largest group of city workers, also got a somewhat smaller increase. Janice Davis, who was Franklin’s CFO before Glass, told the City Council the pension benefits would increase the city’s liability, but the city could afford it. Davis, who left to work for the North Texas Tollway Authority, wouldn’t comment for this story. Franklin told the AJC she left it to the City Council to take the lead.
Rick Anderson, Franklin’s former CFO, now retired in Florida, said via e-mail that the City Council “caved in to pressure from employee unions in an election year [both 2001 and 2005 had city elections] ... In the final analysis, no one had the gumption to just say ‘No’ to what employees wanted.”
Layoffs and cutbacks
Digging out is going to require major changes. The city has started with a move that bought it time and reduced annual payments. In July, it extended the due date by which the pensions had to be fully funded from 2017 to 2030. The change — akin to extending the mortgage on a house — dropped the city’s annual payments. But the city still has to pay as much as $100 million annually going forward.
Combined with plummeting city tax revenues, Atlanta officials have had no choice but to cut city operations to keep its budget balanced and its pension program funded.
The result: hundreds of layoffs and millions of dollars in cutbacks. The Department of Parks, Recreation and Cultural Affairs lost 57 positions — 17 percent of the total — from fiscal year 2009 to 2010. During the same time, the department’s budget dropped from $29.6 million to $25.3 million. Other departments saw similar reductions.
Municipalities across the country have wrestled with exploding pension costs as the economy faltered. Last year, Vallejo, Calif., voted for bankruptcy in part because of its pension payments.
Carter Doyle, a Georgia State University professor and a public pension expert, said public pensions across the country now have combined unfunded liabilities of about $1 trillion. Doyle said for years local governments pushed off the problem. New national accounting standards and the financial crisis have forced governments to face their pension costs.
“They kept kicking the can down the road. ... It’s not sustainable over time,” Doyle said.
ABOUT THIS SERIES
Atlanta has always been a city with vision — the kind of vision that concocts the world’s favorite soft drink, sees beyond race, invents cable news, produces the world’s largest airport and hosts the Olympics. But it takes more than vision; it takes a commitment to solve problems. On Nov. 3, Atlanta will choose a new mayor for the first time in eight years — a change of guard that comes at a critical juncture. A veteran team of AJC reporters is looking deeply into the key challenges ahead, issues that resonate far beyond Atlanta’s city limits. A team of outside experts also will offer its suggestions and solutions.
Nov. 1: Advice from experts, who will offer their solutions to city woes.
TOTAL CITY PENSION PAYMENTS 2002-10*
2003 $43 million
2004 $36.6 million
2005 $60 million
2006 $59.8 million
2007 $94.5 million
2008 $97.3 million
2009 $136 million**
2010 undetermined ***
* Numbers are for fiscal years
** City Council Select Committee report
*** Because of accounting changes, this year’s payments are expected to be lower
Sources: City reports, City Council Select Committee on Pensions
PENSION NUMBERS
Fiscal year 2009 unfunded pension liabilities, the number of employees and retirees in the plans and the city’s 2009 pension payments.
| Unfunded liability | City payment ’09 | |
| Police | $313 million | $44.8 million |
| Firefighters | $234 million | $28.8 million |
| General employees | $634 million | $62.4 million |
| Total | $1.2 billion | $136 million |
Source: Select Committee on Pensions Final Report, summer 2009, based on pension actuarial reports
MAYORAL CANDIDATE VIEWS
Lisa Borders:
» We need a thorough review of each of our pension plans to determine whether the benefit levels that have been set are economically sustainable.
» We need to review our investments strategy to ensure that the pension funds are generating sufficient income.
» We need to revisit some basic issues — such as whether the city should rejoin the Social Security system — in order to diversify the sources of income of our retirees.
» I would convene members of the pension plan boards, actuaries and retirement plan experts together with the CFO in the first 100 days of my administration to determine the best course of action for the city.
» I will work to bring more revenue into the city. Whether it is local sales tax collection, monetizing our assets or cutting nonessential spending, we cannot continue to grow without fixing a fundamental flaw in our economy.
» We must also mitigate our future obligations and generate more revenue within the pension funds.
Mary Norwood
The last CFO gave the city’s financial management a grade of F; our bond rating has fallen; the most recent report acknowledges work still needed to learn the true state of city finances. This disarray resulted in police and firefighter furloughs and blocks the strategic vision needed to deal effectively with big issues like crime, pensions and infrastructure. As mayor, I will initiate comprehensive independent outside audits, reorganize the finance department and put all city transactions online. Accountability matters.
Kasim Reed
As a result of irresponsible decisions by this City Council — including two of my opponents — Atlanta could find itself on the brink of insolvency. ... I led the effort to rescue the city’s pension funds without raising taxes. I was the Senate sponsor of HB 371, which will allow the city to diversify its investments and improve performance and was the first step in this effort. Going forward, I would assemble a team of experts in pension fund governance to develop reforms to be implemented during the first 100 days of my term. We must go back to the pre-2001 system for new employees and change the time for vesting from 10 years to 15 years. I would also work with other mayors to lobby for a change at the federal and state level to relieve the financial pressure caused by the council’s decisions.
Jesse Spikes
What Atlanta needs is a new perspective and new skill set to solve the city’s pension crisis. We are in this mess because the politicians failed us. ... Atlanta needs a mayor who understands finances and understands how to make the tough business decisions.
Solving this problem will be long-term and difficult, but with the right leadership it is possible. The city must stop increasing benefits, even though general employees are seeking parity with the police. We must repeal the ordinance that requires the city to fully fund its pensions by 2024. We must look into joining Social Security and increasing the amount workers pay into the system. None of these solutions are politically ideal, but I am not a politician.
— Cameron McWhirter
ATLANTA PENSION FACTS
● Percent of employee contribution: 7 percent (8 percent if married).
● Number of years that city employees must work before vesting: 10
● Maximum of salary retiree can draw annually once they retire: 80 percent
Source: City pension actuary reports
HOW OUR PENSIONS COMPARE
A 2008 report by the Pew Charitable Trusts compared the pensions of Atlanta, Philadelphia, Boston, Baltimore, Chicago, Denver, Detroit, Phoenix, Pittsburgh and San Francisco. It found Atlanta had the third-most poorly funded pensions. Philadelphia was the second worst and Pittsburgh was the worst.
The report also found Atlanta had the third-largest amount of unfunded pension costs per capita of the 10 cities. Boston and Philadelphia had higher costs per capita.
An AJC review of the pension plans of the 10 cities found that the benefits, the number of years of employment required to vest in the pension and the percentage of employee contributions of pensions varied greatly. However, Atlanta’s benefits seemed to be within the average range for these cities.
THE THREE PENSIONS
Police
Total fund size (as of June 2009):
$571.1 million
Percent funded in 2008 before the crash: 65.5
Fire
Total fund size (as of June 2009): $386.8 million
Percent funded in 2008 before the crash: 64.2
General Employees
Total fund size (as of 2007): $749.3 million
Percent funded in 2007 before the crash: 52.2 percent
HOW WE GOT THE STORY
AJC reporter Cameron McWhirter spent weeks reviewing city financial statements, attending pension board meetings and interviewing administration officials, pension board members, politicians, actuaries, union members, retirees and others. McWhirter also interviewed national experts about the city’s finances and its pension situation.