Municipal pensions deeper in debt

Rising market, cost cuts bringing relief

The health of a pension plan is often measured by comparing the expected value of its investment assets against the expected cost of future pension payouts. These are the worst funded of the nearly three dozen local plans examined by the Atlanta Journal-Constitution, based on the most recent data available in annual financial reports.

10 worst-funded local pension plans:

Atlanta schools: 17.57%,

Atlanta General Employee: 51.2%

Fulton Schools: 53.4%

Cobb County: 54%

Marietta: 55.15%

MARTA non-represented employees: 61.8%

Henry County: 63.8%

DeKalb County: 66.14%

Fulton County: 68.6%

City of Buford: 68.33%

10 best-funded local pension plans:

Lithonia Retirement: 209.57%.

Suwanee Retirement: 162.4%

Cobb-Marietta Water: 112.3%

Fayette County: 110.55%

Gwinnett schools: 105%

Stone Mountain Retirmenet: 101.6%

MARTA union: 99.4%

Chamblee Retirement: 98.3%

Alpharetta: 92.3%

Atlanta Housing Authority: 91.64%

About this story

The Atlanta Journal-Constitution gathered information about three dozen pension plans of Metro Atlanta cities, counties, school districts and other local governments using the Georgia State Auditor’s biennial report on local retirement funds. To examine the plans more in depth, the AJC used local government’s annual financial reports and obtained pension actuarial valuation reports on plans that were severely underfunded. The reporters also interviewed city, county and school district officials, pensions board members and pension experts.

Metro Atlanta’s municipal pensions are short almost $4.4 billion of the assets they need to pay benefits promised to tens of thousands of local government employees, retirees and their families. That’s nearly half a billion dollars worse than the plans were two years ago.

Many of those retirement systems would have plunged even deeper into the hole if counties, cities, school districts and other local governments hadn’t paid in a near-record $448 million in annual contributions, an Atlanta Journal-Constitution investigation found.

But the hefty pension bills force some tough choices: Fall further behind on the pension, or cut services upon which people rely, such as police, libraries or parks? Increase taxpayer and employee contributions, or cut pension costs by reducing benefits?

In many cases, to avoid the more painful decisions, local governments have resorted to creative pension math that allows lower annual payments. That pushes the burden of fully funding the plans further into the future.

Investment losses during the financial crisis get the blame for the deteriorating condition of some pensions. Several local governments worsened the problem, though, by cutting contributions or boosting benefits in earlier years. Then, as the Great Recession squeezed budgets, they weren't able to keep up.

None of the nearly three dozen Metro Atlanta public retirement systems examined by the AJC appear in danger of tipping local governments into bankruptcy, as happened this year in Detroit and San Bernardino, Calif.

However, several pension plans, including those in Atlanta, Cobb County and Marietta, now have only about half as much money as they'll eventually need to cover pension checks. Atlanta Public Schools — one of the worst-funded pension plans in the state — only has 17 percent of the money needed to cover its obligations. When funding drops that low, the pension plan is essentially on a "pay as you go" basis and the school district has to pay retirees' benefits mostly out of its operating budget.

“It’s really scary,” said Hattie Mayfield, 58, who has worked as a bus monitor for the Atlanta school system since 2003, making sure kids fasten their seat belts, behave, and aren’t left on the bus. Mayfield said she loves her job. But with no pay raises in years and the pension plan in a shambles, she’s about “fed up.”

“Eventually, it sounds like they won’t have any money,” for pensions, she said. “They should make it right.”

Pension officials with many of Metro Atlanta’s governments are hoping that time and recent cost-cutting decisions will reverse the damage. They point out that the plans don’t have to fund most of their promised benefits for years or decades, and that they’re now getting some relief from rising market values.

But pressure on the worst-funded pensions is about to increase.

That’s because, starting this year, new accounting rules take hold that are aimed at giving bond investors and the public a clearer picture of local governments’ pension debts. Many will likely have to report larger pension debts. They also will have to disclose if their pension plans could run out of money, and when.

Cobb County, for instance, estimates that its pension plan will be $424 million in the hole under the new rules, vs. $369 million under the old rules. The county's pension is already one of the most poorly funded in metro Atlanta under the old rules, with assets covering only 54 percent of its pension liabilities.

The new rules will likely amp up the spotlight already trained on public pension debts across the nation. And that in turn, say experts, could increase bondholders’ and taxpayers’ push for municipalities to shore up their pension plans, cut benefits or eventually shut them down.

“It may drive the public sector to switch out of (traditional pension) plans,” said Doug Hinson, with Alston & Bird’s pension litigation practice.

DeKalb pension gets into trouble

DeKalb County turned to creative math with a vengeance during the 2007-09 market crash that cost its pension more than $300 million. It didn’t put all the losses on the books and did something akin to refinancing the shortfall every year, so it never would be paid off.

Still, at a time when the county was cutting hundreds of employees, reducing services and raising taxes, it also had to shovel piles of money into the pension fund. In 2006, it pitched in about $13 million. By 2011, its annual contributions swelled to almost $48 million — almost as much as the county spends on its fire department.

And yet the plan fell even deeper into the hole. By early 2012, DeKalb’s pension debt had risen to almost $641 million.

So even without the new rules, Edmund Wall, chairman of DeKalb County’s employee pension board, knows the county faces an uphill battle keeping up payments on its plan, which covers 10,500 people.

At the pension board’s suggestion, the county is now considering ways to cut benefits and eventually reduce the debt. “The county’s got to do something,” he said.

“The knee-jerk reaction of everybody is to shut off the pension plan,” Wall said. “My hope and prayer is we can earn our way out of this hole.”

DeKalb offers a pretty typical case of how public pensions got into trouble.

Fourteen years ago, the county’s plan was flush with about $1.40 for each dollar it needed for benefits.

But then the county declared a “contribution holiday,” slashing the county’s and employees’ combined contributions to only 1 percent of pay, a fraction of the previous level. It turned out to be a big mistake, Wall said.

During the near-meltdown on Wall Street, the market value of DeKalb’s fund plunged to less than $800 million.

The deep recession and real estate crash also wreaked havoc with the county’s tax revenues. Property values on DeKalb’s tax rolls sank by 25 percent, eroding tax revenues by a similar amount. Alarmed that DeKalb soon would have to pump much more cash into its limping pension plan when it could least afford it, county officials scrambled to do something. They bumped employees’ contributions to almost 9 percent of pay. The county’s share went even higher.

Other moves amounted to hand-waving with the help of the pension plan’s actuarial firm.

Actuaries use a number of mathematical techniques to smooth out big shocks to pension plans. For instance, big stock market losses and gains on investments are averaged over several years, so that contributions to the plans don’t go up and down wildly each year.

After the crash, DeKalb County turned to more forgiving formulas. The pension board decided to recognize its $300 million-plus loss over 10 years instead of five.

Likewise, the county raised from 10 years to 30 years the time it will take to catch up on its under-funded pension. Moreover, it decided to use an “open” 30-year period – akin to someone re-financing their 30-year mortgage every year, meaning that it never gets paid off.

Such moves allowed the county to shave millions of dollars off what it otherwise would have had to pay. But it also meant the pension plan fell farther behind each year.

Still, the new math only slowed the mounting costs.

And some moves the county took to deal with its budget woes put even more pressure on the pension. To cut labor costs in 2010, the county borrowed $14 million from the pension to offer sweetened early retirement packages to employees. More than 800 retired, about double what the county expected.

The move added $47 million to the pension plan’s debt. It also meant hundreds more former employees were collecting pension checks instead of contributing to the system.

Wall called the move “revenue neutral” and said the county is repaying the loan with interest. But he said he wouldn’t make such a deal again. “The savings to the county was illusory,” he said. “It was very controversial with the employees. They thought we were raping the pension fund.”

The stock market rebound has since pushed DeKalb County pension assets back above $1 billion. But the pension plan’s financial health is still in decline because obligations have risen even faster, to more than $1.8 billion. These days, the pension plan has about 65 cents to cover each dollar of obligations.

DeKalb County commissioners are now considering a proposal to close the existing pension plan to new employees. They would go into a so-called “hybrid” plan that includes a traditional pension about half as generous as the old one, plus a 401(k)-style retirement savings plan. Unlike traditional pensions, such plans don’t guarantee benefits.

Trying to repair the damage

While some local retirement plans are well funded, many are struggling with mountainous debts. Some already have overhauled their plans to cut costs.

According to the most recent annual figures reported to the state auditor, Atlanta spent $90 million on its pensions. That is the equivalent of 18 percent of the city’s general fund revenues — a comparison used by some bond rating firms to compare the pension burden. But the city’s overall revenues are much higher, about $1.8 billion.

Meanwhile, Cobb, Fulton and Gwinnett counties are each spending $30 to $50 million a year on pension contributions — equivalent of up to 13 percent of their general fund revenues.

Annual pension bills likewise top $30 million at the Atlanta, Fulton and Gwinnett school systems, not counting contributions on behalf of their teachers and administrators to the statewide Teachers Retirement System.

Today, Atlanta Public Schools is trudging through a draconian plan to pay off its pension debt, with annual payments that rise from $48.5 million this year to almost $80 million by 2027. After that, the annual pension bill is projected to drop to a few million dollars a year – if the school board keeps up with its payments.

Currently, the payments amount to about 8 percent of the school system’s operating expenses – roughly $1,000 per student that can’t go toward books, computers or other needs.

The pension plan, which covers about 800 active employees and 2,300 retirees, was gutted in the late 1970s when its teachers and administrators were allowed to join the Teachers Retirement System. To take over their pensions, the state required the then city-run school system to transfer enough money from its pension to fully cover the exiting employees’ future retirements.

Afterwards, Atlanta’s school board failed to patch the hole in the plan. The pension now has about a $550 million shortfall.

"It's a difficult situation," said Chuck Burbridge, the district's chief financial officer.

Cobb County also has taken steps to address its funding shortfall. This year, for example, commissioners approved an additional $5 million contribution on top of its required $31.9 million payment. It also decided to pay off the pension debt within 30 years, rather than rolling most of it over every year.

Gwinnett County closed its plan to new hires in 2006. But after the pension fund lost more than $145 million during the recession, county officials decided to pay off those losses in five years. That required extra contributions of $29 million a yearabout what the county spends running its parks and recreation department. This is the last year Gwinnett will make the extra payment into the plan, which is funded at nearly 77 percent and is in better shape than most in the metro area.

Still, Gwinnett Commission Chairwoman Charlotte Nash said the added contributions have been a strain.

“It’s forced a much more stringent budget prioritization process,” she said. “It’s really difficult to separate out the impact of the pension plan and what had to be done with it from the overall recession. Ironically, closing the defined benefit plan to new hires has put more pressure on us in the short run and it would have been much easier to deal with if we hadn’t had the economic downturn and those investment losses.”

Atlanta overhauled its $2.5 billion pension system in 2011 when its costs were approaching a fourth of its property tax revenues. The city nearly doubled the amount employees must contribute, to as much as 13 percent of pay. New hires, meanwhile, went into a “hybrid” plan with a less generous traditional pension plus a 401(k)-style savings plan.

“It was a tough decision but the right decision,” said Jim Baird, Atlanta’s chief financial officer. Pension costs “are definitely getting better. Paying off the liability was the right thing for the retirees and for citizens.”

The moves allowed Atlanta to cut contributions to its three pension plans substantially, from $119 million in 2010 to $90 million last year. However, the city still has a vast $1.4 billion financial hole in its retirement system.

“A lot of questions”

Local government officials don’t relish the fact that such numbers will soon have a prominent spot on their financial statements.

By 2015, the Government Accounting Standards Board will require cities and counties to report their pension debts — hundreds of millions or billions of dollars for some — right on their annual financial reports. Currently, such details are buried deep in the municipalities’ financial disclosure documents filed with regulators.

Moreover, under the new GASB rules, local governments that now take 25 years or more to catch up on their under-funded pensions likely will have to use higher estimates of their pension liabilities than under the old rules. All municipalities also have to reflect the true market value of their pension plans’ assets — no more spreading losses over five or 10 years.

Many governments are “only recently waking up to the requirement,” said Keith Brainard, research director for the National Association of State Retirement Administrators. Even though the new rules don’t affect the underlying financial condition of the pensions, they’re “going to introduce an unprecedented level of volatility” in local governments’ financial statements… “It’s going to generate a lot of questions,” he said.

Burbridge, with Atlanta public schools, said the impact will be noticeable on the balance sheet. He predicts the school system will have to report more than $1 billion of pension liabilities under the new rules.

That includes the $500 million-plus liability from the Atlanta school system’s pension. But the district may have to report an even larger liability, he said, for its share of the Georgia Teachers Retirement System, which covers most of the school system’s teachers and administrators.

Burbridge said he doesn’t expect the new numbers to have “any practical impact” on the school district’s operations, its credit rating or its ability to borrow money.

But in cases where the governments’ newly calculated pension liabilities are much better or worse than bond analysts expect, “it could be a factor in credit ratings,” said David Driscoll, with Buck Consultants in Boston. That in turn could affect governments’ borrowing costs.

In one potentially embarrassing exercise, cities and counties also have to project whether their pension plans are likely to be depleted unless they boost contributions or cut benefits. They also have to report this so-called “cross-over date” in the financial statements.

“That would be an important revelation,” Driscoll said. “Running out of money is generally an unpleasant experience.”