By Yolanda Adrean
Atlanta had to change its employee pension system. This fact was driven by a $1.5 billion dollar unfunded liability for pension benefits earned by existing employees. The market meltdown, combined with enhanced pension benefits enacted in 2001 and 2005, created a “perfect storm,” with unfunded liabilities growing from $321 million in 2001 to over $1.5 billion in 2011.
The financial risks to the city became unsustainable, impacting everything from annual budgets, service levels, bond ratings to the capacity to borrow capital to fund infrastructure. The dramatic drop in real estate prices put downward pressure on the tax digest, resulting in millions of lost tax revenues and further budget pressures.
The administration, council, unions and employees all understood what was at stake for the city, taxpayers and employees. Stakeholders widely agreed on the urgent need to reduce costs, shift market risk and reduce the unfunded liability.
Atlanta’s fire and police personnel and most general employees with pay grade levels of 18 and below are covered by defined benefit plans which provide a guaranteed retirement income. With extraordinary market fluctuations and new accounting requirements, these plans have become harder to sustain. It is a nationwide issue.
Following months of analysis and debate, we changed the funding of current benefits for existing employees and adopted a new plan for future employees. Key changes are as follows:
• Existing employees will contribute 60 percent more to maintain their current benefits. Their annual contribution increased from 7 percent of pay for those without a beneficiary and 8 percent for those with a beneficiary to 13 percent for everyone.
• New employees will be enrolled in a new plan consisting of a combination of a defined benefit plan and a defined contribution plan with a mandatory contribution of 3.75 percent, matched by the city. Additionally, these employees can voluntarily contribute an additional 4.25 percent, which will also be matched by the city.
• The age of retirement for new employees has been increased from 55 to 57 years for sworn police and fire and from 60 to 62 for general employees.
• The cost of living adjustment applied to pension benefits was reduced to 1 percent. Pension benefits will now be computed using the average of the highest 10 years of compensation instead of the average of the highest three years. Vesting is at 15 years of service.
Employees strongly favored a “skinny” defined benefit plan over Social Security. Their 8 percent contribution will fund the annual “normal” costs, which represents the present value attributable to future service.
The changes in benefits and amounts contributed by employees will result in savings in “normal” costs of between $20 and $25 million per year.
Accounting for the unfunded liability was changed from an “open” amortization to a 30-year closed amortization, enabling the city to “pay down” the liability instead of “kicking this can down the road”. The cost of amortizing the unfunded liability represents almost all of the city’s annual contribution to the pension.
City Council adopted strong measures to monitor pension costs on a continuing basis. A cap was put in place to force us back to the table to renegotiate if pension costs exceed 35 percent of payroll. I know that sounds high, but keep in mind, most of the annual costs are driven by the unfunded liability. Additionally, experience audits and actuarial audits will take place to compare actuarial assumptions for factors such as investment returns, mortality, average pay and age of retirement.
The city will continue to grapple with the triple issues of compensation, pension and post retirement health benefits in the months and years to come.
A pay-in-class study will be presented to the council soon The purpose of the study is to define the market in which we compete for our workforce, conduct a job classification review and study compensation. The goal is to align the city’s pay structure with both market rates and actual job classifications.
As baby boomers age and retire, the challenge of balancing benefits with resources will be a continuing part of the dialogue for all employers, both public and private. Atlanta has taken significant steps to reform pension. I am confident we will approach the issues of employee compensation and post-retirement benefits both vigorously and analytically.
Yolanda Adrean represents District 8, which takes in portions of Buckhead, on Atlanta City Council. She chairs the council’s finance executive committee.