Police and Fire Pension Funds Face Insolvency

by Mark Friedman  on Monday, Sep. 17, 2012 12:00 am  

In less than 10 years, seven firefighter pension plans across Arkansas are projected to be insolvent, possibly leaving taxpayers on the hook to pay millions of dollars to fund the generous benefits promised to firefighters years ago.

Other police and firefighter pension funds might soon find themselves facing the same financial crisis, according to an Aug. 22 report by the actuarial consulting firm Osborn Carreiro & Associates Inc. of Little Rock, done for the Arkansas Fire & Police Pension Review Board, which oversees the plans.

At the end of 2011, the unfunded liability stood at $311.89 million for the 144 police and fire pension funds that are locally administered. The seven fire pension funds that are projected to be insolvent in 10 years are Arkadelphia, Benton, DeWitt, Fayetteville, Pine Bluff, Russellville and the Pulaski County Fire District 5, which covers Sherwood.

“The obligation is beyond our ability to handle, to be frank,” said Pine Bluff Finance Director Steve Miller. The Pine Bluff fire and police pension funds had $36.8 million in unfunded liabilities at the end of 2011. “And I think there are other cities that feel the same way,” Miller said.

In words underlined for em-phasis, the Osborn report said that 101 plans in Arkansas “will likely require more contributions in order to pay promised benefits.”

Several cities said they don’t have the money to cover the pension costs.

In 2011, 144 police and fire pension plans in Arkansas paid out $40.6 million in benefits to 2,999 members, but the cities paid only $23.96 million into their pension systems. In 2010, $40.7 million in benefits were paid out to 3,102 members with the cities paying only $23.2 million into the pension funds.

The cities’ responses to the looming disaster range from turning to residents for more money, denying that the problem is as bad as the report indicates or hoping that their investments improve to wipe away the unfunded liability.

The top question is, what will happen if a pension fund becomes insolvent?

Don Zimmerman, the executive director of the Arkansas Municipal League, said there’s no clear answer to that question. Officials in some cities, however, said that they think that once the funds are gone, the benefits end.

David Clark, the executive director of the Arkansas PRB, said the “employer could ultimately be responsible for the payments if the funds become insolvent,” which is his interpretation of attorney general opinions issued in 2009. “It should be noted, though, that this matter may end up needing to be resolved in court,” he said.

Zimmerman said he hopes the state Legislature can provide some additional money for the pension funds.

“How likely that is to occur remains to be seen,” Zimmerman said. “I suspect that will be a big hill to climb.”

The Legislature’s Joint Retirement Committee has held meetings and is keeping its eye on the pension funds, Clark said.

Zimmerman said the league has offered some suggestions to the PRB on how to improve the financial health of the systems. The PRB recently appointed a subcommittee to review the suggestions, which includes reducing benefits for those who will come into the system. The subcommittee’s first meeting is scheduled for Tuesday.

All the funds projected to be insolvent are locally administered and are closed to new members. Those local plans cover police and firefighters who were hired before Jan. 1, 1983.

As a result of a change in state law, the Arkansas Local Police & Fire Retirement System, known as LOPFI, also administers po-lice and firefighter pension plans for the police and firefighters who were hired after Dec. 31, 1982. LOPFI manages 143 plans with 6,016 active members as of Dec. 31, 2011. It has nearly $700 million in assets and $583 million in unfunded liabilities. Pension experts said healthy pension systems should be at least 80 percent funded; LOPFI’s, though, was at 65 percent at the end of 2011.

By comparison, the 15 closed police pension systems in Arkansas are 50 percent funded, while the 37 fire pension funds are at 51 percent. Volunteer firefighters also have closed pension funds. That pension plan is performing the best at a 79 percent funded ratio.

Good Times

About 15 years ago, the pension funds were performing so well that Pine Bluff city officials wondered what to do with the surplus of money after all the beneficiaries had been paid, said former Pine Bluff Mayor Jerry Taylor, who is now a state senator.

“The times were good, and the stock market was doing fine and the pension funds were growing quite rapidly,” he said.

Several local pension boards across the state were approving more retirement benefits for their police and firefighters.

In 2000, Pine Bluff firefighters in the pension plan received a $500-a-month increase per member to their pension plan, according to Miller, the city finance director.

“They were trying to get people who retired at a very low wage … up to something that was a livable wage,” he said.

With that increase, firefighters in the system received about 75 percent to 80 percent of their final salary instead of 50 percent, Miller said.

Other cities were generous as well with benefits. In Fayetteville, retirement benefits in the local police and fire fund were bumped up to close to 100 percent of the officers’ final pay, said Sondra Smith, Fayetteville’s city clerk.

To pay for the benefits, the Fayetteville boards that oversaw the funds were counting on the retirees not living as long, she said. However, once a retiree dies, benefits are paid out to the surviving spouse.

“It’s something you can’t count on because you have no idea when people are going to [die],” Smith said.

Clark, the Pension Review Board executive, noted that the board has actuarial studies that local pension boards can use to predict death rates.

Smith said she had concerns about the funds back in 2003, but there wasn’t much she could do about those worries. “It’s hard for the city to do anything about it, because there’s only two people from the city that sit on the board,” she said. “The rest of the board is retirees. And so the city can’t get anything passed.”

Smith said she thinks the arrangement is a conflict of interest because the retirees end up voting for their own increases. Once pension increases are approved at the local level, it goes to the Pension Review Board for approval. City councils don’t get a say in the matter of increases in pension benefits.

“I don’t think it was a generous benefit package” that has put the systems in a financial crisis, said Clark, of the PRB. “Although some of these local plans have … generous structures, most of them are at half salary with no cost-of-living adjustment. It’s not like anybody is becoming wealthy off their retirement benefits.”

He said the flaw in the system was that the kind of contributions that are actuarially required for full funding have never been set aside.

The cities were required only to match the contributions from the firefighters or police officers.

“They’re not required by law to put anything over and above that amount,” Clark said. “So often they have not, year after year, and obviously we have now what we’re faced with: that is pension funds that are severely underfunded because they haven’t had the contributions coming in that they needed.”

For the cities to dig themselves out of the financial pit will require additional streams of income for the pension funds, he said.

But Clark said the options for increased revenue are limited now.

The main sources for the closed pension funds are contributions from members, which are matched by their cities, a tax on insurance policies and investment income.

In 2011, the PRB and LOPFI lobbied the Legislature to change the insurance tax distribution formula for pensions in both plans, Clark said.

That resulted in $31.3 million for the pensions in 2012, up about $1 million from the previous year.

The cities also could contribute more to the plans. But, Clark said, “I think people realize that cities are pretty strapped right now.”

Solutions

For the closed local pension plans that have already consolidated with LOPFI but are still faced with unfunded liabilities, help could be on the way if Amendment 2 passes in the November election.

If that is approved, cities and counties could issue bonds to retire the unfunded liabilities of the closed police and fire funds. Sales tax proceeds would be used to repay the bonds. Those cities that still administer police and fire plans couldn’t take advantage of the proposal.

The Municipal League supports the passage of the amendment.

Zimmerman also suggested that cities ask their residents for millage increases to support the pension funds.

“All this is designed to be some solutions and not take benefits away from existing employees but to make [the funds] more stable in the long run,” he said.

Some cities are taking steps to improve the financial situation.

In May, the city of Pine Bluff asked voters to approve a millage increase to fund the troubled police and fire pension funds. Voters approved a 0.4-mill increase for both funds, but the extra $150,000 the tax generates won’t be sufficient to rescue the funds, said Steve Miller, the finance director.

At the end of 2010, Pine Bluff’s fire department pension had an unfunded liability of $20.5 million, and the police fund was $14.7 million. In 2011, the fire pension fund’s unfunded liability increased to $21.6 million, and the police’s unfunded liability was $15.2 million, for a combined total of $36.8 million.

The fire pension plan is paying $1 million more in benefits than it is collecting in revenue.

The fund had less than $10 million in assets at the end of 2011. “The state has projected it will be insolvent in under 10 years,” Miller said.

Smith, the Fayetteville city clerk, said her city’s pension fund board has changed its investment strategy in an attempt to generate more revenue. Smith said she thinks benefits should be reduced, but that’s unlikely to happen considering the number of the retirees on the local board.

“They’re not willing to reduce benefits at this time,” Smith said.

Smith said she didn’t know what the board would do if the investment strategy doesn’t work. One option might be asking Fayetteville citizens for more money.

The Fayetteville fire pension had an unfunded liability of $14.8 million at the end of 2011.

Smith said the interpretation from the city’s attorney is that the city wouldn’t be on the hook for the unfunded liability if the plan becomes insolvent.

“But if the cities are responsible to pay the unfunded liabilities, then that means probably a lot of cities’ employees would be laid off just to fund the increases that the pensioners have voted for themselves,” Smith said.

In Benton, the fire pension plan was facing a $5.15 million unfunded liability on Dec. 31.

The Benton City Council approved a one-time payment of $10,000 to the fund in 2012, “which is not very much compared to the status of their fund,” said Karen Scott, the finance director for the city.

The board has considered moving the closed fire fund to LOPFI, which would manage the funds. But the city of Benton would have to pay about $350,000 a year to LOPFI for the next 15 years, money the city doesn’t have, Scott said.

“The council is really not doing much other than kind of waiting and hoping that the investment market turns around, which as we know is not very likely in the next few years,” Scott said.

DeWitt finds itself on the projected insolvency list for its firefighter pension plan. Liz Ferguson, the city clerk for DeWitt, though, doesn’t think the plan is in trouble because one of main beneficiaries of the plan recently died. The local board will continue to monitor the plan, she said.

“We have a meeting twice a year,” Ferguson said. “We’re just floating along, I guess you might say.” 

 

 

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