Atlanta Pulls Off A Major Pension Overhaul

Plus, what might a lost NFL or NBA season cost your state and city?
by | July 14, 2011

Hailed as the most sweeping overhaul of public employee retirement benefits by a large U.S. city in recent years, Atlanta's Mayor Kasim Reed and the City Council reformed their public pension plan with an eye toward sharing investment risk with employees.

Most private companies did a harsher version of this years ago. They shifted their employees out of defined-benefit (DB) pension plans and into 401(k)-style defined-contribution (DC) plans. Their mantra was simple: Let workers take all of the investment risk.

Recently, eight new governors and numerous legislators supported similar moves. But not much has come of it, and 401(k) fever seems to have petered out for now -- at least among states.

The localities are something else. Atlanta's plan is a clear break from the past. However, the city takes the middle road by offering a hybrid plan, which targets the newly hired, who are eligible for a small DB component plus a DC plan.

Employees and their unions don't usually like DC plans since they don't provide the same guarantee of retirement income that a defined-benefit plan does. Keeping a small DB plan as part of the package helped assuage Atlanta employees misgivings, but the DB piece will provide only a small income. The rest of a retiree's annual payment will have to come from a DC, often referred to as a 401(k)-style plan.

While most people see 401(k)s as a means of accumulating assets -- a high-risk proposition -- the plans can be tailored to focus on future income. "No one has to lose in this thing as long as sound risk management principles are followed," says Richard Hiller of TIAA-CREF, a financial services organization. "You can provide lifetime income adequacy to government employees while at same time not subjecting yourself as a government employer to the risk of unfunded liabilities and unpredictable budgets. But you've got to design the DC part right."

One way to do that, Hiller suggests, is to give employees with a DC plan a variety of annuity investment options -- ones that the employee would contribute to during his or her work years, thereby mitigating the risk of buying an annuity at an unfavorable time. The other important component is to educate employees on investment objectives and how to achieve them.

But there's more to Atlanta's overhaul than just a DC plan for newbies. The reform also extended the retirement age for new employees, and created a minimum retirement age as well as a cap on the city's annual contribution to the pension funds. Current employees will continue in their DB plan, but they will have to contribute 5 percent more of their paycheck. According to the mayor's office, the comprehensive pension reform plan creates $22 million in savings the first year, reduces the city's exposure to market risk and allows the city to pay off a $1.5 billion unfunded pension liability. Looking further out, the measure saves the city more than $270 million over the next 10 years, and more than $500 million over 30 years.

Meanwhile, the not-for-profit National Institute on Retirement Security has a new report that offers lessons learned from six public defined-benefit pension plans that weathered market turmoil and remained well funded despite two economic downturns.

Anyone who reads Girard Miller's columns will recognize these six pointers for success:

  • keep up with annual required contributions and maintain that stability in the rate over time;
  • use employee contributions to share in the cost of the plan;
  • actuarially evaluate benefit improvements (such as multiplier increases) before adoption, and then fund them properly;
  • grant cost-of-living adjustments responsibly;
  • adopt anti-spiking measures;
  • and set economic actuarial assumptions that are achievable over the long term.

Play Ball!

If the current NFL lockout sinks the season, not only would players and team owners take a financial hit, but a price would also be paid by states and cities that host professional football teams. How much money are we talking about? Maryland's Comptroller Peter Franchot puts the number at $40 million if the whole season is lost.

The losses would be particularly high for Maryland, where the overall revenue estimate in 2010 was $12 billion, since the state hosts two teams: the Baltimore Ravens and the Washington Redskins, who play in Maryland's Prince George's County.

The study, which is the first in the country to look at the economic impact of a cancelled NFL season, took into account estimates of various revenues the state and the two localities collect: income taxes from player salaries (the biggest chunk, at about $20 million), admission and amusement taxes (the second biggest at $12 million), sales taxes, parking taxes, hotel occupancy taxes and revenue from indirect sources, such as bars, liquor stores and retail stores (about $3 million). This latter number was the trickiest to estimate, says Joseph Shapiro, a spokesman for the comptroller. It was done by comparing revenues between seasons.

Why did Franchot write the report? "There was a void of information out there," Shapiro says. "It's important for us to accurately predict what revenue is going to be for each quarter so state and local government planners and budgeters can make judgments accurately." In other words, an unanticipated event, such as a football lockout, can throw a speed bump on the road to accurate revenue predictions.

It will be up to a comptroller from another state to do the estimates for the National Basketball Association lockout. Maryland doesn't have a basketball team. Are you listening California, (four NBA teams) and Texas (three NBA teams)?

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