On Tuesday, Cincinnatians will cast their votes on a controversial ballot measure that seeks to rein in the city’s $862 million in unfunded pension liabilities, but could dramatically change the city’s system for current and future employees and cost the city vital public services.
Issue 4 has generated more than a half million dollars in fundraising between supporters and opponents as of the most recent (Oct. 24) campaign finance reports. The group behind the proposal, the Cincinnati for Pension Reform Committee, has drawn criticism from local media for being almost entirely funded by out-of-state sources with connections to the Tea Party. Although similar to voter-approved pension reforms in San Jose and San Diego last year, Issue 4 also goes one step further by impacting current employees’ benefits.
The proposal affects about 7,500 workers, retirees and their beneficiaries and would close off the city’s defined benefits plan to new hires and enroll them in a 401(k) style plan. Current employees would see their future benefits decrease as the city’s contributions are capped at 9 percent of an employee’s salary. Additionally, the multiplier that factors into a worker’s total pension amount would be reduced by nearly one-third (2.2 percent down to 1.5 percent for most workers) for all benefits accrued after June 2014. Career benefits would also be capped at 60 percent of a worker’s salary instead of 90 percent (given to those with at least 41 years of service) and the council would have the ability to suspend cost-of-living increases for retirees, who do not receive social security benefits.
If it passes, the measure is expected to wind up in court because of unclear language regarding its application to benefits already accrued and regarding whether benefits are still applied before taxes.
Still, the threat of pension changes has prompted scores of people who are eligible for more than 60 percent of their salary to retire now, according to Cincinnati Retirement System Executive Director Paula Tilsley. CRS also issued a memo to employees informing them that that those eligible for at least 60 percent of their retirement benefits could file for a retirement date that becomes effective on Election Day so that they may keep their benefits intact. The 125 employees who have taken advantage of the offer can also rescind their application to retire after the election if the measure fails. Tilsley said CRS made the special offer to help assuage workers’ concerns that they would lose part of their accrued benefit if they didn’t retire and the measure passed.
“Otherwise those that were fearful would just leave, period,” she said. “We’re forcing their hand, they don’t have a choice. This was to avoid a mass exodus from the city.”
Chris Littleton, Cincinnati for Pension Reform’s campaign manager, has said that the measure is needed in order to control the city’s looming unfunded liability. The plan is 61 percent funded (80 percent funded is considered healthy).
“This is a permanent long-term fix to a very difficult and a very heartbreaking problem,” he recently told local television station WKRC. “We don’t want to see Cincinnati end up like Detroit.” But the city council, which is joined by labor unions in its opposition, says the measure would threaten funding for essential city services thanks to a provision that requires the unfunded liability to be paid off in 10 years.
“Closing down that pension plan, if the city wishes to comply with General Accepted Accounting Principles, they would need to pay off that unfunded liability in a compressed time frame,” said Keith Brainard director of research at the National Association of State Retirement Administrators. “So until they pay off that unfunded liability, their pension costs are likely to rise – and as a percentage of payroll, they are likely to rise sharply.”
That would force the city to shift more money from its budget into its pension system in order to keep up with paying off the unfunded liability. According to one study commissioned by a group opposing the measure, Cincinnati would have to cut services by 41 percent or raise taxes significantly and sell assets to make its payments.
Additionally, notes Neil Bomberg, program director at the National League of Cities, all that work to “pay off” the unfunded liability could be misguided.
“The problem with the concept of unfunded liabilities is that the value of a pension today is not necessarily relevant to what the pension will have to pay out in 30 years,” he said, adding that the unfunded liability also included worker and government future contributions. “So talking about an unfunded liability that’s 30 years into the future can be misrepresentative.”
Polls in Cincinnati are open from 6:30 a.m. until 7:30 p.m.