As the city of Springfield addresses a $200 million shortfall in the Police and Fire Pension Fund, officials might look to similar situations across the country for inspiration.
From Pennsylvania to California and at points in between, municipalities facing shortages in their own pension plans have found various solutions.
In Joplin and St. Louis, city leaders have handled their own fund shortages through benefit changes and new sales taxes, respectively. The financial situation in Vallejo, Calif., meanwhile, led that city to file for bankruptcy last year; the city's pension was listed as the largest creditor on its bankruptcy filing, accounting for $219 million in liabilities.
Springfield, however, may be in unique territory even by the standards of others in similar situations. William Hoffman, city controller of Allentown, Pa., is dealing with a $40 million shortfall in his city's pension funds, and when told of the $198 million funding gap in the Queen City, his response was brief:
"How did they get so far behind?"
The Springfield situation
Springfield's pension issues have been building for more than a decade.
Due to a combination of increased benefits in the 1990s, overly conservative investments, the stock market decline and the city's failure to make full contributions 2004-07, the Police and Fire pension fund has just $97 million in assets to cover its estimated $295 million obligation. That's enough money to cover benefits for about 20 years, while obligations are expected to last 70 years.
The city already has closed the plan to Police and Fire employees hired after July 1, 2006, but it cannot legally change benefits that already have been earned by the 974 employees hired before that date.
To solve the problem, city officials - led by newly hired City Manager Greg Burris - are proposing a 1-cent sales tax dedicated solely to the pension fund. City officials estimate that if the tax passes Feb. 3, it would restore the pension to full funding levels in about five years.
"It has become obvious that we cannot budget-cut ourselves out of this deficit," Burris said in November. "It's also become obvious that we can't invest our way out of this."
Bonds and taxes
In St. Louis, city officials were dragged into court after struggling with making payments to three different pension systems - one each for Police, Fire and city employees. A lawsuit filed by the Police and Fire pension systems requesting the city make the pension funds whole went to the state Supreme Court in 2007 before the pensioners emerged victorious.
That decision left city officials on the hook for $210 million in shortages between the three systems.
City Budget Director Paul Payne said his city took a multipronged approach to solving the situation. First was a bond issue passed in September 2007 that brought the system up to date, followed by another $19.5 million bond issue in June 2008 to fund the city's contributions for that year and an additional $12.6 million contribution to the employee pension fund.
The final piece of the puzzle was a 1/2-cent sales tax, passed in February with 55 percent of the vote.
"In the sales tax that we passed, $11 million is allocated to Police and Fire pensions to assist us in our contributions to that going forward," Payne said. He added that recent declines in the financial markets have increased the expected pension contributions for fiscal 2010, and the city continues to look for ways to control rising costs.
Joplin city officials saw a similar shortfall on the horizon for its Police and Fire pensions and the 160 employees it supports.
But a solution was reached earlier this month when members of the pension fund approved changes by a 9-to-1 margin. Revisions to the plan, which is underfunded by $16.4 million, include increasing the length of time required to receive full benefits by five years to 25 years and decreasing the multiplier for service to 2.2 from 2.5.
In exchange, employee contributions are reduced to 10 percent from 18.08 percent - though employees do not get those contributions back unless they leave before retirement - and the city will gradually increase its contribution levels to reach the full actuary-recommended level in four years.
City Manager Mark Rohr said it was not easy to get the pension members to agree to the amendments, which only affect those hired after the changes take effect Jan. 31, but the changes were necessary to address problems created when the city increased benefit levels in 2000.
"The city went the extra mile to spend time with the individual departments and explain those changes and relay as much information as possible," Rohr said, noting that the study group that put the plan together included representatives from both the Police and Fire departments as well as Rohr and Finance Director Leslie Jones.
The pension plan currently sits at about 58 percent funding level, and two independent actuaries have estimated that the changes will push the Joplin pension fund past the 80 percent funding level in eight years.
'Whacked' by investments
Allentown, Pa., and Springfield share a lot of similarities.
Both are their state's third-largest city, and both are home to a little over 100,000 people. And like Springfield, Allentown's city leaders are staring at a shortage in city pension funding - though not to the same extent.
Allentown City Controller Hoffman said that the city's three plans - one each for Police, Fire and city employees - lost a combined $40 million in 2008 due to poor performance in the financial markets.
Pennsylvania state law requires the city to make up that difference by amortizing the loss over 25 years along with the expected interest that would be accrued if the money were invested, meaning the city has to make annual additional payments of $4 million.
Hoffman said his city is not alone; pension plans across the country have been ravaged by the stock market's precipitous drop in recent months.
"Anyone who has a defined benefit plan has been whacked and is going to have to do something," Hoffman said, noting that the $4 million the city could have to add to the pension plans represents about 4 percent of the city's total budget. "Where that money will come from is to be determined, (but) that money just doesn't fall into your lap."
It's unclear where Allentown will find the extra money; Hoffman said a casino under construction in nearby Bethlehem should bring about $4 million in extra revenue to Allentown through a municipal agreement, though he said that money could be planned for other uses.
The state of Pennsylvania also could step in by allowing a dispensation for the city, which would allow it to wait a year and see if the fund recovers some of its losses.
"That's the bugaboo - we're under by $40 million this year, but if the market recovers next year, we might only be down by $25 million, which would mean a lot less we'd have to pay back," Hoffman said.
The last resort
If all other ideas fail, the last option available is the one taken by Vallejo, Calif.
The city of 120,000, located across the bay from San Francisco, filed Chapter 9 bankruptcy in May in U.S. Bankruptcy Court for the Eastern District of California. Chapter 9 allows municipalities to reorganize as bankrupt companies would under Chapter 11 rules.
Court documents show that of the $436.9 million in total claims against the city, pensioners account for $219 million - or 50.2 percent.
The financial difficulty, according to Public Information Officer JoAnn West, comes from several years of renegotiating contracts with the city's four unions to defer raises, and when those deferred raises came due in 2008, the city was unable to renegotiate the contracts.
"Those contracts, coupled with the downturn in housing values and real estate taxes and a drop in sales taxes, led to (financial trouble)," West said.
The problem was exacerbated when 20 Police and Fire employees, sensing the city's financial distress, retired in early 2008, adding another $4.5 million to the city's pension payouts.
As a result, the city ended fiscal 2008 with a $9 million revenue shortfall, leading to cuts for this year in everything from salaries to staffing levels to donations to community groups - similar to what Springfield city officials are recommending if the sales tax proposal fails next month.[[In-content Ad]]
Why would an employee ever turn down a $200 a month raise? Jody Dow with The Springfield Dream Center explains the “Cliff Effect” that exists in the state of Missouri for people who are employed and on state or federal assistance. “You may be getting $500 in food stamps, and your raise is only increasing your pay that month by $200. Well, that’s a $300 discrepancy.” In the state of Missouri, assistance is all or nothing. The Dream Center helps workers in this situation learn how to prepare for in advance for a pay increase that results in a gap in monthly income.