Baltimore City Pensions: A Worthy Report

George Liebmann
2010-04-27

The recent report of the Greater Baltimore Committee's Task Force on Fire and Police Pensions under the Chairmanship of Donald Fry is a worthy effort, and repeats many of the observations in Calvert's The Baltimore City Retirement Systems: Heading for Trouble report in 2006.

Task Force recommendations fall into three broad categories- PLAN MANAGEMENT, FUTURE BENEFIT STRUCTURE and RETIREMENT SYSTEM GOVERNANCE, as follows:

PLAN MANAGEMENT

1. A realignment of the plan's asset management structure by the marshalling of pension plan assets into a single, tightly managed fund, eliminating the 6-part asset allocation currently used. The Task Force believes this recommendation will ultimately lead to better overall asset returns and lower plan administration costs with limited, if any, increase in risk to retiree benefits.

2. Require the City to make the required actuarial contribution each year from its General Fund and not use money already in the trust to mitigate their contribution obligation. In the past, the City has used the System's unallocated earnings to meet its contribution3 as determined by the plan's actuary. The Task Force believes it is important to the long-term sustainability of the Plan for the City to refrain from satisfying its obligation to the plan by using plan excess earnings.

FUTURE BENFIT STRUCTURE

3. Replacing the current "variable benefit" for retired members of the plan with an annual increase based upon a cost-of-living with an annual cap. This would allow the Plan's actuary and the City Finance Director to more closely project future expenditures for cost of living increases and provide a more stable increase for retirees. This would further conserve pension fund assets by allowing positive earnings on plan assets to fund current benefits. A simple acceptable approach would be a cost of living tied to the annual increase of social security. Any imposed cap should not exceed 3% per annum. Due to the challenging economic times there is no cost of living allocation afforded under the social security index.

4. A lengthening of the age and service requirements for determining eligibility for pension benefits. Currently, pension system members can retire at age 50 if they have at least 10 years of service or at any age if they have completed 20 years of service. The Task Force believes consideration should be given to increase the age and/or service requirement so that the combination of the two equates to at least 75 in order to receive full benefits. A number of plan options exist to implement the Rule of 75. For example, the Rule of 75 could require a member to reach a minimum age of 55 years, earn a minimum of 25 years of service or simply attain the sum of age and service totaling at least 75 with no age or service year minimum.

5. Terminating the provisions of the Deferred Retirement Option Plan (DROP2)for those members who have not yet achieved 15 years of service. The plan as currently structured allows experienced fire fighters and police officers with 20 years of service to suspend their participation in the F&P plan for three years during which they remain on the job, but earn no service credits toward their pension.

During the three-year DROP period, participants can channel the contributions they would have made to the F&P Pension system into a personal retirement account that earns guaranteed interest at the rate of 5.5% until the member’s last day of covered City employment as well as their frozen annual retirement benefit. This recommendation would apply to all employees with less than 15 years of service.

6. Revision of the calculation method for the average final compensation (AFC) by increasing the service period used in the calculation. The AFC is currently based on compensation earned during the last 18 months of service. The Task Force believes by increasing the number of months used in calculating final average compensation, the plan will achieve a more equitable retirement benefit among all beneficiaries entering retirement while better aligning retirement benefits with earnings during an employee’s period of service. The Task Force recommends increasing the service period used in the calculation to a minimum of 36 months and a maximum of 60 months.

7. Increase the employee contributions supporting the F&P system from the current 6% to no more than 10%. Union representatives who appeared before the Task Force indicated a willingness on the part of their memberships to explore increases in the mandatory employee contributions. The Task Force believes that higher employee contributions are warranted by the retirement benefit amount earned coupled with the period over which such benefit will be paid when compared with other public plans.

8. Consideration of a Defined Contribution Plan for future hires. The Task Force believes serious consideration should be given to converting from a defined benefit plan to a defined contribution plan for future fire and police officers. This form of system is under consideration in many other jurisdictions and is consistent with private sector plans. In reaching this policy decision it is imperative to consider both the cost, the ability to attract and retain high quality fire fighters and police officers, and the competitiveness of the total employee compensation package offered to the

City’s public safety officers.

RETIREMENT SYSTEM GOVERNANCE

9. A re-structuring of the F&P Pension system governance. The ultimate solutions to the problem now confronting the system depend on experienced, effective, longterm, decision-making about the benefit structure and about the marshalling of assets to support it. The members of the Task Force are in general agreement that the governance of the Fire & Police pension system could greatly benefit by expanding the membership of the Board of Trustees to include individuals with broad experience in finance and budgeting. It is recommended that the citizen representation on the board must have a background in one or more of the following: accounting, actuarial, auditing, investment management, investment consulting and financial law. The Task Force recommends expanding the Board to include the Director of Finance and the Budget Director or their designees, as well as, an additional citizen member. In addition, it was considered of utmost importance that the communication between the Board of Trustees and the City of Baltimore increase through at least semiannual hearings before the appropriate City

Council committee.

A Less Worthy Report

The Report of Mayor Rawlings-Blake’s 151-member Transition Team is a disappointing document. Even though it was prepared under severe time constraints, its defects are hard to excuse. It does not provide a useful guide to what had to be done to meet the City’s short-term fiscal problems; for that, the new Mayor had to look to her own fiscal officers. Nor does it provide any long-term vision of where the City should be headed. Rather it provides a pastiche of off-the-cuff suggestions and agency wish lists, some meritorious enough, but lacking any theme or sense of direction.

The report recommends added storm water charges and an increased hotel tax, reduction in the use of fire equipment in association with ambulance responses, the transfer of Head Start to an education agency, a new look at the City’s employee health benefit plans, a commuter tax, privatized trash collection, rationalization of the City’s vehicle fleet, inventorying of city properties and the use of schools as recreation centers. Nearly all these suggestions, worthy and unworthy, have been made before and have foundered for various political reasons. The report also recommends various reorganizations and combinations of agencies and the creation of a myriad of coordinating committees, the product of a touching faith in bureaucratic centralization.

The road not taken is that contained in various earlier Calvert reports–one which would undertake to stimulate bottom-up private and civic enterprise. A statute enabling block-level land readjustment agencies, familiar in Europe and Japan, would be a useful initiative. So would rationalization of the city’s street network and improved procedures for street closings. So would a cumulative zoning ordinance opening up additional areas for mixed-use and apartment development. So would an ordinance allowing creation of accessory apartments in owner-occupied single-family homes. So would provisions allowing street abutters to petition for traffic calming and neighborhood street governance. The report notes the existence of provisions for School Family Councils in each school, but suggests nothing to give them budgets, revenues, by-laws, or statutory functions. Such ideas do not appeal to bureaucrats, or those duped by bureaucrats.

　

The report actually recommends reduction of the entertainment tax, originally conceived as a mechanism for obtaining suburban support for city cultural activities. Vague suggestions for land banks are unaccompanied by any suggestion that new town developments be fostered in the regions where there are larger numbers of vacant and city-owned lots. The city’s crime and drug problems are completely unaddressed, as is its criminal justice system. There are no suggestions for school drug testing as an alternative approach to criminalization, nor is it suggested that maximum penalties for minor drug offenses be reduced below the jury trial threshold so that the District Court can impose effective testing and treatment sanctions. Nor are there proposals for reduction in the number of peremptory challenges allowed in criminal cases, which would improve the efficiency and enhance the even-handedness of the criminal justice system. There are likewise no proposals for arresting the decline of the City’s parochial school system or nurturing and providing facilities for charter schools, although Calvert reports have demonstrated that the school system is the single most important spur to flight from the City. Nor are there proposals for reform of the business personal property tax and its replacement by a broad based and mild Business Enterprise tax on the New Hampshire model, or other tax reforms which would cast smaller burdens on manufacturing and greater ones on nonprofit and service industries.

It is to be hoped that the new Mayor does not believe that this assemblage of 151 ‘usual suspects’ has exhausted the possibilities for municipal reform.

Pensions Revisited

We return to the melancholy subject of municipal and state pensions. Last year, we noted Governor O’Malley’s actions in signing three new measures relating to investments by state pension funds: one which barred them from investing in companies with business operations in Iran or The Sudan, one which removed ceilings on the commissions of hedge fund managers, and one which institutionalized a program of ‘affirmative action’ for that enslaved and destitute class, ‘minority’ investment bankers.

Early returns are in on the results of these O’Malley Administration initiatives, all of which we must suppose to have been inspired by disinterested regard for the public interest.

1. On December 18, 2009, the Maryland Retirement Systems issued a press release proudly announcing that in compliance with the new law it had divested "more than one million shares of common stock valued at $38.3 million and $3.6 million in bonds of Royal Dutch Shell" to comply with the divestiture law. As of April 21, 2010, Royal Dutch Shell was trading at $61.55 per share and rising, and its practices in Iran remained unaltered.

2. The FY 2009 report recorded that more than $4 billion was to be invested in private equity, and that the $962 million already invested produced a negative return of 22.3% versus negative 20% for the portfolio as a whole.

3. $1.3 billion had been confided to the Terra Maria ‘Emerging Manager’ program, producing a negative return of 21.2%.

While the O'Malley administration has thus occupied itself, the Pew Center on the States has released The Trillion Dollar Gap, a study of state pension and employee retirement systems, finding Maryland’s pension system to be one of 8 states given a zero grade and one of 18 raising ‘serious concerns’ and finding it to be 78% funded with an unfunded liability of $10.9 billion, the 15th largest in the country. The state’s unfunded liability for employee health care was $14.7 billion, 13th largest in the country, its obligations were only 0.8% funded and it too raised ‘serious concerns.’