In the spring, there will be growth,” as Chauncey Gardiner, aka Chance the Gardener, famously says, over and over again, in the Peter Sellers classic, Being There. And for decades now, growth has been a normal outgrowth of the spring budgeting process for the city of Memphis and Shelby County, not to mention MLGW and our city and county school boards. Between 1995 and 2005, for example, the Memphis City Schools budget grew by 69 percent, while the consumer price index grew by 31 percent and the number of students shrank by 5.6 percent.
These were golden years, when money was no object and generous pensions and benefits packages were commonplace for public employees. From 2001 to 2004, for example, those lucky enough to secure positions with the city could retire with their earned pensions after only 12 years of service. Even members of the U.S. military never had it this good. Today, the economic worm has turned, and austerity, not prosperity, is just around the corner. Budget cuts have become the order of the day for municipalities and school systems all across America.
This spring, watching the local government budget process was a bit like watching grown men and women try to carve up a watermelon with toothpicks. Determined to cut expenses, council members and commissioners spoke out for closing golf courses and libraries, along with a host of other items that amount to small change in government budget parlance. But in 2010, in Memphis as elsewhere, political leaders are having to face up to their biggest fiscal challenge: above-market salaries, excessive benefits, and obscene pension plans that have been put in place for public employees.
In June, I attended the Memphis Light, Gas & Water pension board meeting where the annual pension and OPEB reports were presented and discussed. I listened to the discussions and had the opportunity to examine and analyze two eye-opening reports from the Segal Group, MLGW’s actuaries.
First, let’s look at the pension plan for MLGW. The budget calls for a total plan contribution for the employer (MLGW) for 2010 of $27 million (17.77 percent of payroll), compared to $22 million (14.87 percent of payroll) in 2009. Employees will contribute 8 percent of payroll, for a 2010 total contribution of $39 million. In these numbers, MLGW has only recognized part of recent market losses; otherwise, the required contribution would be even higher.
These assumptions illustrate the pitfalls of the defined-benefit pension plans that dominate the public government sector and pose such huge risks for the future. The days when an MLGW employee could start working at age 18 and retire with a full pension after 25 years are drawing to a close. But not soon enough for many public entities, where the cost of maintaining existing pension systems and OPEB promises (Other Post Employment Benefits, which is retiree health care and life insurance) make up a formidable portion of municipal budgets.
Basically, OPEB is a commitment by politicians to government employees that when they retire, the local governmental entity (i.e., taxpayers) will pay 70 to 75 percent of their health-care premiums. Just think about the OPEB cost incurred by our one hypothetical 43-year-old retiree who could live to be 85. That’s almost enough money to run a branch library for a year! Indeed, the total unfunded OPEB liability of MLGW, the city of Memphis, Shelby County, Memphis City Schools, and Shelby County Schools is over $4 billion. Where in the world will all this money come from?
Only one of these five government operations is doing anything to reduce its unfunded liabilities. That exception is MLGW, which, since the 1990s, has been quietly preparing for just this kind of rainy day. Under Larry Papasan’s leadership, the utility started a trust fund in 1995 to address the future funding of OPEB. For most of its history (the Joseph Lee era was an exception), MLGW has rated at the top of the list of professionally run local government operations in Shelby County and has been highly regarded nationally as well. The organization takes its promise to retirees seriously and is fortunate to have a source of income (utility rates) that is at arm’s length from the politically charged property tax system. Unlike other governmental organizations in town, the utility company has made great strides toward reducing its OPEB liability over the past few years, in the midst of the worst economic downturn in 70 years.
Consider these numbers. John McCullough (chief financial officer and secretary treasurer of MLGW) estimates the price tag for funding current-year benefits at around $20 million; plan members receiving benefits contribute about $4 million toward these costs. As of December 31, 2007, the plan was just 2.2 percent funded, as MLGW’s unfunded liability was $679 million. The projected value of the assets, according to the actuaries, was $15 million.
In 2008, MLGW contributed $66 million to its OPED fund, roughly $44 million over and above annual costs. In 2009, that contribution number was $55 million, and the 2010 estimate is $43 million. This total three-year contribution will be $164 million, resulting in a significant three-year pay-down of $104 million of the utility’s unfunded OPEB liability.
Where is MLGW finding the money? Well, take a look at your MLGW bill. That’s the only real source of income for the utility, given how poor investment market returns have been since 2008. True, other government bodies don’t have such ready access to their citizens’ wallets. Nevertheless, this is quite a significant achievement in this economic climate. It’s been quietly done, and there have been little or no media reports of this pay-down expenditure by MLGW.
The next item of interest that I came across in the MLGW OPEB report was in the section titled “Valuation Assumption Changes.” The AAL (actuarial accrued liability, i.e., the amount that the actuaries say is the outstanding total owed to the health care retirees for their premiums) for the OPEB fund decreased by $159 million. Subtracting this amount from the 2007 unfunded OPEB liability of $679 million and adding in the $104 million in cash pay-downs, this means that MLGW has reduced its unfunded benefits liability a whopping 39 percent in just three years. That is fiscal responsibility.
I kept looking, however, at the $159 million liability reduction, baffled at the figure. How could the actuaries come up with this huge write-down of the liability? The Segal Group report offers two explanations: “changes in obligations due to changing the valuation-year per capita health costs and future trend on such costs” and “change in assumed plan choice at retirement.”
These answers did not satisfy my curiosity, and I started reading and calling around. Here is what I found: At least a third or more of this reduction in liability, according to McCullough, was due to MLGW staff exploring the possibility of allowing current employees at the utility who were employed before 1986 to buy back into Medicare. That was a pivotal year in Medicare history, when federal law was changed requiring public employees and their employers to have all employees covered by the Medicare portion payroll deduction for health insurance. But at MLGW this only applied to employees hired after 1986.
MLGW determined that its OPEB liability might be reduced if they were able to allow those hired before 1986 to buy back into Medicare. Frank Carney, an outside pension attorney, worked closely with MLGW staff in the finance and HR areas while investigating the legalities and determining what needed to be done to make this happen. MLGW had to get approval through the Social Security Section 218 administrator and Internal Revenue Service to facilitate the tax aspect of the arrangement. After stiff resistance from the feds, the package was finally approved in May 2008, and of 620 eligible employees, 180 chose the buyback option.
Why did they choose this option and expense? In talking to several MLGW people who opted for the buyback, it was seen as extra insurance against the unknown future of OPEB funding and the possibility that MLGW could someday be sold.
Considering the huge reduction in the OPEB unfunded liability MLGW was able to achieve at least partially through this buyback program, I asked if the city of Memphis, Shelby County, and other public entities had been informed of this program. I was told that MLGW CEO Jerry Collins Jr. informed the city and county about a month ago, after the extent of the reduction of unfunded liability was determined. The question remains unanswered as to what, if anything, the city of Memphis has done in this regard and whether they have missed an opportunity to reduce their huge unfunded OPEB liability of $934 million with a similar buyback program.
MLGW, the city, and the county should work closely together and share their information with each other and with the public. The politicians and the taxpayers can no longer ignore these huge and growing liabilities; reform of pensions, OPEB benefits, and salary levels must be urgently addressed. The time is now.
Joe Saino is a former board member of MLGW. He is president of the nonprofit organization MemphisShelbyInform.
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