No matter how much money the City of Burlington has put into its pension fund every year, it hasn’t been enough since 2003.
Just a few years earlier, in 2000, city taxpayers contributed about $43,000 toward the retirement of city employees, and the system was funded 120 percent. In 2012, public contributions exceeded $7.5 million — almost 175 times the cost in little more than a decade.
And still the pension is underfunded by $58 million, and the amount is growing, even though the city has met its contribution goals almost every year.
Wrapping up a nearly four-hour city pension “summit” held in Burlington Tuesday evening, Mayor Miro Weinberger said the problem threatens the heart of the city’s success.
As part and parcel of salary and compensation negotiations, Weinberger and several others underscored that pension plans are key to recruiting city workers whose professional services make Burlington a great place to live. But there is a limit to the amount Burlington taxpayers can afford for those employees’ benefits, Weinberger said.
“We are bumping up against that limit,” he said, noting that the financial pressure is already “crowding out” other areas of public investment.
The summit, “Why the Burlington Retirement System Matters,” was coordinated by the City Council to educate the public about pension logistics and the history of BERS, as the city’s retirement system is known. Aimed at city representatives, employees, retirees and unions, about 40 people attended. The event was livecast on Channels 17, 317 and the city’s website.
Special guest speaker Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence, said the tension between past obligations and present tax burdens is the crux of the challenge the city faces now.
Today’s taxes are paying the salaries, benefits and retirement plans for employees currently providing city services, Kellar said. But taxpayers are also being asked to pay for unfunded pension liabilities that have accrued.
The funding has come up short for several reasons, Kellar and other panelists said. Their goal was to walk a “tight rope” to explain the crux of the current dilemma without casting blame on any one side of the equation.
Underfunding
The “Great Recession” was the most commonly cited scourge of the pension system.
Invested pension funds are predicted to increase 8 percent each year through interest earnings. But they actually lost value in four years since 2000, and underperformed every year except 2007, according to a report prepared for a City Council working group by former Chief Administrative Officer Paul Sisson.
Another major driver of the drop was previously devised as a solution during very different economic times, explained Joe McNeil, a labor lawyer for the state of Vermont and the City of Burlington.
In 2000, McNeil said, the city wanted employees to pitch in more money toward their own health care. At the time, pensions were not much of a concern. But to get the concession of higher health care contributions, the city offered more generous pension plans.
“Starting in about 2002, the city administration began to realize it had put in place a series of benefits that could not be sustained without a significant infusion of additional money,” McNeil said.
Recession soon struck in 2003, followed by the more extreme economic decline of 2008. The value of the pension fund was wrecked, he said. The “three-legged stool” of employee contributions, public contributions and investment earnings was assailed and left to stand on one leg: taxpayer money.
A series of complex financial projections are used to deal with such volatility, and to plan for changes in staffing needs, life expectancy, cost of living and other variables. Actuarial assessments try to predict the amount of money a pension will need to have on hand in the future, thereby instructing financial managers as to how much money needs to be contributed in a given year to reach those goals.
But there are different ways to go about that actuarial accounting. Kellar noted that the method the city is using — the method by which the city’s required contribution is set each year — is used by only about 13 percent of pension systems around the country.
“Maybe there’s something about this method that is causing this mismatch between what you think you’re going to achieve and where you are,” she said.
Solutions
Tuesday’s pension summit was more about positions and questions than answers.
One clear determination was shared: Something must be done, and soon. Each year that the pension system continues to fall short, the liability and long-term cost grows more quickly.
But just what the solution is, or what combination of strategies will form a solution, is a long way off.
One possibility that’s been floated — although it was not discussed at the summit — is to switch from a “defined benefit” to a “defined contribution” pension plan. Dialogue Tuesday night stayed strictly to the advantages of defined benefits.
With defined benefits — which the city currently offers — public employees are guaranteed a certain income in their retirement, based on the amount of money they were paid at the end of their careers. If the investments perform poorly or if employee contributions are set low, a defined benefit system leaves taxpayers with a higher bill to make up the difference.
Defined contributions, on the other hand, require set inputs from employees and employers (taxpayers, in the case of public pensions). Pension payments made to retirees are calculated according to how well the investments perform: Their retirement funds may not be predictable, but theirs and the taxpayers’ contributions are subject to no surprises.
Other solutions may entail renegotiating city contracts, for example cutting back on positions or wages, reducing benefits, raising the bar to participate in the pension system, or asking city employees to contribute more to their own retirement plans.
A complicating factor in that regard is the “balkanized” way that city contracts have been negotiated over the years, McNeil said.
The actuary assigned to the city’s pension system, David Driscoll of Buck Consultants, agreed. He said the city has responded to the unique needs of each employee sector by setting up a different pension structure for each one. On average, there is one plan for every 40 employees, he said — in a system comprised of fewer than 1,000 active participants.
“I fully appreciate that there’s a big difference in the careers of policemen and a person who works in an office for the city,” Driscoll said. But he thinks a joint effort to streamline the pension plans, involving all unions, is necessary to shore up the system for the future.
Weinberger said his “homework” is to report back to the City Council in two months to propose a “process going forward.” While he did not elaborate on the benchmarks that process would include, he prioritized a “global” solution and indicated his willingness to favor comprehensiveness over speed.
More information on the City of Burlington’s employee retirement system can be found on a dedicated page of the city’s website.
