As Detroit, Mich. lurched into the biggest municipal financial bankruptcy in American history, mostly from an estimated $3.5 billion in immediate debt it couldn’t pay to current and future retirees, the question in Baltimore and countless other U.S. cities is blunt– and fretful: Could it happen here?
Yes, according to municipal finance experts. But Baltimore officials say that a proposed switch from the traditional retirement system to a 401(k)-styled plan will help increase the economic viability of the city.
“Our main goal is preserving and fortifying the defined benefits pension plan for existing retirees and existing city employees and providing reasonable benefits for new employees while balancing the need for affordability on the part of the city,” said Baltimore City’s Director of Finance Harry Black.
The proposal is being advanced in the nick of time, Maintaining the Employees’ Retirement System cost the city $17.7 million in 2003 and rose exponentially to $77.9 million in 2012, Black said.
By moving to the new retirement plan, city officials forecast savings of $1 million in 2014, and increasing savings each year until 2022, when the savings are expected to reach $7.8 million.
Under the current proposal, which has to be approved by the City Council, new city hires will be expected to contribute 5 percent of their income to their retirement accounts, which the city will match up to 4 percent. Those new employees will have the option of doling out an additional 2 percent, with the city contributing an additional 1 percent.
While the city may benefit, employees are likely to question the change from the current defined benefit plan, which guarantees a specific level of retirement benefit based on years of service and age.
“Under the defined benefit plan, the employer bears 100 percent of the risk, but under the other system, both the employer and the employee share the risk,” Black said.
City Comptroller Joan Pratt further explained in an emailed response, “The investment decision [for how the retirement funds are invested] rests with each individual member. [Therefore,] each member bears the investment risk because they have to select their own asset allocation, whether it is stocks, bonds, stable value, or some other asset class.”
Safety personnel, such as police officers and firefighters, and current city employees are exempt from the new retirement plan. However, they, too, have experienced some version of pension reform, which was started in 2010, Black said. For example, security personnel have to serve for a longer period before they can retire and, in the case of civilian employees, they are now required to contribute toward the fund, which they have not been mandated to do since 1979.
Those changes elicited some protests and Black said he expects negative reactions to the 401 (k)-type retirement plan as well.
“That’s a natural reaction. Anytime you are talking about making changes you create some level of uneasiness,” he said.
But the changes are necessary to shore up the retirement system, which has gone from being 103 percent funded in 2003 to 68 percent funded in 2012, officials said.
“If we don’t do anything that number will continue to rise,” Black said, “so it’s important to take these measures now to increase the sustainability and viability of the retirement system.”
“What led to the unfunded liability was the financial crisis, the global economic crisis, especially in Europe, the recessionary period, market decline, and [poor] investment returns,” Comptroller Pratt said.
The status of Baltimore’s retirement system is not unlike that of other retirement funds all over the country and reflects the economic realities of the times.
According to a Pew Charitable Trust study, Baltimore is among "30 cities at the center of the nation’s most populous metropolitan areas " that are looking at " $192 billion in unpaid commitments for pensions and other retiree benefits, primarily health care, as of fiscal 2009 and are employing a variety of strategies to address these shortfalls."
The cities are facing a "long-term shortfall of $88 billion for pensions and $104 billion for retiree health care and other non-pension benefits."
"For retiree health care, the most serious underfunding per household was in New York at $22,857, followed by Boston at $18,962, Detroit at $15,682, San Francisco at $13,487, and Baltimore at $10,208," The Pew study, dated March 2013, said.
But while the current outlook may seem grim, the situation can change for the better, she said.
“The pension board…maintain[s] a broadly diversified asset allocation,” Pratt said. “There are market cycles and they will be volatile but overall the Baltimore Retirement System strategy is investing for the long term.”
Similarly, Baltimore continues to be economically viable, Black said.
“Baltimore, considering its challenges, is solvent, is fiscally sound,” said the finance chief. “We’re seeing a lot of economic progress in the city. The population is stabilized and actually growing. There’s tremendous interest in terms of economic development.”
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