Mayor Protests Retirement Plan, But Employee Benefits Safe For Now
Mayor Bob Kelly said he will be praying in the next few weeks about making a tough decision: whether to vote against West U’s 2010 budget to try to send a message about his fears of financial dangers from the retirement system for city employees.
The retirement system will remain the same regardless, because a majority of the city council is against the changes, which they believe would do more harm than good.
But Councilman Chuck Guffey is also contemplating a “No” vote over the issue. Even if Kelly and Guffey vote against the budget, it would still pass 3-2. They say they want to warn residents that they think retirement costs could mushroom out of control in the next 30 years.
“I think this is my responsibility as mayor, if I see a tremendous, dark-black storm cloud out there on the horizon,” Kelly said.
Kelly and Guffey want the city to reduce one portion of its benefits package: a cost of living allowance, which adjusts retirement payouts to keep up with future inflation. Both are met with strong resistance from Council members George Boehme, Steven Segal, Bob Fry, and City Manager Michael Ross, who say reducing benefits would make the city less attractive for potential employees, and may even drive some existing employees to work for other cities with better benefits.
“If you go out and try to hire for anything, even the best janitor … If you want the best janitor you have to pay what the best janitors make,” said Boehme said.
Ross said West U staffers have felt agitated over the issue, starting about a month ago when the mayor began speaking publicly about cutting retirement benefits. Back then, Kelly discussed even more drastic changes. He devoted his column in the city’s fall newsletter to the issue.
“All the 120 employees read that and said, ‘Why? What is going on here?'” said Ross. “It has been an enormous distraction, it certainly has affected morale for a period of time.”
Many employees have chosen to work for the city, even though they could make more money in private industries. Ross said because their salaries are lower, they do take seriously the value of retirement benefits. Many city employees have worked here for longer than residents have even lived here, they are close to retirement, and reducing their benefits would be a huge blow.
“People come here, they work here, and they stay here. That’s a good thing,” Ross said. “In my personal opinion, I don’t know if you want to penalize that.”
The retirement system
The city offers employees retirement benefits through the Texas Municipal Retirement System, a state-mandated public trust fund that provides retirement benefits for employees in about 830 Texas cities. West U officials determine the level of benefits, including the cost of living allowance that Kelly and Guffey want to reduce.
West U employees must contribute 7 percent of their income for retirement, and the city promises to match them with 14 percent once they retire. The 2010 budget includes $7.1 million for paying West U employees, which includes $994,000 for the city’s promised 14 percent match.
Topic of concern
Every year, the TMRS sets an amount — called unfunded actuarial liability — to make sure the city is growing a large enough fund to actually pay out all the benefits it has promised its employees.
“I don’t think there’s a public retirement system in the world that doesn’t have unfunded liability,” said TMRS spokesman Bill Wallace. “You fund benefits over a period of time, and the unfunded liability is a part of that pension debt.”
Kelly and Guffey are concerned with the amount of unfunded liability that TMRS says West U owes this year — $12.4 million, which is due over the next 30 years. For 2010, the city would pay an additional 5 percent of payroll, which comes out to $355,000. That raises the total cost for employees’ retirement benefits to $1,349,000.
“In West U, this is the cost of doing business if we want to stay competitive, which is what council wants to do: Last year they passed an ordinance saying we want to be an employer of choice,” Ross said.
The amount the city owes TMRS for unfunded liability has increased substantially over the past five years:
2004 – $6.3 million
2005 – $6.7 million
2006 – $7 million
2007 – $11.4 million
2008 – $12.4 million
Wallace said the reason the unfunded liability jumped to $11.4 million in 2007 is because the TMRS changed its policy to require cities to pay in advance for the cost of living allowance. The $1 million increase from 2007 to 2008 reflects an 8-year “phase-in” rate that is meant to spread out the advance payment for the cost of living allowance.
Proposals for change
Right now, the city has an option to pay a cost of living allowance of 70 percent of the annual Consumer Price Index increase. Kelly said he wants the city to switch to paying only 50 percent.
It’s important to act defensively now “so we don’t just sit here and let this thing coast on without us being a big player in our own destiny,” Kelly said.
Guffey agrees with decreasing the cost of living allowance, because he is afraid that inflation could skyrocket as the nation climbs out of the recession and must pay off the government debt from stimulus efforts.
“I believe that we have a gold-plated system and with the situation going the way it is, we really need to do something about this cost of living allowance,” Guffey said. “We’re not the only city, I’m sure, that’s concerned about this.”
It’s true that rising inflation would cause the city’s unfunded liability to increase, since the retirement fund would pay retirees more cash to keep up with the inflation, said TMRS spokesman Bill Wallace.
“In the event of several years of rising inflation, city officials might want to get our support staff to run some cost projections for them,” he said.
If the city decreased the cost of living allowance from 70 to 50 percent, it would shave $1.6 million from the unfunded liability, down to $10.8 million, Wallace said. But that savings is spread out over the next 30 years, which means the cost savings for 2010 would be $35,000.
The entire 2010 budget totals $28.7 million.
Other city officials feared backlash
Segal, Boehme, Fry and Ross argued against decreasing the city’s retirement benefits ever since the mayor first brought it up. The arguments crested at a budget workshop on Sept. 26.
They say decreasing benefits would make it harder for the city to recruit the best employees, some employees may decide to retire early, and the change would affect existing employees’ morale.
“I think the mayor is well intentioned,” said Boehme. “But he’s never run a business.”
It would be a mistake to decrease benefits, he said, because other comparable cities do offer top-of-the-line retirement plans. For example, the city of Bellaire recently approved a budget that did include a 70 percent cost of living allowance for its employees’ retirement benefits. West U employees may leave to work for other cities if their current benefits dip below the mark, the council members argued.
With only $35,000 cost savings at issue, Boehme said the risk of losing employees isn’t worth it.
Kelly said he thinks West U is a progressive city that sets milestones, and he wants to make the change as a step in the right direction.
“This is situation where we need to step up and set an example,” he said. “If we did that, we may have other benchmark cities following us.”
City employees’ benefits will not change this year, because Kelly and Guffey are outvoted. Both say they haven’t decided whether they’ll vote against the budget to protest this fact.
Ross said city employees felt relief on Sept. 28 when they learned that their benefits would remain the same.
“It was a huge exhale, Monday, when everyone learned the majority of the council was not interested in reducing their retirement benefits,” Ross said.
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