Local News

June 7, 2014

Pension problems?

Dalton, Whitfield retirement system stronger than some in other areas

The headlines have been bleak.

Two years ago, Moody’s Investors Service reported that the pension plans for American cities have more than $2 trillion in unfunded liabilities.

A report by the Pew Charitable Trusts last year found that cities across the nation have huge unfunded liabilities in their pension funds. Houston, Texas, alone has more than $11 billion in unfunded pension liabilities. San Francisco has more than $17 billion in unfunded liabilities.

Few local governments have fully funded pensions. And only slightly more keep their pensions funded at 80 percent or more — the level recommended by actuaries. The pension of Omaha, Neb., according to the Pew study, is funded at 43 percent. In Charleston, W.Va., the city pension plan is funded at 24 percent.

The rising cost of funding employee retirements is one factor that has pushed a number of local governments across the nation — including the city of Detroit, Mich. — into bankruptcy.

Local officials say their pensions are in far better shape than those of many other local governments.

In fact, Whitfield County’s pension is fully funded.

“We don’t have any unfunded liability at this point,” said Board of Commissioners Chairman Mike Babb. “At one point, we were actually funded at 121 percent. But over the past two years, we were able to use that extra as credits to our funding.”

The county did not put money into its pension for two years, allowing the funding level to drop down to 100 percent and using that money elsewhere in the budget.

“If you look at the budget this year, we put $750,000 to keep it at 100 percent,” Babb said. “Our goal as commissioners is to keep it at 100 percent. I can’t see why we would let it get below 100 percent, especially with the accounting changes that are coming next year.”

The Government Accounting Standards Bureau will require governments, starting with their next fiscal year, to include their net pension liabilities in their financial statements.

By itself, the change will have little impact other than making it clear just how large those liabilities are. But bond rating agencies will take them into account, and if a city or county’s total liabilities, including unfunded pension liabilities, are large enough it could affect their bond ratings and make it more expensive for them to borrow money.

As a result of rising pension costs, some cities have begun closing their pensions to new employees, putting new hires in “defined contribution” plans similar to the 401(k) plans used by many private businesses. Under such plans, the employee agrees to a have a set percentage of his wages taken out of each paycheck and invested in a specified plan. That money is not taxed until it is withdrawn from the plan.

The city of Dalton closed its pension to new employees in 2002, Dalton Finance Director Cindy Jackson said.

That means the city isn’t accruing liabilities for employees hire after July 1, 2002, when it closed the plan. But it currently has 340 retirees and spouses drawing benefits, and it has 311 active employees eligible for benefits. Those include city employees as well as those of Dalton Utilities and some joint agencies such as the Dalton-Whitfield Solid Waste Authority.

Employees currently pay 5 percent of their wages into the fund, and the city pays 35.12 percent. The city’s share is scheduled to increase to 39.4 percent in 2015. In 2014, the city will pay $6.5 million into the fund.

The pension is currently funded at 66.3 percent, leaving it with an unfunded liability of $38.5 million. By comparison, the city has a current annual operating budget of $30.2 million and a fund balance of around $19 million.

According to documents provided by the city, the pension fund was once funded at more than 70 percent, but its investments took a huge tumble when the recession hit in 2008.

City officials stress that the pension fund is in no trouble, and it is funded at a higher rate than many other cities and counties, significantly higher that those that have gotten into financial troubles.

But at least some City Council members say they would like to increase the funding level.

“When we work with our actuaries they try to help us figure out the smallest amount we can responsibly put into the plan,” said council member Tate O’Gwin, a professional financial adviser. “Each year, our financial obligation continues to creep upward. I’m of the mindset that we should try to bend that curve in the other direction and put in more than is recommended so we start facing a number that is constantly decreasing.”

He views the pension’s unfunded liability as a debt that should be paid down. O’Gwin says he’s open to using part of the city’s fund balance to increase the funding of the pension plan.

“I’m not sure I would do it right now,” he said. “I like the idea of having that buffer in case we have a couple of bad years in the market and our obligation to the pension should increase. I like having a reserve in case we have to put more in, and I want to be developing a plan to put more into the pension. But with markets towards their highs and interest rates near their lows, right now might not be the best time to push a large lump sum into the pension.”

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