Municipal Pensions

Here’s the problem.  In the early 1990’s the state legislature mandated that city contributions to municipal fire and police pensions had to be actuarily sound, something called the forty year rule.  When cities saw how much that would cost them, they raised a stink.  The legislature then passed an alternative method by which cities could comply with the funding obligations for their pensions.  This is the so-called 107% of last year’s contribution rule.  Simply put, each year the city had to pony up 7% more than it had put in the year before.

Now what this does is push out the day of reckoning as the 7% multiplies on itself each year.  Sort of like compound interest.  So cities followed this rule handed down by the legislature which created in large part the huge underfunded liabilities.  Under the alternative rule eventually the ever compounding 7% rule will solve the problem but it will solve it by becoming so huge that the city budget is devoured by the pension obligation.

The 107% rule is sort of like credit card debt where the minimum payment is so low that the debt never decreases but steadily gets bigger!  The legislature made a bad move when it handed down the “relief” alternative method.  Of course, cities were stupid when they followed it.  What a mess.

The best thing the legislature can do is at least allow cities to freeze their present plans and switch to a FINANCIAL SOLVENT method of providing pension benefits for new hires.  Some type of matching defined contribution plan is what everyone else in the world (other than government) uses.  Try that.

Cities can then at least proceed to “attack” the present problem.  More home rule authority will be needed in this area.  The legislature should allow cities to impose their own taxes and fees.  Presently, cities that don’t have pilot home rule can only collect what revenues the legislature tells them they can.  If cities aren’t given the power the fix the problem, it is a lot like telling the cities to mow a huge lawn but oh by the way you can’t purchase any lawnmowers!  Figure that one out.

Here’s hoping the legislature will simply shut down the broken system which it in part is responsible for creating and set the cities free to set up a solvent system and find a way to pay the unfunded liabilities.  Unfortunately, West Virginia has a history of micromanagement which cuts against trusting anyone to actually make a decision for themselves.  However, this problem is so big that maybe real progress will be forthcoming and no more rearranging the deck chairs on the Titanic.

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