Private Pension Problems

Conservative study suggests tea-party backed pension amendment would reduce benefits


ocal business groups, unions, progressive organizations, the mayor and all council members are united against a tea party-backed ballot initiative that would semi-privatize Cincinnati’s pension system, and a Sept. 27 report from the conservative Buckeye Institute helps explain the opposition.

The report echoes claims made by both sides in Cincinnati’s pension debate: The amendment, if approved by voters on Nov. 5, would reduce retirement benefits for new city employees by one-third. At the same time, the city’s current unfunded pension liability might be three times what officials estimate.

The Buckeye Institute, which is rigidly conservative, supports the tea party-backed amendment and touts its benefits in the report’s summary, but the details of the report are much more mixed.

The amendment would privatize Cincinnati’s pension system so city employees hired after January 2014 would contribute to and manage individual retirement accounts, which would also be supported by a proportional match from the city. That’s a shift from the current system in which the city pools pension funds and manages the investments through an independent board. The idea is to move from a public plan and instead imitate a 401k plan that’s often seen in the private sector.

Opponents of the amendment say it would massively reduce city benefits and actually increase costs for the city, which the Buckeye Institute’s report acknowledges as real possibilities.

Officials are also concerned the city would be forced to pay into Social Security, which would impose additional costs, if the tea party-backed system isn’t exempt from the federal retirement program. The current system absolves the city government from paying into Social Security.

Supporters of the amendment say the drastic changes are necessary to help solve the city’s growing pension liability, which city officials put at $862 million.

The Buckeye Institute report argues that the city estimates are too low. When pricing the city’s pension liabilities through fair market value — a measure embraced by some economists — the unfunded costs actually stand at $2.57 billion. That puts the pension system at 35 percent funding, which means the city will have to make up the 65-percent hole with extra payments.

But Vice Mayor Roxanne Qualls says these kinds of calculations, whether based on actuarial values as the city-hired consulting agency suggests or fair market values as the Buckeye Institute proposes, are enormously complicated, so it’s possible anyone could doctor the numbers to make a political point. In this instance, the Buckeye Institute could be purposely making the city’s pension situation look grimmer than it is in reality to expedite the need for action, according to Qualls.

Still, the report confirms a key claim for the amendment’s opposition: Future city employees would get about one-third less benefits if the amendment is approved. Current city employees would also face similar levels of cuts depending on how long they’ve been working at the city government, with the newest employees getting the largest reduction in benefits.

The Buckeye Institute’s estimate also doesn’t consider the risk involved in a 401k-style plan. Under the current public pension system, the city manages retirees’ investments through an independent board that includes full-time financial experts. With the tea party’s proposed system, an individual city employee would have to manage his or her own retirement account even if he or she has no financial expertise. 

The benefit reductions should save Cincinnati $19.7 million a year, according to the report. But the savings estimate doesn’t consider cost-of-living adjustments, which the report says will rise for future employees and shrink savings over time. The estimate also assumes the tea party’s proposed system will be able to keep Cincinnati’s Social Security exemption, which city officials say is unlikely. 

Despite the reductions, the Buckeye Institute claims the final benefits will be better than comparable 401k plans in the private sector, but the assumption hinges on the city meeting its full contribution to employees’ retirement accounts. The amendment allows — but doesn’t require — the city to contribute up to 9 percent of an employee’s salary to retirement accounts. The city contributes only 2 percent of payroll under the current system, which is already strained for costs.

The report also acknowledges that, if interpreted a certain way, the tea party amendment could force the city to pay for its unfunded pension liability in just 10 years, down from 30 years. Paying the liability so quickly could prove impossible for a city that hasn’t passed a structurally balanced budget since 2001.

Support for the pension amendment is coming from tea party groups, some of which appear to reside outside the state. National tea party champion Paul Jacob, who is president of Virginia-based tea party groups Liberty Initiative Fund and Citizens in Charge, is pushing pension changes around the country through ballot initiatives. Liberty Initiative Fund’s website in particular has two total blog posts, one of which is dedicated to the Cincinnati effort.

Petition documents obtained by CityBeat through the city administration also show Cincinnati for Pension Reform, the tea party group behind the amendment, paid California-based Arno Petition Consultants nearly $70,000 to gather petition signatures. The group has declined to clarify where the funding came from, but financial reports due on Oct. 24 should provide more information.

Meanwhile, opposition group Cincinnati for Pension Responsibility announced its formation on Sept. 27 and promised to get voters to reject a “risky plan” that “could cost taxpayers millions.” Mayor Mark Mallory, Republican and Democratic council members, the AFL-CIO, the Cincinnati USA Regional Chamber, ProgressOhio and other groups have also joined the opposition.

Opponents readily acknowledge the current system’s unfunded liability, but they argue the city would be best off making reforms within the current system. City Council is expected to consider such changes in November.

Voters will make the final decision on the pension amendment when it appears as Issue 4 on the Nov. 5 ballot. ©

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