Pension Zombies Threaten Memphis!

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The news gods have not been kind to Memphis the last few years. We've had endless budget stories, tax stories, the school system merger and un-merger, six-hour board meetings, five-hour City Council meetings, the preternaturally calm Mayor Wharton, and petty political grievances.

Now comes the public pension "crisis" and a fat file of "valuation and projection assumptions" and alarming claims from budget hawks and union leaders that Detroit-style doom is near and, depending on your point of view, either pensioners or the city administrators are as dangerous as zombies.

Pensions are extremely interesting to the people who are receiving them or are about to receive them. Otherwise, who wants to do the math? Pensions are probably what Robert Penn Warren was thinking of when he wrote in "All The King's Men" that a politician working a crowd should "make 'em cry, or make 'em laugh" but "don't try to improve their minds" because "it breaks down their brain cells."

The trigger for the latest pension blast, first reported by Jackson Baker, was a speech and accompanying report from chief administrative officer George Little about the state of the pension plan. I'll spare you the details, but the 40-page report, highlighted in red lest anyone miss the point, concludes that the "unfunded actuarial accrued liability of the current plan" is trouble. Union leaders responded by asking if Memphians really want to have "80-year-old fire fighters" and fireman-flight if the pension plan is changed.

As one who gets paid to follow this stuff, a few comments.

First, if a fireman has been working 50 years until he's 80 years old then he is either really bad at saving money or enjoys the excitement and camaraderie of the fire station more than the golf course. A senior fire fighter makes well over $50,000 a year according to city figures. A savings rate of 5 percent would create a nice sum, apart from a pension. Tennessee has no state income tax, and Memphis has no payroll tax. The cost of living is among the cheapest in the nation.

Just a guess, but I would say the public is tired of hearing police and firemen threaten to move out of the city (in greater numbers than ever) or, worse, put up billboards claiming Memphis is unsafe as a negotiating strategy.

Wharton did not say anything about a pension crisis when he spoke to reporters earlier this summer to assure us that Memphis is not going bankrupt, ala Detroit. Just the opposite. He said the pension plan is much better funded here but some tweaking would be needed. The report that came back last week seems to suggest this will happen sooner rather than later.

The city finance department assumes the pension fund will grow 7.5 percent a year. Standard assumption, they say. But is it? What conservative investor wouldn't be thrilled to get a safe 4 percent, much less 7.5 percent on his or her retirement savings the last five years? By the compounding rule of 7 and 11, money doubles in 11 years at 7 percent and in 7 years at 11 percent. You wish.

True, the Standard & Poor's 500 Index has averaged a return of 8.6 percent over 20 years, 7.3 percent over 10 years, 7 percent over 5 years, and 18 percent over 3 years. But timing is everything. If you took your nest egg out in 2009 after the stock market crash, you "lost" half of it.

Here's an illustration. One investor, Miss Mattress, had $100,000 under a mattress in 2009 and kept it there. Another investor, Mr. Market, had $100,000 in the stock market and kept it there. Mr. Market lost 50 percent in 2009 and gained 18 percent a year for the next four years. Historically, that is like winning the lottery four years in a row.

Who has more money today? Miss Mattress has $100,000. Mr. Market has about $97,000. A city pension plan has to try to take care of both of them.

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