Pension Zombies Threaten Memphis!

Posted by John Branston on Tue, Sep 17, 2013 at 11:39 AM

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.

Comments (7)

Showing 1-7 of 7

People get to pension age then live too long. I may change my mind on Obama care and go for the death panels. People living too long is also why heath care has gone nuts.

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Posted by CEBorst on 09/17/2013 at 5:45 PM

Ok i'll bite. I will assume that you (the write) do not agree with public pensions. I will start by adding a few facts you left out. According to other news sources the city has an approx 650 million unfunded liablity with the current pension. The city employees currently contribute 8 percent to the pension while the city contributes 6 percent after said employee reaches 10 years of service. City workers are also not subject to socail security as they have had a pension since they were hired. Another nice little token to add, the city has underfunded the pension for the last 4 years. Three of those years underfunded by 50 million per year, while last year was underfunded by 70 million. How can this be possibly blamed on the employee. Lets take a look at the private sector since everyone loves to compare. Company A to retain employees offers a 6 percent 401k match, and must pay social security 6.2 percent. When added to the .9 percent medicare this equals 13.1 percent which is paid in addition to salary on day one for this employee. The city however, hires an employee on a promise of a not so great pension after 25 years of service. City pays 6 percent to the pension after the employee reaches 10 years of service, and pays nothing to social security. This equals 6 percent only after 10 years. I realize i have used alot of numbers, but the city saves millions of dollars per year with the current pension. If drastic changes are made, good luck finding or retaining employees.

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Posted by The Answer is Near on 09/17/2013 at 7:00 PM

Another article that is late and redundant with no facts other than what was gleaned by others reporting.

Everything that was said has already been said.


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Posted by oldtimeplayer on 09/17/2013 at 10:29 PM

Answer Near: The question is not "public pension, agree or disagree" because pensions differ so much. So do pensions in the private sector. The question is how much goes in, from who, when. The 6 percent you mention, in my experience, is (was) an employer match of 50 percent of up to six percent of the employee's salary. Some 401(k) plans now have no employer match, much less a defined benefit. "Drastic" change is in the eye of the holder and those underwriting the pension plan. I can't imagine the city having too much difficulty finding employees in this job market.

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Posted by John Branston on 09/18/2013 at 8:07 AM

My goal wasn't to persuade anyone to support the current pension plan. I was simply trying to add the facts you left out. Regardless of the 401k match, the city does not pay the 6.2 percent to social security that ALL PRIVATE SECTOR MUST PAY. The current pension plan described as "lavish" by opponents is 62.5 percent of salary after 25 years. You mention MFD employees have a salary of 50k per year. 50k x .625= just over 31 thousand per year. This is after said employee has contributed 8 percent of earnings to a plan for 25 years. Keep in mind the city does not contribute a dime to the pension until an employee reaches 10 years of service. I also wanted to make it clear that the city currently saves millions of dollar per year with the current pension plan. I realize 6 percent is a bit much for a 401k in todays job market, but most careers will offer atleast 4 percent match 401k.

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Posted by The Answer is Near on 09/18/2013 at 12:18 PM

Local charter governments is just the same as corporations. Unless there is a clause in the prior pension contract, giving the corporation the ability to unilaterally, automatically change the system, then they have to honor what was in the contract unless they declare bankruptcy.

At this point in time, there are not enough votes on the city counsel to change the plan and renege on the current workers. Bank on that!

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Posted by oldtimeplayer on 09/18/2013 at 1:52 PM

Everything AC Wharton touch goes BAD he left the county in 2 billion dollar hole and since he has been at the city its been bad news every day , He maybe a good lawyer but he is not a good Mayor and he has proven it twice !

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Posted by Wake up Memphis on 05/10/2014 at 7:59 AM
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