Wednesday, January 21, 2009

Pension Apples and Pension Oranges

Let's sort 'em out together

Back in the December 17 issue of CFP I was inspired to write a pension update (page 6) because of this News-Leader article's statement:

"Assistant Fire Chief David Hall, a pension board member, said the city now is facing "a really tough lesson" because of mistakes that were made in the past.

He said the pension fund investments were making double-digit returns in the 1990s, but city leaders chose not to reinvest all of that "surplus" in the fund.

"That should have been done," Hall said. "The city took the extra and used it elsewhere, rather than put it into the fund for future years when the market took a downturn.""

The story was very misleading and I felt it needed much stronger clarification than the News-Leader made the following day.

What Hall was saying was the pension fund's investments were bringing in more in returns than had been projected and the city opted later, due to the "surplus" returns, it lowered the amount of the actuarially recommended contribution the city was required to make.

Here's the update from CFP's page 6 of the Dec. 17 issue:

"Recent news might have caused a misunderstanding among the public regarding investment returns of the police and fire pension system. Pension trustee David Hall set the record straight for CFP.

"All investment returns are at the sole discretion of the pension board and can only be used for benefit payments," Hall said. "The city is unable to take any funds out of the pension system."The city's actuarial recommended contribution is separate from the investment returns. According to Hall, the city has never withheld any investment returns from the pension fund. Every year, the pension board actuary determines and recommends a contribution amount to the city.

"Except for the fiscal years 2005-2008, the city has been making the actuarial determined contribution amount," Hall said. "The issue with the police and fire pension system is a very complex issue, which can easily lead to misunderstanding."

If you would like to read pension trustee David Hall's full statement, go to and click on the online supplements to the print edition link."

Hall is right, as is City Manager Greg Burris, when they say the police and fire pension system is a very complex issue. Hall was right when he said, because of the complexity of the issue, it can easily lead to misunderstanding. In the case of the above article, the pension fund's investments were confused with the actuary's recommended contribution. While the city can decide not to make the actuary recommended contribution any given year, the city cannot withhold "surplus" investment returns.

Today, when I read, "State can take some of city's pension tax funds," though I feel I have a very good grasp of the pension issue, I got that familiar feeling of apples and oranges being all mixed up until you didn't know which was the apple and which was the orange any more. I'm not slamming the News-Leader but I don't feel it is at all helpful to the public to mix two separate issues up, discussing one, then the other, returning to the first, without proper clarification. It was more confusing than enlightening and so, here I am again, trying to straighten out the facts so that perhaps, at least the readers of JackeHammer, won't come away confused and befuddled.

In the News-Leader's article today, the writer started off discussing the State's practice of withholding 1 percent of the city's sales tax revenue in order to compensate itself for the administrative costs of collecting it and dispersing it back to the city in the form of a monthly check.

The State of Missouri collects all of the city's sales tax revenue. That is why you hear the City Manager refer, at times, to his inability to tell the City Council or the public what the sales tax receipts for, let's say, October, are until the first week or two in November, or until they receive the check for their portion of the sales tax revenue the state has collected on behalf of the city.

The writer of the article did a fine job defining that in the first part of today's article however, I wondered about Burris' statement:

"Would we rather keep that? Absolutely," Burris said. "Is it a reasonable? I don't know what the state's overhead is. ($400,000) seems like a lot to me."

I think it is important to note here, that the $400,000 would be the state's 1 percent handling fee on the $40 million the city estimates it will take in for the pension fund annually, if the pension sales tax initiative passes.

The next part of the article is where it gets a little applesy-orangey to me:

"The fee is detailed in a 2007 pension reform law that also allowed Springfield to seek a one-percent sales tax to help solve its pension fund shortfall.

The law, which the city of Springfield fought unsuccessfully, carries a big stick.

It was crafted after Springfield police and fire representatives complained to state lawmakers that the city wasn't adequately funding the pension plan. Lawmakers agreed and created a costly penalty if the city failed to make full recommended payments determined by the pension fund's actuary.

The law allows the state to withhold city revenue equal to 25 percent of what the city fails to pay into the pension fund, as recommended by the actuary.

Burris said it remains unclear how the state intends to calculate that "deficiency.""

You see, the State has always withheld a portion of all of the city's sales tax revenue to, like I wrote above, compensate itself for administrating the revenue. As the News-Leader article pointed out:

""That one percent is a standard fee DOR collects for handling sales taxes from every city," Farnen said."

So, I'm not sure why the city or the public should have a problem with the State including the standard fee DOR has always collected for handling sales tax revenue. Why did it only become questionable when it was included in the law the state passed to force the city fund the pension system? I also think it might have confused the reader as to whether the city opposed the law or the city opposed the state's standard fee, identified within the law, to withhold 1 percent of the gross sales tax revenue as a handling fee.

Regarding the "deficiency," according to the News-Leader article:

"Burris said it remains unclear how the state intends to calculate that "deficiency."

I think the "deficiency" Burris may be referring to is the below 60 percent funded ratio of the pension plan. That is the deficiency which causes the state law to kick in. I don't know what other "deficiency" he, or the state, could have been discussing in regards to the pension plan.

The article goes on:

""The goal here is to make it moot," Burris said. "That's why the city made a full payment this year, and why I'm recommending we continue to make the full payment that the actuary recommends."

You see, the reason the law was made moot by the city's full payment in the current fiscal year is because, by making the payment, the city bought four years before they are required, by law, to make a full actuary recommended contribution again. The only thing making the full actuarial recommended contribution in the next year will accomplish is to keep the four years they bought this year by making the full contribution remain at four years, instead of decreasing to three years.

The next statement in the article...:

"In public presentations, Burris says the state could withhold up to $18 million from the city if the council doesn't make full pension payments." one of the most confusing and troubling statements in the article. The statement, by not telling the reader when or why the state could withhold up to $18 million from the city if the council doesn't make full pension payments, might lead the reader to believe that if the council doesn't make the full actuarial recommended contribution in the next fiscal year the state could withhold up to $18 million from the city in the next fiscal year. This simply cannot happen because, the city, in this fiscal year (2008-09), stopped that action for four years by making the full contribution in this fiscal year.

Then the article defines a very convoluted foundation for the figure of $18 million the City Manager claims the state could withhold. I can't begin to decipher what it may be getting at. You see, because the city made the full contribution in the 2008-09 fiscal year, the state cannot withhold 25 percent of the city's sales tax revenue unless they fail to make a full actuarial contribution again in the next four years.

The fact is, the city could wait until fiscal 2013-14 before making another full actuarial recommended contribution to the pension plan and only if they failed to make another full actuarial recommended contribution in one of the years between the next fiscal year through fiscal 2013-14 could the state begin to withhold 25 percent of the city's sales tax revenue. The reason the state would withhold 25 percent would be so that they could put that 25 percent into the pension fund because, they would feel the city has not displayed a good faith intent to fund the pension plan. The state simply wants to make sure the city does the right thing. Remember, the city did not pay the full actuarial recommended contribution on its own from 2005-2008.

Later in the article, under the section outlining how the tax can be repealed, the reader is advised:

"If voters reject the proposed sales tax, the city gets a one-year extension to make a full payment into the pension fund, without penalty from the state."

I'm not sure what that has to do with how the tax can be repealed but, I think it does change that 4 year deadline. I believe what is being said here, is that if the city brings a sales tax initiative to the ballot in an effort to fix the pension plan they are allowed an extra year because they have shown they are making an effort to remedy the problem and fund the pension plan.

That would be the reason for a statement made in a previous News-Leader article, "Burris: Shortfall costing city more every day," I believe it was published yesterday:

A: It (the sales tax initiative, even if voted down?) bought us an extra year. The way it's been describe to me is that it's like a five-year moving window, and so it (making the full contribution in 2008-09?) bought us four more years.

If City Council would elect not to make the full recommended contribution, legally they could do so for the next four years."

Sometimes you just gotta wonder if an already complex issue isn't being made even more complex to discourage understanding. After all, if it gets complicated enough, maybe you'll just decide not to care and trust the solution offered instead of really understanding it.

I liked the comments made by Council candidate Nick Ibarra on KSGF's Vincent David Jericho Program this morning. He articulated the issue very well and showed a deep understanding. (If you read this after Wednesday night, the 21st, try this link to listen to Nick Ibarra instead).

Anyway, if you hung with me this long, I hope this helped your understanding and resolved a bit of the confusion. :)


1 comment:

Anonymous said...

They always seem to use the penny argument to get people to vote for a sales tax, how come it does not work that way when city funds are being held back.
$400,00 is mere pennies compared to 40 MILLION