Atlanta Mayor Kasim Reed asked members of the Atlanta City Council today to consider cutting the pensions of existing city employees, a move that unions say is illegal and would set a precedent allowing other cities to alter the retirement of their current employees.
Chief Operating Officer Peter Aman said the mayor would like to see the council come to a decision on the matter by July 1.
Each of two plans put forward by the mayor to the council’s finance executive committee would shift more of the cost burden of retirement from the taxpayers onto the employees themselves and would slightly reduce retirement benefits.
Both plans call for “closing” the amortization of pensions—meaning the obligation to pay off the funds would be spread over a set period of 30 years. “Option 1” would move all employees from a defined benefit plan in which they know how much money they will draw in retirement to a defined contribution plan similar to a 401 K that fluctuates according to financial market performance. It would require a 6 percent contribution from employee paychecks. The mayor claims it would save the city between $27 million and $31 million in the first five years.
Option 1, according to the mayor’s office, has been the plan in place for all higher ranking employees hired since 2001.
“Option 2”would shift employees at pay grade 18 or below—sergeant and below in the police department—to an 8 percent defined contribution plan and would also allow them to participate in Social Security, which the city opted out of in the 1970s to avoid the funds matching required by the federal government. Reed says this option would save the city between $12 million and $18 million in the first five years.
The changes would affect a majority of employees. Those with less than about 27 years with the city would see an increase in the amount of money withheld each pay period in order to achieve slightly less than present projected retirement earnings.
On average the portion withheld from an employee’s check would rise from about 8 percent to 14 percent.
Using the example of a 25-year employee who made $45,000 annually and retired at age 55, Reed showed that the current retirement would be $33,750 per year, or 75 percent of their earnings while still employed. Under Option 1, however, that would drop to $30,121, or 67 percent of the employee’s earnings.
Under Option 2, the same employee would see his or her annual retirement earnings decreased from $33,750 to $30,406.
At present, the pensions rely upon funding from city taxpayers, but the city has not met its obligation to the pension match in about a decade, a situation acknowledged by Reed, and one he attributes largely to the recession. Reed explained that the unfunded portion of the pensions, the part the city is required to pay to match the contributions its employees make, has soared from about 4 percent for the police in 2000 to almost 50 percent in 2009. The pension funds of the two other employee groups, the firefighters and general employees, have seen similar increases in the city’s unfunded liability.
“The direction these funds have taken is undeniable,” Reed said. “It is literally unconscionable to continue.”
The mayor held out the threat to fire employees at least 10 times during his presentation to council, if pension costs are not reduced.
“I don’t want to fire people,” the mayor said, but added that the city is running out of money.
The attorney for the International Fire Fighters Association has sent a letter to the city claiming that modifying the pensions of existing employees without employees’ consent represents a breach of the employment contract and would open the gate for other public employees elsewhere to have their retirement terms changed without their permission. The firefighters union says such changes are illegal and the group is prepared to fight it out in court with the city.
“We have received a letter [from the firefighters’ counsel] that we are going to take very seriously,” Reed said. “I happen to believe it could not be more wrong, but that will come out in the wash over time.”
The president of the local chapter of the International Brotherhood of Police Officers, who also spoke during the four hour meeting at City Hall, seconded the firefighters, saying the police would also be willing to pursue a lawsuit to stop such changes.
When council members raised the question of whether good employees would seek employment elsewhere if changes to the pensions went through, Reed said: “We have no problem recruiting employees in an environment where there is 10 percent unemployment.”
Councilman C.T. Martin said the market may have been to blame for much of the city’s pension woes, because pension money invested in the markets performed badly, but it’s not to blame for all of it.
He pointed out that the City of Atlanta has been largely funded through bonds which have in turn robbed the city of tax revenue and pushed the city into debt. That revenue, said Martin, could have been used to help meet the pension obligation.
Atlanta has 10 TADs, or Tax Allocation Districts. They are funded by bonds which are then paid off by setting aside any tax revenue collected in the TADs for payment of the bond debt. So, that’s tax money the city can’t use for other things. The idea behind the TADs was to attract development by having the taxpayers underwrite the projects of private real estate and construction firms, however, many of Atlanta’s TADs are prevalently condo developments, and many of the units are sitting empty or being rented at less than the amount the city originally proposed. SR