State and local governments across the nation have been struggling with their pension liabilities, but Atlanta is suffering even more than most. Its unfunded pension liabilities have grown from $321 million in 2001 to $1.5 billion in 2009, and the pension funds have gone from 83% funded to 53% funded—well below the 80% funded level that is typically considered healthy—during that time. Atlanta now spends approximately one-fifth of its budget on just the pension system. That's nearly as much as the entire Police Department budget. Add to this an additional unfunded liability of $1.1 billion for retiree health-care benefits and the consequent credit rating downgrades and the city's fiscal outlook looks rather bleak for many years to come.
While the most expedient culprit for the pension disaster may be the economic downturn—and it is certainly true that the resulting investment losses by the pension funds haven't helped—this is more a symptom than a cause of the city's troubles. The real problems began long before the recession and were the result of bad political decisions to significantly increase workers' benefits, for which the city could not afford, and underfund the system.
In 2001 and 2005, the City Council increased pension benefits by as much as 50%, and compounded the error by applying those increases retroactively. (This may sound regrettably familiar to many Californians.) The true costs of these increases may have been hidden when the deals were made in better economic times, but the benefit increases have now been revealed as excessive and unsustainable.
As with an addict in a 12-step program, the first step is for the city to admit that it has a problem. It was thus encouraging when Mayor Kasim Reed asserted in his January 2010 inauguration speech, "The stark reality is that one of every five dollars is currently going to fund a pension system that is strangling our city," and subsequently established the Pension Review Panel, which has put together an excellent presentation that analyzes and describes the depth of the problem.
As I wrote in an article published recently in the Atlanta Journal-Constitution, the city needs to first stop the bleeding by switching from lucrative, defined-benefit pensions to more affordable 401(k)-style defined-contribution plans—as the private sector has been doing for the past 30 years—for all new employees, adopting voter approval requirements for all future government employee benefit increases, and prohibiting the practice of granting retroactive benefit increases.
Addressing the liabilities that have already been racked up will require some bitter medicine, although the remedy can be sweetened a bit through the use of privatization, outsourcing government services, and adopting budget reforms like priority-based budgeting and eliminating unnecessary and failed programs, rather than simply enacting massive tax increases or slashing service levels.
Here is an excerpt of that article:
In order to stop the financial bleeding, the city should shift all new employees to 401(k)-style defined-contribution plans like those typically offered in the private sector. The city and the employee would contribute a specified amount each year into a retirement account controlled by the employee. This would move away from the city’s existing lavish defined-benefit plans, which guarantee a large percentage of an employee’s salary for life and leave taxpayers on the hook for any funding shortfalls.
There’s a reason nearly every company in the country has abandoned defined-benefit plans: They are unsustainable. Why do around 90 percent of Atlanta’s police officers retire at age 55? The retirement benefits are simply too good to pass up. That’s great for a select group of employees, but terrible for all the taxpayers stuck with the bills.
Going forward, Atlanta should require that any future pension benefit increases be approved by taxpayers. Voters in San Francisco and San Diego, for example, get the final say on benefits increases, helping limit politically motivated pension handouts.
The city must also prohibit sweetheart, retroactive benefit increases in the future. Atlanta should explore its legal options to rescind the retroactive portion of the 2001 and 2005 increases, which essentially forced taxpayers to pay government employees again for work they had already performed and been fairly compensated for.
To address the mounting debt, some leaders have suggested tax increases. Taxpayers have been fleeced enough. Competition for government services is a better option. Atlanta should copy the example of Chicago, where Democratic Mayor Richard Daley has partnered with the private sector to reduce costs. Does the government need to run parking meters or garages? A company paid Chicago $1.16 billion to operate its 36,000 parking meters and the city leased four parking garages for $563 million. Atlanta should evaluate all programs from scratch and eliminate those that are low-priority, duplicative or simply not working.
Such solutions can help tackle the massive pension liabilities while being fair to both employees and the taxpayers who are paying the ever-growing bills.
See the full column here.