Last Tuesday, Cincinnati, Ohio voters rejected Issue 4, which would have overhauled the city pension system by transitioning new city employees from the current defined benefit system to a defined contribution, 401(k)-style plan. Issue 4, titled the Cincinnati Pension Reform Charter Amendment Initiative, would have also required the city to eliminate the over $860 million unfunded liability for the Cincinnati Retirement System (CRS) in ten years. The initiative would have also tied Cost of Living Adjustments (COLAs) to the consumer price index, with a cap of 3%.
The need for reform was, and still is, obvious: As of December 31, 2012, the city reports that the pension system is only 61% funded. In dollar amounts, the CRS currently has assets of $1.3 billion to cover $2.2 billion in liabilities, leaving an unfunded liability of $872 million. These funding problems with the pension system prompted Ohio Auditor Dave Yost to comment that the system “has turned into a Frankenstein’s monster … and is on the verge of spinning out of control.”
Cincinnati taxpayers have seen increasing portions of their tax dollars allocated towards the CRS, though far from what is necessary to fully fund the system. For fiscal year 2014, the city is set to contribute a total of $78 million out of a budget of approximately $900 million. This equates to 48.79% of payroll, and reflects a high contribution/payroll ratio relative to other systems. A report by the Buckeye Institute released in late September, cites data from the Public Plans Database, which contains data on 126 state and municipal pension plans, which shows Cincinnati’s contribution/payroll to be excessive. Only 17 of the 126 systems even had a contribution/payroll ratio equal to or greater than 25%.
The Buckeye Institute report notes that “the CRS is a high-cost system even among public plans nationwide, where costs have soared over the past decade.”
While Cincinnati has made some reforms in recent years, such as creating a new tier of pension benefits for employees hired after July 2011, savings won’t be seen for decades. Like other systems, Cincinnati has had to deal with the problem of pension spiking. In 2011, it was reported that 900 Cincinnati employees were eligible to retire with the equivalent of “at least six months’ extra pay when they retire,” which has the potential to cost taxpayers an additional $93 million in lump sum payments to cover saved up sick leave and vacation payments. As employees hired before the 2011 reforms, these payments may allow these 900 employees to receive significantly higher pension benefits. A high earning city employee who receives a lump sum payment of $60,000 could hypothetically receive an $18,000 increase to their annual pension benefits.
One of the more egregious examples of this occured in 2010, when a city nurse with a base salary of $55,000 engaged in pension spiking that enabled her to retire at age 60 with an annual pension of $191,000.
While this abuse has been corrected going forward, Cincinnati must find a reasonable solution to the $862 million unfunded liability that goes beyond tweaks to pension formulas. The city has a limited range of options before it: substantially increase pension contributions or switch to a defined contribution system. The first option requires several unpleasant adjustments: higher employee and taxpayer contributions to the pension system, cuts to city services, or tax increases to fulfill higher payments, or some combination. In the long-run, the reform most likely to create fiscal stability and cost savings to taxpayers in Cincinnati would be a switch from the defined benefit plan to a defined contribution plan. Doing so requires the city to address its perpetually deferred pension debts now rather than later, which will ultimately save taxpayers from rising debts and interest payments. It also averts a crisis rather than waiting for one.