The City Council of Wilmington, Delaware rejected a recommendation by the city pension commission to increase public employee pensions for the first time since 2006 on Thursday. The recommendation would have increased annual public employee pensions between $93 and $547 a year, a modest change but an unaffordable annual cost to the city of $200,000.
Chief among the concerns behind the vote was the reality that city pensions are already underfunded. Funding ratios for the largest plans, which use a 7.5% investment return assumption, range from 47.6 to 83.5%.
The city forecasts significant increases in spending on the five city pension programs.
According to the FY 2014 budget, approved in May:
- FY 2012: Wilmington spent $14.4 million out of a budget of $147.8 million (9.72% of the budget)
- FY 2013: Wilmington spent $14.7 million out of a budget of $145.7 million (10.1% of budget)
- FY 2014:Wilmington is budgeting $15.6 million out of a budget of $145.5 million (10.69% of budget)
- FY 2015: Wilmington projects it will spend $16.4 million out of a budget of $153 million (assuming 10% property tax increase; 10.7% of budget)
- FY 2016: Wilmington projects it will spend $17.2 million out of a budget of $155 million (11% of budget)
The city, well aware of the escalating costs of public employee pensions and the corresponding diversion of increasing amounts of tax dollars to fulfill pension obligations, by rejecting the pension commission’s recommendations has at least spared taxpayers from having even more of their tax dollars funneled away from city services.
The city has previously made adjustments to the city pension system–by passing responsibility to the state.
The city shifted pension management responsibility to the state for police and firefighter pensions hired after August 1991, and in 2011, closed the city’s pension program for new general employees. All employees hired after July 2011 have been enrolled in the state pension system. According to 2013 a Pew report on city pension systems, City Treasurer Henry Supinski expects the closing of the city plan to “reduce expenses and ease the city’s administrative burden.”
While this may alleviate some pressure from the city of Wilmington, the Delaware state pension system has problems of its own.
According to a recent report by State Budget Solutions, using a fair-market valuation of tying the Delaware pension system’s investment returns to the same rate as Treasury bonds, the Delaware pension system is only 48% funded. With liabilities of $16.3 billion and assets of $7.8 billion, Delaware’s state pension system has a per capita unfunded liability of $13,324.
Long-term budgets in Wilmington and Delaware are likely to be increasingly occupied by rising pension costs, as municipal and state governments across the country are similarly dealing with. Meanwhile, taxpayers may become increasingly aware that they are paying more taxes and getting fewer services for them.
The issue of pension reform may be unpopular with some special interest groups, but for the sake of taxpayers and systemic stability, it is an issue that needs to be addressed. Simply rejecting proposals to increase pension benefits across the board and passing responsibility to larger government systems may give the illusion of sustainability for a short time, but it may actually just delay the inevitable: reform or implosion.