Mounting costs have Columbia pondering changes to police, fire pension plans

Mayor will form task force to deal with issue affecting cities nationwide
Thursday, September 9, 2010 | 3:36 p.m. CDT; updated 6:08 p.m. CDT, Thursday, September 9, 2010
Fire Captain Jan McCrary leans against an engine for a portrait on Aug. 30 at Columbia Fire Station No. 2 on West Worley Street. McCrary is just one of many who will be affected by lower pensions. "It's not just a fire issue; it's a whole city employee issue," he said. McCrary also serves on the board overseeing the firefighters' pension plan.

COLUMBIA — Brandon Crites is a big guy.

The officer's athletic build seems barely to fit inside the cramped interview room at the Columbia police station. In his workout clothes, Crites talks about his past as a basketball player.


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He gave up his dream of playing overseas to work at the Columbia Police Department and stay near his hometown of Hallsville. Now, a little less than two years later, Crites, 23, feels uncertain about his future with the department.

He's worried about the police and firefighters' pension fund.

The financial market dive in December 2007 has caused the fund to get a lower return on investments than expected. To make up for this, the city has been forced to contribute more to the pension plans. And those contributions will continue to go up unless the city makes significant changes.

"You never know what's going to happen out there," Crites said about his life as a police officer. "Now you don't know what's going to happen on the other end."

This is a national problem, and according to those familiar with the pension fund issues, Columbia has done better than many other places such as Illinois, which is faced with selling its assets to pay for benefits.

This isn't happening in Columbia, but Crites is still angry, and he's nervous that he will not be able to retire after 20 years and become a basketball coach, as he planned.

Although Crites is frustrated, the pension plan has seen no changes. The anxiety he shares with other young officers and firefighters shows the wide impact any changes would have on the police and fire departments.

Mayor Bob McDavid said a task force will be announced soon to deal with this issue.

"We got a problem," he said. "It will be addressed head-on."

How does the pension fund work?

One inescapable fact about pensions is their complexity. Here's a primer on how they work:

A police officer or firefighter contributes some of his or her paycheck into a single fund that covers two plans, one for each department. Police usually put in 3.5 percent; firefighters contribute about 16 percent.

The city also puts money in the fund, but its contribution varies depending on how much money is needed to keep the funds on solid financial footing.

City Treasurer Bette Wordelman invests the money in the pension fund in a roughly equal combination of stocks and bonds. The profit, along with contributions from the city and from police and firefighters, pays for retired members' benefits.

The underlying philosophy of pension funds, Finance Director Lori Fleming said, is to keep contributions relatively stable over the long haul. But short-term and sometimes dramatic fluctuations in financial markets can make that difficult.

The police and fire fund uses several "smoothing" techniques. Many involve making assumptions about a plan's members or about how the economy will perform.

One of the most important assumptions deals with the financial markets' performance. Until recently, the city assumed the pension fund's investments would bring an 8 percent return every year. So, if the plan invested $100, it would expect $108 back.

The Finance Department uses several other assumptions  provided by third-party consultants, including:

  • When employees will retire and how old they will be when they do it.
  • The rate of inflation in future years and its affect on employees' wages.
  • An age when members and retirees will die.

These assumptions help the city predict how much money it needs now to cover future benefits. If the assumptions are off, the city might invest more or less than it needs.

A third party reviews the assumptions every few years, and the city tweaks them to better fit reality. Since these are predictions, Fleming said they are never 100 percent accurate.

Over the past 10 years, the city's investments earned only about 5 percent. Although the amount might seem small, it's a big difference when looking at the funds' $88 million size. Last year, it paid out almost $6.5 million in benefits to 239 people.

"When we're expecting 8 percent returns and we're remaining basically flat — that's a big part of why we're in the dilemma we're in," Wordelman said.

This difference means some future retirement benefits the city will owe are unfunded, and the city has to contribute more money as part of its legal obligation to keep the fund financially sound.

These unfunded benefits, or unfunded actuarial accrued liabilities, are not a bad thing on their own. The city knows it will have to pay a certain amount of benefits when officers and firefighters retire. But that's a couple of decades down the road for the youngest officers, so the city has time to pay off what's now considered "unfunded."

It's similar to a home mortgage. No one expects homeowners to pay off a mortgage instantly. Instead, they plan to pay it off over a number of years. The main difference between the pension fund and a mortgage, Fleming said, is pensions are usually not expected to have enough investments to fully pay for all of the benefits they will owe, since new members constantly join the plans. In 2009, about 280 police officers and firefighters paid into the pension fund.

These unfunded benefits become a problem when they start to rise. This has happened in Columbia over the past decade, with unfunded benefits growing dramatically in both plans.

Fleming said the stock market downturn amplified existing problems with the plans' other assumptions about its employees. Because of these incorrect assumptions and poor investment experience, the plan needs more money at a time when the city has little to spare.

"If we had these increasing contributions in a time where the resources weren't so scarce, the urgency of getting the change wouldn't be quite as much as it is now," Fleming said.

Because almost everyone views ever-increasing city contributions as an impossible long-term solution, major changes to the plan appear to be the only way to keep the pension funds solvent.

Unpopular options

Jan McCrary doesn't look very old. At 44, the lifelong firefighter is young by some standards. But because he works for the Columbia Fire Department, he'll be able to retire in about three years.

With two boys at home, including one approaching college-age, McCrary isn't interested in quitting just yet.

"Oh, I'm too young to retire," he said, laughing. "If I do retire from here, I have no idea what I'd do."

McCrary, a fire captain at Station No. 2, also serves on the board overseeing the firefighters' pension plan. Usually, the board hears reports about investments and listens to appeals from firefighters about their benefits.

Now, McCrary has a chance to weigh in on any changes to the pension fund.

"This is not a good time to be on a pension board," he said.

Even though coming changes won't affect him, McCrary remains nervous about the future of the firefighters' fund and changes that might occur.

City Manager Bill Watkins outlined some of these changes in a June 30 memo to the City Council:

  • Raise the contribution rate for officers and firefighters.
  • Reduce the benefits the plan offers.
  • Close the current plans and offer new employees defined contributions. Under this option, both the city and employees would contribute money, but it would be up to workers to invest it in something, such as a 401(k) plan.

Fleming emphasized that these are just a few options and that it's too early to know what will happen to each plan.

McCrary hopes the benefit plan stays the same because it's a good recruiting tool.

"If you talk to a firefighter, they can't live on what they make here," he said. "A majority of firefighters have to have a part-time job just to survive."

A starting firefighter in Columbia makes about $34,000.

With a reduction in benefits, or an increase in the contribution rate, McCrary thinks fewer people will want to work at the Columbia Fire Department.

He also worries the retirement age could go up. He describes firefighting as a young person's job. Packing 50 pounds of equipment on your back inside a burning building is hard work, McCrary said.

That helps explain why the U.S. Fire Administration reports heart attacks killed more on-duty firefighters than anything else in 2008.

"You don't want 50-year-old guys climbing on trucks," he said.

It's too early to know what changes will happen, Fleming said. Although Watkins is urging changes within the next year, work on the overall budget for fiscal 2011 has delayed progress.

The City Council plans to pass the budget during its Sept. 20 meeting. That's when McDavid said he also will announce a new task force to study the pension plans. He is forming the task force now but would not comment on who he will appoint.

Meanwhile, the Columbia Police Officers Association formed a pension committee on this issue several weeks ago, Officer Lloyd Simons said. The committee has met a few times and plans to survey members.

McCrary remains realistic, but the fire captain has an idealistic touch to his voice.

"Hopefully the economy goes up, investments turn around, and everything is just Zen," he said.

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John Schultz September 9, 2010 | 6:06 p.m.

How much does the city put in during "good" times? Do firefighters and police officers get a certain percentage of their final salary when they retire and start drawing a pension?

(Report Comment)
Will Guldin September 10, 2010 | 9:37 a.m.

Hi John,

The city, by law, has to put in enough money to keep the fund financially sound. That means putting in more money when the assumptions are off and when the markets aren't doing as well.

In "good" times, investments make much greater returns than the city's recent assumption of eight percent. The fund needs smaller contributions from the city as a result. That's my understanding of it.

When police officers and firefighters retire, they get a percentage of their highest average salary over a course of three years.

Both police officers and firefighters can retire after 20 years on the job. They earn additional benefits for working five years past this 20 year mark.

Once they reach 25 years, police officers and firefighters can either retire or enter the Deferred Retirement Option Program.

In the DROP, someone works up to five years while drawing retirement benefits. These benefits are set aside for the employee until they exit DROP. They still pay into the pension fund while they are in DROP.

I hope that helps John. If you have any more questions, feel free to ask.


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