June 23 (Bloomberg) -- Atlanta’s City Council may begin closing a $1.5 billion pension shortfall by reducing retirement pay for current employees and allowing them to contribute to a 401(k)-style plan.
The proposed benefit reduction, which may come to a vote today, is among several changes under negotiation. An alternative measure would increase employee pension contributions while keeping existing benefits.
Atlanta’s response to what Mayor Kasim Reed has called a crisis mirrors the situation in cities and states across the county. Benefit changes in the ninth most-populous city may help up the ante for public workers elsewhere. Employee lawsuits followed after Colorado, Minnesota and South Dakota changed cost-of-living adjustments to retirement checks.
“We have a $1.5 billion unfunded liability that’s poised to grow exponentially,” Peter Aman, the city’s chief operating officer, said in an interview in his office last week. “It will become untenable.”
Negotiations among council members and union representatives continued into last night, Reese McCranie, a spokesman for Reed, said in a telephone interview.
“This process is fluid,” he said.
Changes are necessary to keep Atlanta’s pension liabilities from ballooning further, in an effort to save about $15 million for the year beginning July 1 and $20 million in fiscal 2013, according to Aman.
“We all know the impact of not acting on pension reform,” Yolanda Adrean, a council member, said in a statement. “The inability to offer raises, the inability to borrow money and the impact on services for our citizens. These are extraordinary financial times.”
Moody’s Investors Service rates the city’s credit Aa2, the third-highest investment grade, while Standard & Poor’s gives it an A, sixth highest.
Police and fire unions, which agreed to raise employee retirement contributions to 13 percent of salary from 8 percent, want a compromise, said Jim Daws, president of the Atlanta Professional Fire Fighters Association.
“Our hope is that they come up with something,” Daws said. “Everyone knows what our members have offered here in Atlanta. It’s almost unprecedented.”
U.S. municipalities and states face a $3.6 trillion gap between pension assets and what they’ve promised retirees, according to an October study by Robert Novy-Marx of the University of Rochester and Joshua Rauh at Northwestern University.
Amid the Crash
The strain of funding pensions intensified as falling markets lowered investment returns during the 18-month economic recession. Asset values declined to about 76 percent of obligations in 2009 from about 82 percent in fiscal 2008, according to data compiled by Bloomberg.
Atlanta’s general employee pension is funded at 59.4 percent, its fire pension at 57.6 percent and its police pension at 58 percent, according to a Moody’s report in September.
The pensions were more than 90 percent funded in 2000, said Aman, the city COO. The City Council added sweeteners to the plans in 2001 and 2005, raising the size of most workers’ retirement checks and the city’s liability.
“Overnight, the contribution we had to put into the fund went up, and with the market meltdown, it just ballooned,” Aman said.
Today, every dollar of employee salary requires the city to pay an additional 39 cents for retirement, or more than double the median for the nation’s 20 largest cities, he said.
One proposal would change Atlanta’s formula for calculating benefits, delivering lower pensions than workers were promised.
The measure would close the plan to new hires, put those workers under Social Security and replace the defined-benefit plan with a defined-contribution plan for all workers. The city would match contributions up to 8 percent.
“After all these months, one of the council members has finally gotten the labor organizations, the council and the mayor in the same room together,” Daws said. “I don’t want to use the kind of language right now that can be construed as threatening.”
--With assistance from Darrell Preston in Dallas, Texas. Editors: Stephen Merelman, Pete Young
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