Retirement funding method comes up short
CHARLESTON, W.Va. - In the early 1990s, most West Virginia cities wanted to reduce their payments to police and firefighter retirement funds.
The Legislature granted the cities' wish. State lawmakers gave cities a reprieve. But now retirement bills are coming due with vengeance, according to a recent study of city pension plans.
"It was only a way - to use an old, old term - to kick the can down the road," said Charleston City Treasurer Victor Grigoraci.
Cities as large as Charleston and as small as Welch must find $976 million in coming years if they want to keep promises made to their retiring firefighters and police, according to the study by Michigan-based Gabriel, Roeder, Smith & Co.
Cities that took the cheaper route 20 years ago face the daunting task of keeping retirement funds solvent after years of failing to do enough to shore them up. A big problem is they didn't invest enough money upfront, so they haven't been able to take advantage of two decades of market growth.
To be considered fully funded, a retirement fund needs to have enough money invested to cover costs as the benefit checks are cut over time. All told, retirement funds for police and firefighters are only 17 percent funded in West Virginia.
But cities fare differently based on the choices they made 20 years ago.
At the time, cities were struggling to pay bills. So, the Legislature let cities choose one of two ways to fund police and firefighter retirements.
The first method was the "standard" method. It's simple: Come up with a 40-year payment plan and set aside enough money each year to guarantee retirement funds are fully funded within 40 years of 1991.
Under that plan, if cities lost money in the market one year, they had to put in more money the next.
The plans of cities that made this choice are now 44 percent funded, according to the study. And they are on target to be fully funded in 20 years.
Even struggling cities that went this route have well-funded pension plans. The beleaguered McDowell County seat of Welch has a police pension plan that is 68 percent funded.
But most cities didn't do this. They took the other fork in the road.
They went with an "alternative" funding method. Cities that opted to try it - and most did, including Charleston - simply had to increase pension payments by 7 percent each year.
This was initially cheaper than the standard plan. Cities were able to "pay less into their plan" than they were projected to need, according to Blair Taylor, executive director of the newly created state Municipal Pensions Oversight Board.
The alternative method also wasn't cheap in the long run: The 7 percent annual increases amount to a doubling of payments every decade.
All told, the cities that went with the alternative method now have pension plans that are 22 percent funded - half as well funded as the cities that went with the standard plan. In 30 years, only eight of the 32 pension plans are projected to be fully funded.
Charleston, which initially took the alternative method, now has a police pension plan that is only 8 percent funded and a firefighter pension plan that is only 5 percent funded.
Gabriel, Roeder, Smith & Co. made a blunt point about the alternative method in its recent report. The firm said the alternative funding method adopted in the 1990s wasn't guaranteed to produce a "reasonable" payment strategy.
"Many of the funds using the Alternative method are very poorly funded and will require a significantly higher level of contributions in the near future in order to bring the funded ratio to a more secure level," the report said.
And that doesn't tell the whole story: Charleston and Huntington recently went to the Legislature to get a third and fourth option for funding their pension plans. Huntington is trying one of these funding plans, and Charleston is trying the other.
While each of the two new plans is meant to ensure the cities' retirement funds remain solvent, it's unlikely cities can continue without making changes.
They'll either have to cut benefits to firefighters and police, raise taxes on everyone or get a bailout from the state.
Charleston's current leadership team has been struggling to shore up these retirement funds. But, in some respects, they have to plug holes that were left by their predecessors.
"If this administration had been in place 10 years ago, 15 years ago, that would have been awesome," Taylor said.
On the other hand, it's not as if cities didn't face trade-offs based on the decision they made in the early 1990s.
Cities that went with the standard plan were forced to use money they could have spent on roads, water and other services to pay down pension costs. Charleston, by keeping its pension payments low, presumably had more money freed up for that kind of spending.
Weighing all that may be an impossible task, Grigoraci said.
In West Virginia, 31 cities have 53 separate firefighter and police pension plans. Some cities have a police department but not a fire department.
Of those 53 plans, there are 14 standard pension plans, 32 alternative pension plans and seven pension plans using one of two new funding methods created by the Legislature.