Birmingham needs to find a way to add an extra $12 million each year over the next 30 years into its pension fund for city workers to ensure it will meet its long-term commitment to retirees, said an advisor to Mayor Randall Woodfin.
This unpaid advisor, Daniel Coleman, who now serves as the president of Birmingham-Southern College, discovered the city’s nearly $1.4 billion Retirement and Relief Pension System was underfunded by $378 million while serving on Woodfin’s transition team about a year ago.
“It’s not the end of the world because we think we can fix it, and make sure it is solid for everyone,” he said during a special-called work session before the Pension Board of the City of Birmingham Retirement and Relief System on Nov. 27.
If the city doesn’t fix the problem, though, the fund could run out of money in 30 years, according to city officials.
A standing room-only crowd of current and former city workers attended the recent work session to hear about possible changes to their pension.
Many cities are in a similar pension predicament.
According a survey by the National Conference on Public Employee Retirement Systems, the average funding level for public retirement systems in 2017 was 71.3 percent. The survey was based on the responses of 164 public retirement funds.
Birmingham’s Retirement and Relief Pension System is funded at 73 percent, according to the city.
According to the National League of Cities, 74 percent of cities started pension plan reforms between 2009 and 2016. The most common reform at 33 percent was increasing employee contribution rates.
The majority of cities that responded to a NLC survey, 65 percent, said their pension plans are administered at the state level rather than having their own plan.
Coleman said there’s only four ways to fix the issue: cut the costs of running the pension; increase the payments people make into the pension; increase the payments that the city makes into the pension; and decrease the benefits.
Woodfin, though, asked that the cost of employees not be increased, he said.
Coleman said the city could save about $4 million a year by moving the management of the pension plan to the Retirement Systems of Alabama (RSA), the state pension system. Morgan Stanley currently manages the city’s pension and charges about $4.6 million a year to do it.
The city also needs to increase its contribution to the system by $4.4 million each year, he said.
Also, to reduce costs, Coleman suggested reducing pension benefits for current city workers under the age of 50 by 7.5 percent. He also suggested benefits for newly hired general employees be decreased by 18 percent. Decreasing benefits for new hires in the police and fire departments by 15 percent was also proposed.
The reduction in benefits would save about $3 million, Coleman said.
“If we do these things, working with our actuaries, we believe we can solve this problem,” he said.
Coleman said current retires’ pension “is in good shape,” and won’t be affected by the underfunding or by any possible changes to the pension plan.
Members of the pension board discussed possible solutions to the underfunding during the recent work session. Woodfin said he is “wide open” for solutions.
Board member Marty Leonard said the city’s pension investments are doing better than those in the RSA and didn’t know if he would support moving the pension fund to the state system.
He said the solution to the underfunding won’t be solved in a day. Leonard said he city could consider some minor taxes, such as increasing lodging taxes, that could go into the pension fund. He also suggested gradually increasing its funding over time.
Board member Dale Wyatt, who is a battalion chief at the Birmingham Fire and Rescue Service Department, said benefits for current employees shouldn’t be changed.
“Many of us here have turned down opportunities to leave this place for other departments with less workload and higher pay, because I know at the end of the road, I have this pension coming,” he said. “To change my benefits midway through the year is unfair.”
According to the city of Birmingham, the city’s pension was fully funded in 2001. But, that same year, the city decided to increase the pension benefits for city employees.
Two years later, in 2003, the city did not keep up with the contributions necessary to meet the needs of those increased benefits. Losses in investments during the nation’s financial crisis in 2008 created greater declines in the value of the pension fund.
The pension board will discuss and possibly vote on changes to the pension fund at its next meeting set for 3 p.m. on Dec. 12 at Birmingham City Hall.