Reed can’t afford” to lose pension showdown”

Shortly after taking office early last year, Mayor Kasim Reed warned Council members that Atlanta’s pension crisis was worse even than he had indicated in his dire campaign speeches.

“After we’d fired everyone we could fire and still call ourselves a government,” he said in typically blunt style, “this would be a city that provides some police service, some fire service some trash pickup — and pays pensions.”

In the months since, Reed has mounted a full-court press for a reduction in pension benefits, resulting in the current showdown with the police and firefighter unions that will ultimately be decided by the Council — and likely upheld or rejected by a judge.

But whether you view the mayor’s pension proposal as much-needed reform or the “ultimate betrayal,” as Jim Daws, president of the Atlanta Professional Fire Fighters Association, famously dubbed it, the smart money would seem to be on Reed to prevail.

Not only does the mayor have untapped leverage and incentives he can use on reluctant Council members, but he has additional reserves just across the street in the form of a Legislature that has the power to rewrite state law — even to the point of wiping out retirement benefits that city workers have already accrued.

For now, of course, the administration is talking only about future benefits for current employees and new hires. Boiled down to its basic points, the mayor’s argument is this: For every dollar the city of Atlanta pays in employee salary, it must stash away 39 cents to cover retirement benefits. The national average for cities, Reed’s office says, is about 17 cents per dollar. To help the city remain solvent, Reed proposes that employees increase their own pension contributions from the current 8 percent of salary to 14 percent, which he maintains is closer to the standard rate and would take some of the burden off the city budget. New employees will also be given the option of sticking with Social Security rather than joining the city’s pension system.

Perhaps most important, the administration wants to shift from a “defined benefit” plan, in which the city guarantees a specific retirement payout, to a “defined contribution” plan similar to most private-employer 401Ks that stipulates how much money the city is required to put in its pension fund but doesn’t obligate it to make up investment losses. In other words, the city doesn’t want to be on the hook when the stock market takes a tumble.

The mayor has laid out two proposals. The early reaction from Council, according to Chief Operating Officer Peter Aman, has been that Option 1, which sharply reduces the city’s contributions, may be too harsh, while Option 2, which is more generous, may not go far enough to reduce the city’s red ink.

Last week, the Council took two notable pension-related actions, one largely symbolic, the other hugely consequential. In a clear message to Reed not to keep pushing for a decision before the June 30 deadline to approve the 2012 budget, the Council resolved to enact pension reform by September, give or take a few months. But Council members, ironically, also heightened the urgency for such a decision by voting to close amortization on the pension fund, a move that, while more fiscally responsible in the long run, will cause annual pension payments to spike in the short-term.

During the height of the recession in 2009, in an effort to avoid more layoffs and cuts to city services, the Council opted for an open amortization for pensions, a measure similar to an interest-only home loan. The city saved $12 million in pension payments that year, but didn’t end up contributing any principal toward its pension fund. Mayor Reed has called the arrangement “worse than a sub-prime loan” and, last week, finally managed to persuade the Council to reverse itself.

The result is that the city will begin to reduce its unfunded pension liability — which now stands at 37 percent, compared to the standard 15 to 20 percent — but the additional cost will average about $40 million a year over the next three decades. Last year, the city spent $125 million, about one-fifth of its general fund budget, on pensions.

As for the Council’s self-imposed September timetable, Councilman Howard Shook says he and a few of his colleagues hope to press for action much sooner.

“The mayor campaigned on pension reform,” Shook says. “He can’t afford to fail, therefore it’s safe to assume he won’t. So why not save ourselves some time and headache and get it over with?”

Shook isn’t being flippant; he, too, believes the city needs to rein in its pension benefits, and he’s trying to convince colleagues that the sooner the system gets fixed, the fewer city employees will need to be laid off in coming months to cut costs.

In fact, he and the mayor agree that a reduction in pensions can clear the way for the reinstatement of step pay increases for current city workers.

“To the extent that we cut pensions, we need to raise salaries,” Shook says.

Daws and other opponents to pension reform have cited legal opinions that current employees are guaranteed the pension benefits that were in place the day they started work and that it’s illegal for the city to change them.

The administration, naturally, has its own set of opinions that contradict that view, but even if the city were to lose the case in court, the mayor has one final ace up his sleeve: the General Assembly. It’s no stretch to imagine the GOP-controlled, Reed-friendly state Legislature passing a law allowing the city to declare a limited bankruptcy that would let it rewrite its pension agreements — even for retired employees.

But it likely won’t come to that. Even if the Council doesn’t act soon, it’s a good bet that public opinion will eventually force it to approve some version of the mayor’s proposal. One of the unspoken aspects of the debate is the argument that if the police and fire unions succeed in their fight to keep the current pension system in place, their victory will come at the expense of other city workers and, ultimately, taxpayers. The reasoning is that if the city has to slash its payroll to meet pension obligations, it won’t be public safety employees who are laid off, but rather the workers who cut grass in parks, collect our trash and fix broken stoplights.

Shook is certain that Atlanta’s pension showdown is being carefully watched around the state: “If the city prevails, I assume every city and county in Georgia will be lining up to do the same thing.”