Time for Baltimore to "Pull a Vallejo" and Declare Bankruptcy

A crisis over police and fire benefits in Baltimore, has reached boiling temperature.

Please consider Baltimore police, fire pension costs could double next year.

An unusual pension benefit for police and firefighters could cost Baltimore $164.9 million next year, nearly double what the city is now paying and a figure that the city's finance director says taxpayers cannot afford.

After years of calls for pension reform, board members who oversee the nearly $2 billion system said their Tuesday vote that passes the whopping bill on to City Hall is a message that the fund is close to a breaking point and needs attention.

Edward J. Gallagher, the city's finance director, said the city "certainly cannot afford" to pay the full commitment due in July. "It seems that our concern has really come home to roost."

The new retiree funding request is twice as large as the $81.9 million the city paid to the fire and police pension fund last year.

If the pension system is not altered before the bill comes due, needed cash could come from raising the city property tax rate 11 percent, or "significant reductions across all agencies, including public safety," Gallagher said. Mayor Sheila Dixon, who has long sought reductions in the city's tax rate of $2.27 per $100 in assessed value, has said both options are unacceptable.

The extra cash is needed largely to shore up a part of the pension program called a variable annuity. The benefit is similar to a cost-of-living increase, but is tied to positive stock market returns. When the market goes up, some of the extra money is given to retirees in the form of a permanent pay increase, an uncommon benefit that has made Baltimore's costs grow. In most pension plans, extra money is plowed back into the asset funds to make up for the bad investment years.

The Dixon administration in March recommended replacing that part of the retirement benefit with a straight cost-of-living increase - a change that would have likely headed off Tuesday's vote. However, the unions objected, saying the proposed COLA was too low.

The administration withdrew that plan and offered a new proposal to suspend the variable benefit, with the idea that some type of COLA would be reinstated later as part of a larger pension reform effort.

Unions object to that plan too, and there has been no action on it.

The market value of the fund's assets has fallen to 50.2 percent of what is needed to pay out all benefits. Last year, it was 89.4 percent funded.

Baltimore's Pension Plan Bankrupt

It's time for Baltimore to face the facts. The pension plan is essentially bankrupt. It is grossly unfair to taxpayers to raise taxes one cent to pay for this monstrosity.

My recommendation for Baltimore is to
1) declare bankruptcy
2) privatize the fire department

The greed of the unions is simply unconscionable. It's time for Baltimore to "Pull a Vallejo". Please see Judge Rules Vallejo Can Void Union Contracts for a synopsis of the situation in Vallejo, California.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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