Atlanta Faces Plateful of Pension Reform Choices

Atlanta is in deep trouble over pensions that consume ever-increasing portions of the city's budget. The Business Chronicle discusses a plateful of pension reform choices that Atlanta is considering.

The Pension Review Panel wrapped up a year-long effort by laying out alternatives from a simple reduction of the maximum cost-of-living adjustment to scrapping the retirement system altogether.

The COLA change would save the city $5 million to $10 million a year and reduce its long-term pension obligations by $180 million.

On the other extreme, abolishing the retirement system would save up to $60 million annually and slash long-term obligations by up to $640 million.

Whatever choice the city makes, something must be done to reduce the cost of a pension system that is taking up nearly 20 percent of Atlanta�s annual budget and is saddling the city with an unfunded accrued liability of an estimated $1.5 billion, Mayor Kasim Reed said.

The Pension Review Panel also found:

• Over the past 10 years, Atlanta�s pension liability increased $650 million due to poor investment performance.
• Atlanta contributes 39.1 percent of each employee�s salary toward pension benefits, while its peers contribute 20.8 percent.
• Atlanta�s pension program is funded at 53 percent compared with the national benchmarks of 80 percent of the pension commitment being funded.

Digging out of a Deep Hole

The only plan that will work in the long haul is killing defined benefit pension plans entirely. Atlanta assumes its pension program is funded at 53 percent. I strongly suggest it is 53% funded by the same actuarial madness that says Illinois pension plans are 50% funded (smoothed returns and 8% annualized future returns).

For a look at state pension plans, please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

That report says Illinois is 29% funded. The state say 50%. Laws in Congress on sound actuarial processes for states will show 29%. The reality is smoothing is a fraud and 8% annualized returns are not going to happen.

Illinois pension plans are in aggregate only 29% funded. I suspect Atlanta is in the same boat. At least Atlanta is discussing the issue. The only thing Illinois does is raise taxes.

To get out of a hole the first thing you have to do is stop digging. Atlanta needs to kill defined benefit pension plans going forward (capping all accrued benefits) and scrap COLAs for existing pensioners as well.

Anything else just kicks the can down the road, making the problem worse in the meantime.

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