LR pension hit rated tops in the country

Boston College study shows taxpayers’ share biggest of 173 U.S. cities

Correction: Little Rock officials dispute a Boston College study on how much taxpayers in 173 cities contribute to public pension plans. According to the college's study, Little Rock ranks first. Little Rock officials say the study overestimated the city's portion of tax money that goes to pensions. A graphic Monday should have shown the city's figure that 11 percent of the city residents' tax revenues go to public pensions, which would rank Little Rock 22nd. The graphic and accompanying story incorrectly stated that Little Rock's figure tied it with 10th-ranked Portland, Ore.

A recent study by Boston College researchers found that Little Rock taxpayers contributed the highest share of their tax revenue to public pension plans compared with 172 other cities across the country, but city officials say the study is flawed.

According to the study, Little Rock taxpayers sent 17.6 percent of their tax revenue to public pension plans in 2010, a figure that the study’s authors say shows the total cost paid by city residents not only to city-administered plans but those of school districts and counties as well.

The study’s authors at the Center for Retirement Research at Boston College say their approach bettercaptures the full burden of public pension plans on each city’s residents than calculations that look only at those pension plans that the city controls.

But officials in Little Rock’s Finance and Human Resources departments said Wednesday that the study has some flaws, including what they said was an inflated figure for the money paid into pension plans from the city’s coffers.

Since the study’s release last month, Little Rock officials say they have had several heated phone discussions with the researchers disputing the fairness of the calculation.

Two phone messages left by the Arkansas Democrat-Gazette for Jean-Pierre Aubry, one of the study’sauthors and the center’s assistant director of state and local research, were not returned Wednesday. Aubry is the author who has dealt with Little Rock officials and discussed their concerns about the study’s methodology.

The study’s release in November came as public pensions became a larger focus of city leaders across the country because of Detroit’s struggles for relief from billions in unfunded pension obligations that have played a part in the city’s financial insolvency.

On Tuesday, a federal judge ruled that Detroit was eligible to file for bankruptcy, a move that starts the process of untangling the city’s $18 billion in long-term liabilities, which include $3.5 billion in unfunded pensionobligations, according to The New York Times.

The Boston College study, which looked at 173 cities, 421 overlapping school districts and 161 counties, didn’t examine the solvency of the public pension plans. But its authors note that “some large cities with high pension costs, like Chicago, also have seriously underfunded plans.”

According to the research, Chicago ranked behind Little Rock in the share of taxpayer revenue that goes to public pensions.

Detroit was ranked 61 in the study, mostly because the city issued bonds in 2005 and 2006 to pay off some of its pension debt up front. The move increased the city’s long-term debt and kept it from being ranked higheron the list.

In order to determine the percentages used for the rankings, the researchers used a figure called the Annual Required Contribution, or ARC. That number divides the total liability of a pension plan by the number of years actuaries have estimated it should take to pay off.

Little Rock Finance Director Sara Lenehan said that using the ARC resulted in the study overestimating the amount the city paid into pension plans.

“What we were actually paying out was quite a bit less,” Lenehan said.

She said the number is misleading because of how it includes two closed pension funds - one for firefighters and one for police - still being paid out by the city.

When the city voted to switch its public safety personnel to the state-run Arkansas Local Police and Fire Retirement System in the 1980s, employees were given the option to stay in their current plan. Those plans were closed for new enrollment, meaning any new hire in those departments would be enrolled automatically in the state-managed plan.

Over the years, as the officers and firefighters covered by the old plans retired, the payout amounts for retirees collecting benefits far exceeded any amounts being paid into the accounts.

Because those two funds are closed to new enrollment, state actuarial rules require the liability to be amortized over a five-year period. That means instead of dividing the liability by the remaining years the fund administrators expect to pay out benefits, the total amount is divided by five years when determining the Annual Required Contribution.

Little Rock spokesman Ben Thielemier said that the study’s use of the Annual Required Contribution doesn’t accurately represent what the city spent on pension funding. He said the amount used by the study’s authors inflated Little Rock’s overall ranking by about 20 places.

Thielemier said the Annual Required Contribution was $34.9 million for those two funds, while the city spent closer to $8.3 million.

Using the actual amount spent by the city on all pension plans in 2010 including the two closed plans, the current police and firemen pension plans and the non-uniformed employee plan - about $16.9 million - the Little Rock taxpayer contribution would have dropped to 11 percent. The city’s contribution would have dropped to less than 6.5 percent.

That change would have lowered Little Rock’s rank to the 22nd highest taxpayer contribution, tied with Portland, Ore.

The researchers wrote in the study’s methodology explanation that they purposefully used the Annual Required Contribution instead of the actual payout numbers.

“The ARC is included in the following contributions because it provides a better measure of the burden than the actual contribution,” they wrote.

Lenehan said the city will merge the old police fund with the Arkansas Local Police and Fire Retirement System next year, which will lengthen the amortization time and reduce the Annual Required Contribution for that plan.

The city also will increase its non-uniform employee retirement benefits starting Jan. 1. The city’s contribution to that plan will increase from 7 to 9 percent - an increase of about $731,000 annually. About 900 city employees belong to the non-uniform plan.

Employee contributions will increase from 3.5 percent to 4.5 percent of their salaries.

“We have had actuarial studies done every year, and they have shown that the current level of benefits are fully supported by the projected cash flow, so there is not a risk of insolvency,” Lenehan said.

Even with the increase in contributions, city officials do not expect the percentage of taxpayer money funding employee retirements to rise.

The bumps in the pension plans were only approved as part of a 1 percent citywidesales-tax increase that went into effect on Jan. 1, 2012.

The sales-tax revenue has not been increasing at the rate city officials had projected, but the tax has bolstered the city’s coffers by more than $46 million during the first year of collection.

The city designates $1 million annually from the salestax increase to pension plans and evenly splits it between the closed police and fire pension funds. Each fund also receives a 1-mill annual property tax that the city collects.

City officials built several stopgaps into the new non-uniformed pension plan to prevent it from becoming underfunded, including a requirement that the plan be at least 80 percent funded before a cost-of-living increase would be considered.

Staff also used a conservative estimate for the projected rate of return on its investments - 6.5 percent compared to the average 7.75 percent used by other cities with similar plans. The city’s 10.83 percent rate of return for 2012 far exceeded that estimate.

The Boston College study also includes the portion of taxpayer dollars contributed from city residents to both the county and school districts when considering the rankings.

County employees are required by the State of Arkansas to be members of the Arkansas Public Employee Retirement system.

Pulaski County Comptroller Mike Hutchens said the county’s contributions to those pensions come from different accounts, depending on the employee’s department.

Hutchens said all of those accounts are funded mostly by sales tax and property tax millage collected throughout the county, including inside Little Rock city limits. Little Rock’s population makes up for a little more than half of the county’s population, according to 2010 Census numbers.

Several employees of the Little Rock and Pulaski County Special school districts also belong to the public employee retirement system, but most of them are enrolled in the Arkansas Teacher Retirement System.

The Boston study included contributions to those school districts’ pension plans because they collect property taxes from Little Rock residents.

The study showed slightly more than 50 percent of the millage tax collected from city residents by those districts went to pension plans.

The Pulaski County Special School District collects 9 percent of its millage tax from Little Rock residents. The Little Rock district’s property tax is collected entirely from city residents.

In the study, the authors said their figures should be considered a “preliminary foray into newly collected data.”

“The data … have not been reviewed by the individual cities. This release is likely to provoke responses that will lead to further refinement of these estimates,” they wrote.

Thielemier said city officials hope their objections will result in just such an adjustment.

“Unfortunately the researchers never contacted the city before the report was released, and we’ve since been in contact with them to dispute the ranking,” he said.

Northwest Arkansas, Pages 7 on 12/09/2013

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