A Greater Baltimore Committee task force is calling for “swift and meaningful” reforms to Baltimore City’s fire and police pension system to avert a pension fund shortfall that would become unsustainable for the city’s government.
An executive summary released Feb. 24 by the GBC includes recommendations to stabilize the rate of benefit growth, establish defined retirement service and age requirements, increase employee contributions, and adjust the way benefit levels are calculated upon retirement.
The GBC task force also calls for terminating provisions of an optional personal retirement savings plan now offered to police and firefighters who have 20 years of service that was intended to enhance retention of police and fire employees.
In order to maximize pension fund assets, the task force recommends consolidating pension assets into a single “tightly managed” fund, and expanding the pension board to include more members with experience in finance, budgeting and asset management.
Additionally, the task force calls for more transparency through regular meetings between the pension system board of trustees and City Hall.
GBC president and CEO Donald C. Fry, who chaired the task force, released an executive summary of recommendations after briefing city leaders, pension managers, and police and fire union officials. A full report with complete details of the task force’s findings and recommendations will be issued soon.
If all of the recommendations were adopted, the city’s projected FY 2011 fire and police pension contribution of $166 million could potentially be reduced by as much as 50 percent, Fry said.
The GBC task force has been studying the pension fund’s fiscal challenges since July, after city leaders asked the regional organization of business leaders to conduct an independent third-party examination of financial challenges facing the fund, which lost 21.9 percent of its assets in the recession.
“From the outset, the task force has been committed to a search for solutions,” said Fry. “We focused on developing recommendations that are fair, equitable, creative, and sustainable.”
The 20-member task force was comprised of finance managers and accounting, actuarial and benefits experts from companies that are members of the GBC.
Key recommendations in the executive summary are:
- Replace current annual “variable benefit” increases tied to fund’s investment earnings with a cost-of living calculation tied to Social Security increases with a cap of no more than 3 percent annually.
- Establish defined service and age requirements that determine eligibility for pension benefits. For instance, there is currently no minimum age requirement for pension eligibility once a plan member completes 20 years of service. The task force recommends that retirement eligibility be based on some combination of age and service equaling 75 years (Rule of 75).
- Increase employee contributions to the system from the current 6 percent to no more than 10 percent.
- Revise the formula for calculating average final compensation. Currently, benefits are based on the average compensation for the last 18 months of service. It is common for “multiple and significant pay increases” during that period, the task force found. It recommends increasing the number of months upon which the final compensation calculation is based.
- Discontinue the system’s “Deferred Retirement Option Plan 2,” which gives firefighters and police officers with 20 years of service the option to, for three years, effectively channel their pension contributions into a personal retirement savings account that earns 5.5 percent annually until the member’s last day of employment.
- Realign the funding structure that supports the city’s fire and police pension system. The task force recommends “marshalling of pension fund assets into a single, tightly-managed fund.”
- Re-structuring the pension system’s governance. Solutions to the pension system’s problems “depend on experienced, effective, long-term decision-making” the task force concludes. It recommends expanding the pension Board of Trustees to include more financial experts and broadening citizen representation on the board.
“The members of the fire and police pension system provide valuable services for the citizens of Baltimore,” said Fry. “This dedication and commitment to the city needs to be recognized in a fiscally prudent fashion.”