Lessons Learned from City Pension Deficits ; from San Diego to Houston to Milwaukee, Cities Scramble to Balance Stock-Market Losses and Retiring Employees

By Randy Dotinga Correspondent of The Christian Science Monitor | The Christian Science Monitor, August 5, 2004 | Go to article overview

Lessons Learned from City Pension Deficits ; from San Diego to Houston to Milwaukee, Cities Scramble to Balance Stock-Market Losses and Retiring Employees


Randy Dotinga Correspondent of The Christian Science Monitor, The Christian Science Monitor


Back in the 1990s, big American cities offered generous pension plans to their workers, confident that a booming economy would cover the high costs.

Things didn't turn out that way. Now, even as some employees anticipate retirement payouts totaling $1 million or more, municipal meltdowns have begun.

Here in San Diego, the nation's seventh-largest city faces an estimated $1.2 billion pension deficit. In Houston, the shortfall is $1.9 billion, and voters in May bailed out the city by allowing it to renege on pension promises. And in Wisconsin's Milwaukee county, similar pension problems have claimed the political careers of seven county supervisors.

There are plenty of pointing fingers ready to blame greedy labor unions, clueless politicians, and inept accountants. A rash of federal investigations suggests that even some government players may be crooks.

But observers say there's good news amid the bad. The administrators of many municipal pension plans are learning from their scandal-plagued counterparts, and reformers hope to develop new laws to prevent future financial disasters.

If municipal employees keep their jobs amid budget cutbacks, news reports suggest that hundreds of them will get huge windfalls upon retirement.

Consider a hypothetical 40-something municipal employee making $40,000 a year in Houston. Under the city's pension plan, she could retire at age 65 and get annuities totaling $2.7 million, according to Joseph Esuchanko, a Michigan actuary. "It was very possible for a municipal employee to retire and have income greater than when he was working," said Mr. Esuchanko, whose calculations shocked the Houston city officials who hired him.

In Wisconsin, the Milwaukee Journal Sentinel calculated that the pensions of top Milwaukee County executives would grow as much as 253 percent under a plan approved in 2000.After a scandal broke in 2002, seven county supervisors were recalled and the chief executive resigned.

Like San Diego and Houston, Milwaukee adopted a pension option known as a Deferred Retirement Option Program, or DROP. The options allow workers to divert money that would have gone into their pension benefits into special accounts, sometimes with a guaranteed rate of return. Upon retirement, the workers can take the money from their DROP accounts as a lump sum and continue to receive checks for pension funds they earned before entering DROPs.

"They're a flexible tool to encourage retention of employees who were valuable to the organization," says Nick Greifer, manager of policy analysis with the Government Finance Officers Association. …

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