Memphis has underfunded its city-run pension plan since 2009, putting the cash toward its budget. Tennessee lawmakers want to attach a cost to that kind of scrimping on retirement expenses.
Legislators are poised to take up a bill this week requiring cities, school districts, utilities and other entities with their own pension plans to contribute 100 percent of what actuaries say is needed to meet annual obligations. If they don’t, Tennessee will do it for them, diverting tax revenue the state disburses to municipalities.
The measure may mean hard times in the home of the blues. Memphis, the state’s most-populous city, has been paying less than 25 percent of the actuarial guidelines. It would be responsible for an additional $70 million yearly — equivalent to 11 percent of its budget, or half the annual cost of its fire department. Moody’s Investors Service lowered its outlook on the city to negative in December, partly because of the strain from retirement benefits.
The proposed law “gives us a sense of urgency,” said George Little, chief administrative officer for the city of 655,000 along the Mississippi River. “We know that we have to deal with the situation sooner rather than later.”
Almost five years after the recession, the former home of Elvis Presley joins cities nationwide weighing payments to retirees against the cost of providing services to residents. The gap between the payments that states and localities have promised and available funds exceeded $1 trillion as of fiscal 2012, according to the Pew Charitable Trusts.
Keith Brainard, director of research in Georgetown, Texas, at the National Association of State Retirement Administrators, said he hadn’t heard of a measure like the Tennessee proposal that includes a provision for the state to intercept tax dollars to support pension funds outside of its control.
“This is a fantastic idea,” said Adam Weigold, who manages a $38.5 million Tennessee muni fund at Boston-based Eaton Vance Corp. “There are some issues that come up when you are forcing a muni to make a payment it can’t afford. But, properly implemented, this is good news for bondholders. These are required payments.”
Independent local pension systems make up 94 percent of the nation’s 3,418 state and local plans and about 10 percent of membership, according to Census data. They exist in all but seven states, and in many of the biggest cities, including New York, Los Angeles and Chicago.
The Tennessee measure would take effect next year and be phased in over five years. The Senate passed the bill unanimously in February, and it’s on this week’s agenda for the House.
The bill was championed by Treasurer David Lillard, a former county commissioner who said he understands the pressure on local governments to use pension contributions to patch budget holes. Lillard’s spokesman, Blake Fontenay, said he expects the house to approve the measure.
“The hallmark of just about every distressed pension plan in the country is that they at one time or another reduced their annual payments,” Lillard said.
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