After a Thursday 6th Circuit U.S. Court of Appeals ruling that could alter how cities like Knoxville handle city pension cost of living adjustment increases, a Knoxville councilman wrote an open letter to Mayor Madeline Rogero asking the city to take up the issue.
The 6th Circuit ruled that the city of Chattanooga had the legal authority to reduce the cost of living adjustment increase for city pensions as it sees fit. The adjustment, from 3 percent to 1.5 percent, would save the city millions.
In short, Nick Della Volpe said the city needs to save money where it can with its depleted pension system.
“Mayor, it is time to step up to the plate. The lawsuit boogeyman we’ve theoretically been dodging is hot air,” he wrote in reference to the fear of changing the cost of living adjustment increase rate.
“A (cost of living adjustment) benefit helps an employee or pensioner to keep up with inflation,” he wrote. “So far, so good. But a fixed rate of 3 percent has not been needed in recent years, rather it significantly exceeds the actual 1.5 to 2 percent inflation rate experienced in this economy.
“It is nothing more than unearned and unneeded pay raise to pensioners at the expense of the already over-burdened taxpayers,” he wrote. “And unfortunately it increases the ever growing pension deficit this city must fund annually.”
Currently, Knoxville has an unfunded pension liability to the tune of $175 million – which is the gap between how much the city is paying into the system with regular contributions and the amount the city expects to pay out in benefits in the coming decades.
The city will continue paying off the difference over the next 21 years. Last year’s payment toward the gap was about $12 million.
Della Volpe guessed the city pays an extra $1 million a year in the difference between a 3 percent cost of living increase and what inflation actually is.
“What gives us the right to give away your money as a taxpayer?” he asked.
According to Jesse Mayshark, spokesman for Rogero’s office, the city is reviewing the ruling, but he said Knoxville’s pension is in the city charter, which can only be amended after a city-wide referendum. The next possible referendum vote is in 2018, Mayshark said.
In a written response to Della Volpe, Rogero said the two year window will give city officials plenty of time to debate it.
She also said the city has implemented plans that are saving the city millions.
“Although Chattanooga made the pension changes you listed, it’s important to note that they retained a defined benefit plan for all current and future employees,” she said. “This was part of a compromise package of pension reform negotiated with employee groups. You will recall that in 2012 (also in negotiation with employee groups), we achieved pension reform that provides a hybrid plan for future employees and included a reduced and capped (cost of living adjustment) in addition to several other bold changes.”
Councilman Marshall Stair gave his support to changing the adjustment.
“Given we send close to $25 million every year to fund the pension, I think we are obligated to make sure we do everything we can do keep it solvent,” Stair said in an email to the News Sentinel. “I have always found it puzzling city employees receive a 2.5 percent (cost of living adjustment), which is smaller than the 3 percent (cost of living adjustment) received by retirees.”
Chattanooga, like Knoxville and many cities across the country, faced a massive pension funding deficit in 2014 and changed the cost of living adjustment increase as a way to save money.
In response, the city changed cost of living adjustment increases to 1.5 percent on average in years when the city’s pension fund is less than 80 percent funded.
The opinion, authored by Judge John Rogers, allowed the change and stated the cost of living increase is not “vested nor accrued” within the confines of Chattanooga’s city code.
Chattanooga’s original cost of living adjustment was tied to the Consumer Price Index and had a 0 percent minimum and a 3 percent maximum annual increase.