City Pension Reform

There is a big pension reform decision that will come before the City Council and active city employees who are members of the city pension system. This is a complicated issue and one that is not easily understood unless you are administering the pension plans or are a duly elected or appointed member of one of two pension boards of trustees. At issue is how to effect pension reform with the goal of reducing and stabilizing future employer contribution rates.

The two pension boards of trustees have studied the issue of pension reform for the past two years. They have conferred with their actuary and hired an independent consultant to study benefit changes and made recommendations for pension reform for active employees and new hires.

At the February 12, 2012 Board of Trustees meeting for the Employee’s Retirement System and the Firefighter’s Pension Fund, boards recommended tiered benefit changes for current employees and new hires and recommended these proposals be forwarded to the mayor and the city council with the belief “that the resulting plan provisions will continue to provide the City and its career employees with a sound pension plan while meeting our compensation and benefit objectives.”

The mayor didn’t agree with the boards’ recommendation on the tiered benefit level changes for new hires and subsequently made his own recommendation to close the pension plans to new hires and send them to the South Dakota Retirement System.

As a result, multiple presentations were made at the Information Meeting and the Fiscal Committee to present both sides. Presentations by the boards’ consultant, Cavanaugh Macdonald, were made at an Information Meeting.  The board asked to meet with the City Council Fiscal Committee to fully discuss their rationale and analysis for their recommendations. Representatives from the South Dakota Retirement System were invited to the City Council Fiscal Committee to make a presentation on the state retirement system’s provisions and operations.

The conflicting positions of the mayor and the two pension board of trustees have thrown the city council into a difficult position which has now created a division among city councilors.

It is not too difficult to see where councilors fall on the issue of pension reform. On the City Council Fiscal Committee, it is split 2-2. Two councilors, Jamison and Aquilar support the recommendations of the two pension boards of trustees. Two councilors, Entenmen and Karsky, support the mayor’s separate and conflicting recommendation. It has been decided that two competing recommendations from the City Council Fiscal Committee will be sent to the full council for discussion on June 19^th.

The question to ask is……Why is the mayor inserting his own recommendation contrary to the Pension Boards’ recommendations?

Two years of study by the Firefighter’s Pension Board of Trustees and the Employees Retirement System Board of Trustees does not seem good of enough for the Mayor. Has the mayor attended two years of pension board meetings, read the pension board minutes, studied the actuary’s report or the report of the independent consultant before making his own independent recommendation?

City ordinance is clear regarding the administration of the city’s two pension systems and the fiduciary responsibilities of each pension board trustee:

Sec. 35-63. Administration of system. (Employee’s Retirement System)

The authority and responsibility for the administration, management and proper operation of the retirement system and for construing and making effective the provisions of this article shall be vested in the board of trustees.

Sec. 35-125. Administration. (Firefighter’s Pension Fund)

There is hereby created a retirement board whose duties shall be to administer, manage and operate the firefighter's pension fund and to construe and carry into effect the provisions of this article, subject to such powers as are retained by the council.

Sec. 35-77. Responsibility of fiduciary. (Employee’s Retirement System)

Every fiduciary shall discharge his duties solely in the interest of the participants and beneficiaries of this retirement system, for the exclusive purpose of providing benefits to participants and their beneficiaries and with the skill, care, prudence and diligence, under the circumstances then prevailing, of a prudent person familiar with such matters and acting in a similar capacity. For purposes of this section, the word "fiduciary" means any person or entity who exercises any discretionary authority control over the management of this system or its assets, any person or entity who renders investment advice to this system for a fee or other compensation, or any person or entity who has any discretionary authority or discretionary responsibility in the administration of this system.

Sec. 35-137. Responsibilities of fiduciary. (Firefighter’s Pension Fund)

Every fiduciary shall discharge his duties solely in the interest of the participants and beneficiaries of the system, for the exclusive purpose of providing benefits to participants and their beneficiaries and with the skill, care, prudence and diligence, under the circumstances then prevailing, of a prudent person familiar with such matters and acting in a similar capacity. For purposes of this section, the word "fiduciary" means any person or entity who exercises any discretionary authority control over the management of this system or its assets, any person or entity who renders investment advice to this system for a fee or other compensation, or any person or entity who has any discretionary authority or discretionary responsibility in the administration of this system.

The mayor contradicts the recommendations of the Board of Trustees for the Firefighter Pension Fund and the Employees Retirement System and comes up with his own recommendation.  He ignores city ordinance language that clearly states the administration, management and proper operation of the retirement systems and making effective provisions of the systems is VESTED in the board of trustees.

The board members have completed their fiduciary responsibility in extensively studying the issue of pension reform and have made recommendations with skill, care, prudence and diligence. Can the same be said of the mayor?

There is a compelling argument, on the surface, that the mayor’s alternative position sounds like a good idea. The SDRS has fixed rates and lower pension benefits. In the long run, it will get the city out of the pension business, albeit 30 years or more down the road. That is fine and dandy, except that is not the complete picture. What appears to be an immediate attraction to fixed costs is just one piece of the pension reform puzzle. One must also consider the fiscal viability and cost of the unfunded liability with the remaining active employees in the current pension plans.

There is a cost impact of closing the city’s two pension plans. The city must still continue to pay for the unfunded liabilities of current plans until such time as there are no remaining current employees – for next 15-30 plus years. As the consultant stated in its report, any cost savings from reducing benefits for new hires takes many years to manifest itself and the full impact is only realized after all of the current active members leave city employment and are replaced by employees covered by the new benefit structure.

The City Council cannot take any formal action on pension reform at the council meeting on June 19^th. Any change to benefit levels must be approved by a vote of the employee membership. That is state law. That means the employees must approve the benefit changes first, then followed by the City Council.  If the employees vote down the pension reform recommendations, the issue is dead.

A split position among the City Council sends a conflicting message to active city employees who will be voting on the recommendations. Anything short of a unanimous recommendation from the City Council sends a bad message to city employee members of the two pension systems. 

The mayor should have resolved his differences with the pension board of trustees before it ever came to the city council. This is no way to conduct such serious business as pension reform and sends a terrible message. Is the mayor going to bully the city council to conform to his position, ignoring two years of comprehensive study by two pension board of trustees vested with the fiduciary responsibility to manage and recommend change to the city’s pension funds?

The mayor needs to support the recommendation of the pension boards and assist the boards and the city council in effecting important pension reform that will subsequently save the city and the taxpayers money in the future.

If the city council can’t come to a unanimous position on pension reform, why should the employees vote yes to pension reform.