THE MAYOR'S MYTH: Why McDavid is wrong about "unfunded" CoMo city pensions

The McDavid Administration, investing in a myth

 

COLUMBIA, Mo 11/24/14 (Analysis) -- Facing long-overdue scrutiny of the multimillion dollar "unrestricted" balances City Hall squirrels away in over a dozen different accounts, Columbia Mayor Bob McDavid is reviving a myth his administration has nurtured to make city government look poorer than it is. 

He is proposing to pay down the city's so-called "unfunded pension liability" with $9 million from the General Fund that pays for critical city services like fire, police, and health. 

The proposal comes just weeks after McDavid insisted Columbia taxpayers increase property taxes to pay for more police and firefighters.   Pension experts, meanwhile, say such moves are unnecessary and may even do harm. 

"There is nothing intrinsically wrong with having an unfunded liability," explains Jose Fernandez, principal and actuarial consultant with Georgia-based Cavanaugh Macdonald Consulting.   "Unfunded liabilities are a natural part of retirement system funding, comparable to a mortgage on a home.”

Mayor Mythbusted

A relative small fry among the city's richly-stocked accounts, the General Fund is required by the City Council to keep 20% of its monies in reserves for emergencies.   But for years, it has carried millions of dollars in excess of that requirement.   General Fund reserves hit 35% in 2012.   

Rather than spend the excess on police, firefighters, or better sewers, McDavid wants to invest in a myth. 

As long as City Hall makes its required annual payments, the pension is in fine shape, explains a 2010 white paper from the Florida Public Pension Trustees Association (FPPTA).   Using money needed elsewhere to pay down pensions is a bad idea, these experts say. 

"Local government plan sponsors do not have to take drastic and immediate actions to reduce or pay off a pension plan’s unfunded liability,"  the paper explains.   "It is being 'paid down' in the same way you pay down your home mortgage." 

McDavid has instead painted the city's $100 million pension mortgage as an emergent crisis, even convening a "Pension Review Task Force" in 2011.    "The price of doing nothing is potentially devastating," he told the Columbia Daily Tribune. 

Nonsense, say the experts.  

"As long as the plan sponsor meets the funding needs of the retirement system over the long term, the unfunded liability will not negatively impact the long term funding progress of the retirement system," FTTPA members explain.   "The health of a public retirement plan is not determined by the unfunded liability.   The  health of the plan has more to do with the city’s ability and willingness to make the minimum required contribution." 

Unfunded -- or underfunded?

The myth of the unfunded pension liability may have started with confusion over terminology.  "There is a substantial difference between 'unfunded' and 'underfunded' pension plans;  however, media reports fail to make a distinction," the FTTPA explains.   "The fact that a retirement system has an unfunded liability does not mean the plan is underfunded."

The confusion scares taxpayers, who fear they will be on the hook for the liability; and public employees, who fear loss of benefits and financial collapse.   To clear the confusion, the FTTPA suggests more accurate terminology. 

"Prefunded" is more accurate that "unfunded".       

"If public pension plans were truly 'unfunded,” it would mean the employer pays the  current pension benefits out of tax revenues each year," the FTTPA white paper explains.   "Instead, public plans are prefunded to account for the benefits that accrue over the lifetime of an employee."

Pension boogeymen

Don't expect Mayor McDavid -- or officials in other cities playing the same word game -- to be more accurate anytime soon. 

They use "unfunded pension liabilities" as boogeymen to scare money out of voters and taxpayers -- or mis-allocate existing monies from immediate priorities (like police and sewer work) to a future debt that looks large, but is quite manageable. 

"An unfunded liability is a financial myth," says Ralph Morris, president of the Newfoundland and Labrador Public Pensioners Association in Canada.   "Referring to an unfunded liability...is the latest politically correct way to mislead the general public.  Truth be known, there is no cause for anyone to be unnerved."