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 MythbustedA 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 boogeymenDon'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.