Cincinnati Finds Its Pension Contribution Has Tripled

CHICAGO — Just months after it implemented a series of reforms meant to reduce pension costs, Cincinnati will now need to triple its annual pension contribution in order to meet its annual required contributions.

The revised pension figures come after Cincinnati, like many other state and local governments, suffered steep losses in its pension fund tied to market turmoil last year.

But even if the market makes a full recovery the city would still need to increase its annual contributions or decrease its benefit levels, according to a report from an actuarial firm hired by the city to recommend changes to the retirement system.

The unexpected expense comes as Cincinnati, the second-largest economy in the economically troubled state of Ohio, faces a $51.5 million shortfall in its 2010 budget stemming largely from declining income tax revenue.

Last year the city assembled a task force to recommend reforms to bring down retirement costs and maintain the system’s stability. After implementing a number of the reforms this summer, the City Council recently reinstated the task force to consider additional changes amid revised projections.

Among the recommendations is the issuance of pension obligation bonds — a move that would require state approval but which city officials are likely to consider, says Cincinnati finance director Joe Gray.

The Cincinnati Retirement System’s growing unfunded liability — which will total nearly $1 billion next year — comes despite historically having funding levels of around 90%. The system began to suffer from investment losses in the last several years. The pension fund totaled $2.6 billion in early 2008 and lost roughly $825 million to end the year at $1.8 billion.

The pension system’s funding level has declined to 70%, according to Gray. The losses have pushed up the city’s annual required contributions, and in 2010 the city’s annual contribution is expected to rise to 80% of payroll, or $125 million, up from roughly $35 million in 2008.

“The city is obviously not going to make that payment,” he said. “It can’t afford it.”

Officials will push for more benefit changes to bring down the costs, according to Gray.

“The whole idea is to design and make the plan stronger around a consistent, constant payment,” he said. “If a 26% [of payroll] contribution will approximate the normal cost, we’re going to have to change all of these dynamics of what people receive. The task force is taking a look at what other systems are doing and how we can make further changes to our plan.”

In June, the City Council cut Cinncinati’s contribution by $22 million by, among other changes, reducing retiree health care benefits, increasing employee contribution rates to 9% from 7%, and raising the retirement age to 65 from 60 for new employees.

The city will consider issuing pension obligation bonds, though the move would require special state legislation.

“It’s everyone’s recommendation [to issue bonds]. It makes sense to do it now since the rates are low,” Gray said. “But that’s a payment you can’t slip up on.”

If Cinncinati issued $200 million of taxable pension obligation bonds, its contribution rate would drop to 40.67% of payroll, according to an estimate provided to the pension task force by Cavanaugh ­Macdonald Consulting LLC. A $500 million pension obligation bond issue would cut the city’s contribution to 23.53%, while a $615 million bond issue would cut it to 16.97%.

Meanwhile, Cincinnati is facing a growing budget shortfall, in part because most of its revenue comes from income taxes, which are expected to decline 8% in 2009 and another 2% next year. Officials have already enacted a number of measures, such as labor contract concessions, to offset the current $28 million budget gap, but next year’s budget shortfall is expected to be more severe. 

“There will be layoffs next year for sure,” Gray said.

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