Cincinnati Turns A Corner With Pension Agreement

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CHICAGO - Cincinnati is nearing a historic agreement to remedy its long-standing pension shortfall that sparked downgrades and years of court battles with retirees and unions.

The complex deal, which would restore the city's main pension fund to full funded status after 30 years, was hammered out in federal court during a year of negotiations.

"It was an existential threat to our city; we face an $800 million unfunded liability," said Mayor John Cranley, who was elected mayor in 2013. "My first year in office, I lost sleep over it. The system was going to break and it would have broken our ability to provide basic services to our citizens."

The city, the economic hub of southwest Ohio, reached the agreement with its retirees and unions after years of negotiations and lawsuits. U.S. District Judge Michael Barrett held a final class action fairness hearing on Sept. 24, hearing testimony from a variety of parties, including state officials. If approved by Barrett, the agreement will be a binding and enforceable, meaning the city cannot reduce future contributions over the next 30 years.

Cranley, a public finance attorney, said he asked the federal court to consolidate all the various retiree and union lawsuits into one class-action challenge to pare down litigation that had been growing since 2010.

"That brings everybody into the lawsuit and there's no opt out," he said.

"The key is mediating with all the groups," he said. "We brought them into the process early, when the future of the city was on the line."

Compromise on retiree health care benefits also proved crucial to negotiating the pension deal, Cranley said. The city had won a previous court case that said medical benefits could be cut, and the retiree health care fund was overfunded.

"I told the union guys, we're not going to declare bankruptcy and something has to give, so either you agree to the changes [on the pensions] or we're going to have no choice but to cut medical benefits," said Cranley. "We had clear case law to say we could cut the medical, and we didn't rub it in their faces but said a compromise has to be had."

The city's health care retirement account is overfunded at nearly 120%, providing a source of cash to transfer into the struggling pension fund.

The deal, dubbed the Cincinnati Pension Collaborative, calls for Cincinnati to transfer $200 million from its healthcare trust into the pension system, as well as contribute 16.25% of payroll into the pension annually for 30 years.

The settlement also requires the city to issue $39 million of bonds to raise cash for an immediate payment into the pension fund.

In return, unions and retirees agreed to a reduced cost-of-living-adjustment increase, down to 3% simple from 3% compounded, as well as suspending COLAs for all employees for three years; and extending the retirement age and years of service requirement for some employees.

Cincinnati's unfunded pension liability totals roughly $806 million, with a funded ratio of 64% as of the end of 2014, according to bond documents. That's down from nearly $860 million in 2013.

"I see it as a new beginning," said Peter McLinden, executive secretary treasurer of Cincinnati AFL-CIO and former Cincinnati regional director of AFSME-Ohio Council 8, which filed a lawsuit fighting the city's pension contributions in 2010. That lawsuit, like others, was eventually merged with into the class-action lawsuit.

"We had to take a unique approach. Everybody had some skin in the game, and in some sense no one was going to come out happy," McLinden said. "We understood the city had been downgraded in its bond ratings and we knew this was going to affect the city's ability to grow and do future borrowings for projects. It was the best outcome for all parties."

The city's move to shift $200 million from an OPEB fund to the pension fund is an unusual provision that may not be available to other governments even if their OPEB accounts are well-funded. Retirees in Pontiac, Mich., for example, have challenged a similar proposal from the city's former emergency manager, and the issue is working its way through Michigan's court system.

"I think this could be a blueprint for how to successfully get all parties together and figure out a solution, but every city is going to have its own unique circumstances," McLinden said. "If you're not going to come up with your own solution, you're going to have a solution forced on you."

The Cincinnati Retirement System is the largest of the city's three pension plans and covers both pension and retiree health care benefits. The other two are managed by the state.

At the Sept. 24 federal court hearing, Ohio Auditor David Yost, who, as the state's fiscal watchdog, had warned that Cincinnati was facing a major problem, told the judge that the settlement was a "good plan."

Yost said he would no longer consider Cincinnati to be under the threat of coming on the auditor's fiscal watch list if the final plan is approved, according to local courtroom reports.

Ratings agencies have also said the settlement would be a positive credit move. Standard & Poor's in March 2014 downgraded the Ohio city two notches to AA-minus citing concerns about the high pension debt and other liabilities. Moody's Investors Service in July 2013 downgraded the general obligation bond rating to Aa2 from Aa1, also largely due to the pension debt.

In July 2015, as the city prepared to come to market with general obligation bonds, ratings analysts were more bullish. Moody's revised its outlook to stable from negative.

"A recent Cincinnati Retirement System settlement agreement is expected to moderate the city's annual pension costs and unfunded liabilities," Moody's said in a ratings release. Moody's said it could downgrade the city if the retirement settlement is delayed or cancelled.

Standard & Poor's, also in July, praised the reform plan.

"In our view the city's pension reform is substantial, and we believe it will result in an immediate improvement in the funded ratio," S&P analysts said in a ratings report. "It will also result in lower annual pension costs, which has contributed to the city's ability to adopt balanced budgets for fiscal years 2016 and 2017." S&P analysts said they will likely see the pension liability as a credit weakness until its annual payments fall below 10% of total governmental expenditures. The payments currently make up nearly 13% of total government fund expenditures.

Cranley said he thinks the deal could be a model for other cities.

"I would recommend to people to see if they have a distinction between their medical and pension benefits and find a federal court to certify it as a class-action lawsuit so it's final," he said.

"It's a huge national issue," Cranley said. "I'm just happy to have found a solution that everybody feels good about. We all agreed it was the fairest solution to a difficult situation."

The case, number 00445, is in U.S. District Court Southern District of Ohio.

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