Springfield pensions hurt city credit rating, residents

Springfield pensions hurt city credit rating, residents

The ratings agency cited the city’s “considerable growth” in pension debt in its Oct. 28 downgrade to A3 from A1.

It’s been clear for years that Springfield residents have been suffering under the city’s deepening pension crisis. Two years ago, the city was already spending nearly every penny of its general fund property taxes on pension costs, leaving nothing for other core services.

Springfield officials had already shuttered a few library branches and reduced library personnel by 36 percent, largely due to overwhelming pension costs. Sworn police officers had been cut by 9 percent. Public works positions were reduced by 26 percent. Only through higher sales taxes had funding for sidewalk, sewer and street repairs been restored.

But after little action to tackle the crisis, the city has now has an even bigger hole. The shortfall in Springfield’s pension funds rose by more than $200 million from 2015 to 2016, according to the ratings firm Moody’s Investors Service. In response to this skyrocketing pension liability, Moody’s downgraded the city’s debt by two notches on Oct. 28, to A3 from A1.

Springfield residents will pay for those pension costs through more cuts in government services, or if some officials get their way, through higher taxes. Neither of those will help Springfield as residents, over time, will choose to move right over the city border into smaller, thriving villages that have no legacy costs and where the schools are upgraded and new.

Bigger taxpayer contributions to the pension funds also haven’t helped local city workers. The city’s police and fire funds are now closer to bankruptcy than they were five years ago. The plans’ funded ratios – the amount of money they have in the fund versus how much they owe – are at critical levels.

The police fund has just 41 cents of every dollar it should have today to meet its future obligations. The fire fund has just 38 cents. Younger workers should fear they’ll see their future pension checks cut unless major pension reforms are passed.

A wake up call for the city came earlier this year when the police and fire funds released their most recent fiscal results. Those results proved that defined-benefit pension plans are unmanageable, unpredictable and based on assumptions that simply can’t be met. Three major failures revealed the plan’s flaws and why taxpayers are asked continuously to bail them out:

  • First, the pension plans failed to meet the assumed investment rates of return needed to meet their pension promises. In fact, both the police and fire pensions reported investment losses of nearly 5 percent last year. Over time, shortfalls in investment returns mean taxpayers have to make up the difference.
  • Second, other assumptions including how long retirees live were adjusted. A longer time in retirement for city workers means even bigger pension payouts during their retirements. And bigger pension payouts mean taxpayers are on the hook to contribute even more of their money to the pension funds.
  • Third, the plans revised downward the discount rates used to determine how large their pension obligations are. Lower rates mean taxpayers will be forced to make up the millions going forward.

All three failures have led to an $81 million increase in the amount taxpayers have to put into the city’s police and fire pension funds going forward. Despite this increase in taxpayer contributions, there’s little reason for city workers to feel like they have retirement security – in large part because these continued failures are a recipe for pushing more of Springfield’s middle- and working-class residents out of the city.

That outflow of residents has been in motion for years. For proof, officials need only to look at where its own city workers are choosing to live.

In 2000, a city ordinance required city workers to live in Springfield. All city workers complied and lived within city limits.

But 15 years after the expiration of that ordinance, an analysis found 30 percent of city workers no longer lived in Springfield. Nearly half of the city’s firefighters lived outside Springfield and one-third of its police lived elsewhere.

When the city’s workers no longer feel the desire to live in the city they serve, it’s a sure sign the city’s on a wrong path.

The failure of the pension system is a major contributor to Springfield’s woes. And everyone loses under the current pension scheme.

Police and fire workers don’t have a secure retirement. Taxpayers are paying more toward a broken and bankrupt system. And those dependent on core government services are getting less.

Springfield city officials should be leaders in advocating for statewide change in municipal pensions. They should demand the Statehouse follow the lead of the private sector and many other states that give workers control over their own retirements. New municipal workers need self-managed plans, such as 401(k)-style plans, and existing workers should have the choice to opt in to one.

Springfield city officials are well positioned to take the lead on pension reform, and they should take this opportunity to set the example for the rest of the state.

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