Cincinnati pension fix is band-aid, not real reform

Mar 02, 2016

In 2014, Cincinnati Mayor John Cranley worked with city officials and workers to arrive at a “historic agreement” to avert a crisis and stabilize their pension system. The deal was finalized in early 2015 and took effect in January of this year. Both sides had to make sacrifices to come to an agreement, but officials optimistically project that, if everything goes as planned, the pension system could be fully funded in only 10 years.

However, things don’t always go as planned. Another recession or a drop in city tax revenues could cause things to go south again in a hurry. For example, the Milliman Public Pension Funding Study for 2015 found that while public pension funding status increased from 70.7% to 75% last year, several years of strong market returns are beginning to tail off, and funded ratios will begin to decline again.

The study also points out, as The Buckeye Institute did in 2013, that pension sponsors continue to assume unrealistic investment returns, which results in actual funding ratios being overestimated. Therefore, there is reason to believe that the supposed groundbreaking agreement is little more than a band-aid solution.  With any sort of market downturn the already optimistic investment returns will be woefully inadequate to fund the city’s pension system.

Under the Cincinnati deal, the city will increase contributions to the pension system, including $38 million this year, and then 16.25% of payroll (up from 14%) for each of the next 30 years, or around $26 million per year. The deal will also move $200 million into pension from the more stable retiree health care system. Employees and retirees have agreed to a 3-year freeze on cost of living adjustments to their pensions, after which the COLA increases will be fixed at 3% simple interest per year.

This agreement may help stem the tide of unfunded pensions temporarily, but marginal improvements to an outdated system aren’t going to create a pension system with lasting stability.

The Buckeye Institute has already argued extensively that the solution is to shift from a defined benefit pension plan to one with defined contributions similar to private sector retirement plans.  Other states are already beginning to shift towards defined contribution or hybrid plans, saving taxpayer dollars while continuing to provide government employees with comfortable retirements.

Cincinnati’s efforts only temporarily address the pension problem; the issue isn’t going away at a local or statewide level. Ohio lawmakers can keep applying small reform band-aids, or they can be proactive and fix the system once and for all.