HOT SPRINGS — City Manager David Watkins said he has been directed by the Hot Springs Board of Directors to devise a plan that will move the city forward in reducing the financial liability of its closed pension plan.
“It’s been made very clear to me, by a vote of the board, that they want me to bring back an action plan,” Watkins said.
“It might be a number of things that we have to do; I don’t know if any one approach is going to work totally on its own. I don’t see any silver bullet.”
The current unfunded liability of the closed pension plan is estimated at $41 million, Hot Springs Fire Chief Ed Davis said.
That figure is based on a formula that considers the number of retired employees on the closed plan, including spouses, defined yearly benefits and the assumed number of years benefits would be drawn.
According to Watkins and Davis, the closed pension plan dates back to the 1940s or 1950s, and was administered by the city until 1983.
Davis said a pension board was established in the 1970s to manage the plan and govern the way the assets were invested. The plan funds were kept in local banks but “whatever the level of expertise was on the board, there wasn’t a lot of activity in trying to invest the money,” he said.
In 1989, administration of the plan was turned over to the Arkansas Local Police and Fire Retirement System, also known as LOPFI. Uniformed city employees are under the police and fire retirement system, while all others are in the Arkansas Public Employees Retirement System.
“I think the powers that be in 1983 recognized it had not been properly funded and chose to close it. I’m not really sure what they did for six years, but eventually LOPFI agreed to take over the management and determination of the contribution level the city would have to provide to meet the benefits that were agreed on when the plan was put together,” Watkins said.
“The current LOPFI plan is being evaluated every year, I’m sure by the state, but our closed plan was started in the ’40s or ’50s, and over the years, for whatever reasons, the contribution rate that we needed to meet those expectations, obligations and defined benefits was not enough,” Watkins said.
“So now, all of a sudden, the amount coming in on the revenue side is becoming smaller than the commitment. The commitment is going up steeply and contributions are at a flatter rate.
“On top of that, it’s really kind of taboo to ever tap a pension fund for anything but pensions. I don’t know what went on here, but other places around the country, in public and private sectors, there have been problems with diverting money from pension funds to do something else,” Watkins said.
Based on what he has heard, Watkins said it seems money from the closed pension plan was diverted for other uses.
“Borrowing from a pension plan and then paying it back at the same rates that the assumption of growth is based on. ... I’ve seen that done at the state level in other states. It’s not a good practice, but it’s done. But to borrow from a pension fund and not pay it back, you’re just making your situation more dire,” he said.
Davis said a total of 34.42 percent of the current Police Department payroll is required to fund its open and closed pension plans — 11.75 percent for the open plan and 22.67 percent for the closed plan.
A total of 50.12 percent of the Fire Department payroll is required to fund its open and closed plans, with 15.01 percent going to the open plan and 35.11 percent for the closed plan.
“To go back and capture the commitment to the employees prior to 1989, and to make up for that shortfall, underfunding, and diversion, we’re having to impose a significant raise on our existing payroll,” Watkins said.
“If you could somehow take that [closed plan] out of the equation and look at the open fire and police plans, those numbers are pretty accurate. I don’t see anything troubling about that. But when you fold in the prior plan, it’s very high.
“The way I look at it, I don’t know what happened back in the 1980s and it’s immaterial; it doesn’t make any difference. The bottom line is that in 1983 this [plan] stopped and was turned over to LOPFI in 1989, and for 23 years, the city has been funding this.
“What we’ve got to do is deal with the ‘sins of the father’ that are coming forward at a very escalating rate. That’s what we have to do,” he said.
Watkins said Hot Springs is not the only city facing this kind of situation, and it doesn’t have any options for paying off the unfunded liability “unless you tap the general fund to augment what you’re putting in now.”
“Given our budget situation, I think that is almost impossible,” he said.
“This is a deal where, and I want to make this very clear, the employees have done nothing wrong,” Watkins said.
“We’re trying to be good stewards of the public money. We have to deal with something that was not funded that we now fund properly, but we have this big lug we have to pay down,” Watkins said.
Arkansas, Pages 16 on 07/27/2012