WHEELING, W.Va. — Decades of promises made to city police officers and firefighters – without long-term plans to pay for them – are coming home to roost in communities across West Virginia.
Collectively, West Virginia’s 53 municipal police and fire pension funds have an unfunded liability of about $1 billion, according to the state’s latest actuarial reports. That means the funds would fall about $1 billion short of being able to fulfill all obligations if every member of those plans retired today.
In Charleston, officials are preparing to raise the municipal sales tax by 0.5 percent to pay down its share of the liability, which totals about $287 million. And Wheeling, where the total unfunded liability of its police and fire pension plans is about $80.2 million, may be about to follow suit – either by raising its own sales tax, which is barely a year old, or enacting a user fee, which amounts to a weekly tax of $1 to $3 on all who work in city limits.
City Council members in Wheeling will discuss the pension situation in more depth during a Finance Committee meeting at 4 p.m. Tuesday at the City-County Building. Wheeling – which is looking at a possible budget deficit as soon as next year, despite significant strides in funding its pensions over the last decade – can’t afford to sit back and wait any longer, according to Mayor Andy McKenzie.
“This isn’t a city issue. It’s a state issue. Without strong cities, you don’t have a strong state,” he said. “If you’re a business, and you see three of the state’s largest cities (Charleston, Huntington and Wheeling) are in financial distress because of pensions, it sends a message that you’re not being fiscally responsible. I think this goes a long way to shoring up the finances of the city for generations to come.”
How Did This Happen?
Just as it will take cities many years to emerge from their pension woes, the eight- and nine-figure liabilities those communities face didn’t just appear overnight.
McKenzie traces the problem back to city officials in the 1960s, 1970s and 1980s who, during tough financial times, chose to fund other programs and ignore the pensions.
“At that time, paying pensions were so far off because the work force was so much younger,” he said. “Paying for pensions really wasn’t a priority.”
It wasn’t until recently that governments were required to begin calculating their unfunded liabilities. The eye-popping numbers that resulted was a wake-up call for cities that not been adequately funding their plans.
“Unless you’re required to calculate the cost of those today, it’s easy to do that,” Huntington Finance Director Deron Runyon said.
That all started to change in the late 1990s, when the state began requiring cities to develop 40-year pension solvency schedules. Wheeling has adhered to its plan, increasing its contributions by 7 percent each year as required by state law, and supplementing that with revenue from video lottery at Wheeling Island Hotel-Casino-Racetrack.
Since 2000, Wheeling has grown the total assets in its police and fire plans more than six-fold, from $5.5 million to $36 million. However, the pension plan’s unfunded liability has continued to grow.
Longevity is adding to the problem, as municipal police officers and firefighters in West Virginia can retire at 50, provided they have 20 years of service. That’s because the stress and physical demands of the job lead to a shorter career than is typical of most other professions – but with the average life expectancy nearing 80 years, that’s putting a greater strain on pensions everywhere.
“It’s not uncommon for someone to be retired longer than they were on active duty,” Runyon said. “That contributes to the issue.”
At age 50, under the traditional pension system, police and firefighters can draw 60 percent of the average of their top three years of annual salary with 20 years of service, and 75 percent if they have 30 years on the job.
“Not everybody leaves at 50. But the benefits are so good, it’s hard not to,” Runyon said.
Light at the End of the Tunnel
Recognizing that many of West Virginia’s cities were on a path to financial ruin, the Legislature in 2010 provided a new way for local governments to deal with the pension burden. Cities could avoid the automatic 7-percent increases if they opted to close their current plans and enroll all new hires in a state-run program that would pay less in benefits than what those already on the payroll will receive. That’s the plan Wheeling is considering.
“It’s still a very lucrative pension plan,” Wheeling City Manager Robert Herron said of the state program, known as the Municipal Police Officers and Firefighters Retirement System.
The dilemma: Although the move would begin paying for itself by 2017 on the police side and 2022 on the fire side, Wheeling must raise an additional $2 million in annual revenue to cover a cost increase in the short term.
Huntington, which carries an unfunded liability of $148 million in its police and fire pensions, was the first city in West Virginia to close its old plans, voting to do so as soon as the option became available. Pension costs at that time made up about $9 million of a $40 million overall budget.
According to Runyon, it was without question the right decision.
“For a couple year period, we ended up right at $10 million in contributions. We’re now below $9.6 million,” he said. “If we had not made the change … we would be well over $12 million this fiscal year in contributions. And that would be growing 7 percent” each year.
As for why Wheeling has waited until now to make this move, McKenzie said the city’s situation wasn’t nearly as desperate as Huntington’s.
“Huntington was within days of being bankrupt. … Frankly, it was the only choice they had,” McKenzie said. “We knew it was coming, but we had to figure out a way to pay for it.”
Looking to the Future
Although fixing the pensions will cost Wheeling more up front, McKenzie and Herron are confident moving to the state-run pension plan will benefit the city in the long term.
“It enables us to solidify (the pensions) and worry about other things within the budget,” Herron said.
Police and fire pension contributions account for about 13 percent of Wheeling’s $31.49 million budget for this fiscal year. Within 10 years, the pensions will consume about one-third of the budget unless the city makes changes.
“That means we’re not putting it into infrastructure. It means we’re not putting it into economic development,” McKenzie said.
Although Wheeling believes its plan will put the city on firm footing for years to come, McKenzie believes cities need to continue pushing the Legislature to make changes in the way pensions are handled. More local control over factors such as benefit levels and retirement age is one thing he’d like to see happen.
McKenzie and Herron also said the city hasn’t forgotten the promise it made to reduce business and occupation tax rates when it first enacted a municipal sales tax last year. B&O relief was delayed amid initial uncertainty about sales tax collections, but McKenzie said a reduction in rates for businesses will be a part of the package of changes City Council is discussing.
He added Wheeling has maintained an “A” bond rating with a stable outlook, something in which he takes great pride.
“We’re doing this from a position of strength. We’re doing this because it’s the right thing to do,” McKenzie said of deciding now to make changes.