Paul Bonovich’s Many Misstatements About the City’s Pension Plan

In Perspectives by Joe Sullivanleave a COMMENT

The Knoxville Mercury does not support or oppose candidates for elected office. However, when a candidate makes egregiously erroneous statements, there’s a need to set the record straight.

Such is the case with the spurious assertions about the city of Knoxville’s pension plan made by City Council candidate Paul Bonovich in a recent appearance on the Tennessee This Week program on WATE-TV.

According to Bonovich, “We have not addressed a solution for the pension plan. The liability of the pension fund has gone from $60 million to $180 million, and it is growing. We’ve raised property taxes to fund the recent increase, and we’re going to have to raise them again significantly. We need to find alternatives to keep taxes lower.”

Let’s start with his representations about the pension plan’s liability, which bear scant relation to reality. The plan’s total liabilities as of its most recent annual report on July 1, 2014 were $703 million. That represents the actuarial present value of all future benefits due to members of the plan. Its assets, representing the value of its investment portfolio as of that date, were $546 million. That leaves what’s known as an unfunded liability of $157 million (the adverse difference between the two), which must be amortized over time as an expense.

But instead of going up, as Bonovich claims, the unfunded liability has been coming down—from $218 million in 2012 and $203 million in 2013 to the 2014 level, and no increase is expected in 2015.

It’s true there was a big spike in the wake of the stock market crash in 2008-09. But this was due primarily to a determination by the city’s Pension Board in 2011 to be more conservative in its assumption about future returns on its investment portfolio. A reduction from 8 percent to 7.375 percent brought the city’s assumed rate of return more closely into line with the respected Tennessee Consolidated Retirement System. It also had the effect of lowering the rate at which future pension benefits are discounted to present value, which raises actuarial liabilities.

These rate reductions, much more than any investment losses (which are smoothed over 10 years in the city’s pension accounting), caused the unfunded liability to spike from $127 million in 2011 to $218 million in 2012. This spike, in turn, meant a big increase in the city’s expected contribution for amortization, as determined by its actuarial consulting firm, Nashville-based BPS&M.

Then-new Mayor Madeline Rogero delayed the impact of this increase on the city’s budget for a year by making a $10 million contribution to the pension plan from the city’s general fund balance. When a contribution increase from $13.1 million to $23.4 million in 2014 hit the budget, though, this necessitated the property tax increase that Rogero recommended and City Council approved.

The fact that property taxes went up that year is the one kernel of truth in Bonovich’s otherwise fallacious string of misrepresentations. When he asserts that, “We’re going to have to raise them again,” he flies in the face of BPS&M projections that show annual contributions leveling at a little more than $25 million over the next four years and then gradually declining to less than $23 million by 2023 and to little more than $10 million when amortization of the unfunded liability is completed in 2036. (About the only thing that could alter this equation is a steep and protracted stock market decline.)

When Bonovich says, “We haven’t addressed a solution to the pension plan” and implies that he can “find alternatives to keep taxes lower,” he’s dead wrong on both accounts.

In 2012, the Rogero administration and City Council went through an exhaustive process of examining alternatives. They ended up adopting what’s been termed a hybrid plan that moves halfway from a defined-benefit plan under which employees are entitled to a fixed pension to a defined-contribution plan under which they are only entitled to the market value at retirement of contributions made, a la a 401(k) plan.

New employees starting in 2013 are entitled to defined benefits on the first $40,000 of their earnings (adjusted for inflation) but with a longer vesting period and lesser cost-of-living adjustment. The defined contribution component applies to earnings in excess of $40,000.

The reason the hybrid plan is only applicable to new employees is that the State Supreme Court has long since ruled that a public-sector employee who is vested in a pension plan cannot be deprived of any of its benefits. In its landmark Blackwell decision, the court held that pension plans might be modified “provided that no then accrued or vested rights of members or beneficiaries are thereby impaired.” The TCRS adhered to this same directive when it adopted a hybrid plan for new state employees in 2013 that is quite similar to the city’s plan.

Whether Bonovich’s many misstatements are a product of ignorance or guile, he is not someone who can be relied upon when it comes to pension-plan reform.

Joe Sullivan is the former owner and publisher of Metro Pulse (1992-2003) as well as a longtime columnist covering local politics, education, development, business, and tennis. His new column, Perspectives, covers much of the same terrain.

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