July 28 (Bloomberg) -- Police and firefighters in Memphis are calling in sick by the scores as a new Tennessee law kicks in requiring cities to stop shortchanging workers’ pensions.
Their beef: Memphis’s plan to comply. Tennessee’s largest city, which for years has failed to save enough to support promised retirement checks, plans to make up that sum by eliminating retirees’ health insurance, which has fewer legal protections. At one point, 558 police officers stayed home, one fourth of the force, in a city that had the sixth-highest incidence of violent crime in the U.S. last year. At the end of last week, 131 were out.
The workers say Memphis should find money to shore up their pensions by rolling back business-tax breaks, which cost more than the city pays for their insurance each year. It’s an argument unions want to advance nationally to parry challenges to their benefits by cash-strapped governments.
“Memphis is the place where we are trying to change the debate,” said Scott Treibitz, spokesman for the International Association of Firefighters in Washington.
Public-worker retirement benefits have been a target of politicians since the recession. As investment losses forced state and local governments to deal with a $1.4 trillion shortfall in their pension funds, officials from California to New York rolled back promised benefits they said taxpayers couldn’t afford.
Memphis, a majority-black city of 653,000 on the eastern bluffs of the Mississippi River, is the former home of rock and roll legend Elvis Presley and where civil-rights leader Martin Luther King Jr. was assassinated in 1968 during a municipal sanitation worker strike.
The city has lost 35,700 jobs in the past seven years and loses 2,000 people annually to other cities, according to figures from Greater Memphis Chamber. Now, it’s under pressure to increase retirement contributions after a law passed in April requiring cities to fully fund their annual portions within six years or risk losing state aid.
“It’s an extremely difficult decision but it’s a necessary decision,” said David Lillard, the state treasurer who championed the measure.
“A hallmark of virtually every distressed plan is that at some point in time they made the decision to skip payments or to underfund payments to the pension plan,” he said. “And then, once you spend that money in your budget for something else, it gets hard to replace that income back up to 100 percent payment of the annual funded amount. And that’s what’s playing out in Memphis.”
The city scrimped on contributions before with no immediate consequences. In 2008, it paid about three-quarters of the $21 million that actuaries recommended and the pension was still 104 percent funded.
The pension was hurt by a drop in stock prices in 2008, when the Standard & Poor’s 500 Index fell 38 percent. That tripled the size of the contribution the city needed to pay the next year. Memphis continued to underpay. By 2013, the requirement had snowballed to $95 million, of which it paid just 20 percent.
“Delayed payments are always, always going to cost you,” said Adam Tatum, research director for California Common Sense, a nonpartisan fiscal research group in Mountain View.
Tax Cut Race
The Memphis City Council further eroded its financial wherewithal by cutting property taxes to be more competitive with adjacent Arkansas and Mississippi. It threw finances into crisis, said George Little, the chief administrative officer.
“Our expenditures were out of line with our revenues, structurally,” he said.
The city gave blandishments to business, offering property- tax breaks of as much as 90 percent for as long as 15 years for companies willing to locate in, expand in or simply not leave Memphis. That’s curbing tax growth, state Comptroller of the Treasury Justin Wilson said in a letter to Mayor A.C. Wharton last year.
Police and firefighter unions have run ads decrying the tax breaks. The argument has resonated with workers and retirees.
“They kicked us under the bus for their own mixed-up priorities,” said Jim Music, 74, who retired from the police force in 1994 and whose insurance premiums will more than quadruple. “This isn’t about too much being promised. It’s about mismanagement.”
In a union-commissioned report in June, Good Jobs First, a Washington research group that tracks economic-development subsidies, said the city was losing $42 million a year, or about 14 percent of its property-tax base, through tax breaks for business. The report recommended that the city re-evaluate the incentives, and council members have said they will.
The Greater Memphis Chamber has pushed back. It released a video defending breaks as a way to counter competition in a market dominated by site-selection consultants who give heavy weight to incentives. The chamber has lobbied to shore up the retirement system by cutting benefits.
The pension “is cannibalizing our city’s budget,” said Phil Trenary, the chamber’s president and chief executive. “The only alternative is higher taxes, and we already have the highest taxes in the state. To keep the businesses we have, we have to stop the bleeding.”
For now, the cost is set to fall on the roughly 4,000 retirees, 1,100 of whom are older than 65 and have no Medicare, according to Mike Lee, a spokesman for retirees. The council voted June 17 to stop paying toward their health insurance at year-end and use the money for the pension.
Thirteen days later, city police began calling in sick. The protest peaked July 9, when one of every four officers didn’t show up.
Wharton declared a crisis. He canceled all scheduled days off for the remaining officers, reassigned specialists to patrol the streets and got help from neighboring Shelby County in policing Beale Street, the downtown blues and restaurant mecca.
The number of absent officers has dropped since.
For Danny Parris, 54, a policeman who retired last year after 29 years, his monthly insurance premium will rise to almost $1,650 from $350. The cost is more than half his retirement income. The average Memphis pension is about $30,000 a year. Retirees do not get Social Security.
After suffering spine injuries on the job, once while diving into a flooded culvert where two children were reported trapped, Parris requires regular medical care. Comparable insurance under the Affordable Care Act is prohibitively expensive, he said.
“My kids will tell you, I always had a plan,” he said. “I taught them that you had to set a goal and work toward your future. I had reached my goal only to be cast aside.”
Workers say they hope the council will reconsider its decision this week.
“We’re trying not to panic,” said Richard Walker, 64, a retired firefighter, who said the cost of staying on the city plan will take all but $600 of his monthly pension check.
“They are just pulling the rug out from under a bunch of old folks who have served years and years,” he said.