As pension tax nears expiration, questions remain about how to pay remaining shortfall

Last month, City Council considered replacing Springfield's 3/4-cent Police-Fire Pension sales tax with something different.

The pension sales tax has funded the Police and Firefighters' Retirement System since 2009 when it was first approved by voters. After two five-year renewals, the tax is set to sunset March 31, 2025, and the pension fund's board of trustees is considering the best course of action to ensure the system receives the funding it needs to pay out promised benefits.

As of July 30, the pension fund held 90.7% of the assets needed to pay those accumulated benefits, according to the most recent actuarial valuation report. With the amount of revenue the sales tax brings in — about $45 million annually — renewing the existing tax for another five years would likely produce far more revenue than necessary to get the fund to 100%. There is a chance that the system could reach full funding by the time the tax expires in 2025, though the actuarial consultants from Milliman who presented their findings to the pension board Oct. 12 said the odds of that are slim.

The pension plan funded by the sales tax was closed to new hires in 2006, with new police officers and firefighters enrolled instead in the state LAGERS retirement plan. In addition to the sales tax revenue, the city also contributes 35% payroll of the covered employees — about $5.4 million annually — from the city's general fund.

"Outside the tax revenue, all of our contributions are payroll-based, and our payroll is not going to be around much longer," said Ryan Falls, an actuary with Milliman who presented the findings, noting that the closed nature of the plan means the pool of active employees in the plan is diminishing as more and more retire and begin drawing benefits.

What comes next for the pension fund, tax

At the Springfield City Council retreat Sept. 29, City Manager Jason Gage presented his recommendations for a new 3/4-cent sales tax that — pending voter approval — could replace the current Police-Fire Pension sales tax as it expires. He said the tax would be a useful funding source for a variety of necessary infrastructure and programs without increasing the tax rate above its current level. At the meeting, council members disagreed about how the ballot language should read and where the money from the tax should go.

Filling the remaining shortfall in the pension system was one of several uses for the new sales tax Gage proposed. The exact amount of money that would annually go toward the fund would have to be determined by council if they decide to include the pension system as one of the beneficiaries of the proposed tax.

Falls said that while a set amount of annual funding could be beneficial, it would be better to have more flexibility in the amount paid into the fund each year.

"I'd encourage you to consider adopting more of an actuarially determined contribution — it makes it harder to budget and plan because it might change a little bit every year," he said. "But any time you put yourself on kind of a fixed dollar contribution and something happens one way or the other, it just can send you off in a different direction from what your goal is."

This actuarially determined contribution can fluctuate year to year, based on investment returns and the actual costs of providing benefits to retirees. Since 2009, making the annual contribution has not been a concern since the sales tax revenue alone exceeds this amount every year. But as the sales tax nears its sunset, the annual contribution amount will play a more important role — having the flexibility to adjust annual payments to react to any changes could help the city meet the fund's required policy contribution and stay on track for their goal of reaching full funding by 2030.

Gage said that if the sales tax is not the source of revenue for the fund, it would be budgeted through the general fund. No matter where the money comes from, he said the goal of 100% funding will remain.

If City Council agrees to seek a new sales tax and voters approve, that revenue could be reallocated each year to address any unexpected market changes, Gage said.

"I do believe that the funding for the retirement, regardless of revenue source will have to be flexible," he said. "So that if there is a need to put in a little bit more in a given year to keep the trajectory headed in the right direction then we are able to do that."

A new approach for liability

Following the presentation, the pension board approved a "layered" approach to pay off its remaining debts, in the event the fund is not fully funded by the time the sales tax expires.

That shortfall, referred as the unfunded actuarial liability, is a result of the costs of retirement benefits exceeding the assets in the plan. Currently, the gap between the actuarial value of the pension fund's assets and its expected liability is about $65.5 million.

Both sides of the equation can shift unexpectedly: Changes in projected life expectancy or larger-than-expected salary increases can drive up future costs, while higher or lower investment returns and sales tax revenue affect assets. As the fund gets closer to full funding, changes in the market value of the pension's investments can be a source of volatility, Falls said.

Under the layered approach approved by the board, the pension board's actuaries will calculate each year what the plan would need to reach full funding by by 2030, but spread out the cost of any unexpected changes over 10 years as a way of addressing the volatility of the market and avoiding the need for a large sum contribution one year and less in another. Each year, a new 10-year payment plan would be created to address any new changes, adding a "layer" on top of the original plan and spreading it over 10 years.

"From the board standpoint, you know, we just need to make sure that the target remains at 100% funding and that the contributions are going to get us there," said Tony Kelley, a former firefighter who the board hired as hired administrative director for the retirement system this year.

Board President Andy Stewart said much will depend on how tax and investment revenues perform as the tax nears expiration, with hopes that it reaches 100% by 2025.

"I don't think the board has a way to raise revenue except through the tax," he said, advocating for a "wait and see" approach for now. He said the board has talked with the city's finance department about possibilities for future funding in "broad strokes."

"As a citizen, I want to make sure that you know, we take care of the people that take care of us," Stewart said.

More: With pension sales tax due to expire, City Council considers taking new tax to voters

The last active member of the plan is projected to retire in 2030. When this happens, a number of new options for the future of the retirement system open up, Stewart said, but little has been discussed and nothing decided.

Whether a replacement sales tax will go to voters and what that ballot language might look like also has yet to be determined. City Council did not come to a consensus on a possible replacement for the 3/4-cent sales tax during its September retreat. Cora Scott, city spokesperson, said a Committee of the Whole meeting has not yet been scheduled for council members to revisit the topic.

Gage noted that his recommendations for the reinstatement of the sales tax and the funding categories it could cover would not change ahead of the meeting since more council input is necessary.

Also unclear is whether a replacement tax would be embraced or opposed by the public. After Gage's proposal in September, former mayors Jim O'Neal and Bob Stephens — who both served on council when the original pension tax was pitched in 2009 — wrote a strongly-worded editorial noting that council members at the time had vowed to let the sales tax expire once the pension debt was paid.

"The commitment to our citizens on the 2009 ballot was that as soon as the pension plan was fully funded, the tax would end immediately," they wrote. "No ifs, ands, or buts. No smoke and mirrors. No bait and switch."

Marta Mieze covers local government at the News-Leader. Contact her with tips at mmieze@news-leader.com.

This article originally appeared on Springfield News-Leader: Sales tax for police and fire pension leaves future undecided