Burlington City Council to Consider Changes to Employee Pension Fund

Burlington’s Chief Accounting Officer Jonathan Leopold has good news and bad news for the Queen City’s 820 municipal and school district employees.

The good news is, the city has saved $1.7 million since last November, when it dumped Morgan Stanley [1] as manager of the city’s pension fund and hired the Vermont Pension Investment Committee [2].

The bad news: The fund is short about $30 million — 20 percent of what it owes future retirees — and making up the deficit will likely require significant changes in how the city distributes benefits to employees.

Currently the pension system, which is funded by workers’ contributions, returns on investment and property taxes, is a defined-benefit plan, which promises employees a specific monthly benefit at retirement.

Next year the city council will consider changing the pension fund to a defined-contribution plan, which is similar to a 401(k) plan. The change would ensure a steady revenue stream, but would require employees to make their own investment decisions and shift more of the risk for their contributions to them.

“It’s an interesting situation,” Leopold said last Friday at City Hall. “The benefits need to be restructured to be more affordable and more sustainable for the taxpayers. Obviously, that’s a difficult issue for employees who feel they’ve earned a benefit.”

The city’s current pension woes began when the retirement fund, which was running a 20 percent surplus in 2000, plummeted after the 9/11 attacks. Some attribute the decline to bad advice from Morgan Stanley; others point to overreaching dot-com investment strategies and poor leadership by former Mayor Peter Clavelle.

Whatever the cause, the pension deficit has been squeezing Burlington’s municipal budget since as early as 2004, when the city substantially increased property taxes to finance retirement benefits.

In spring 2006, Mayor Bob Kiss appointed a nine-member task force to review the retirement fund and brainstorm strategies for reducing the city’s costs. Eleven months later, the task force issued a 41-page report outlining 14 strategies, some of which recommend structural changes to Burlington’s pension system.

While the current defined-benefit scheme is good for employees, it can be risky for taxpayers, who must cover shortfalls during lean fiscal periods. According to the 2007 task force report, Burlington taxpayers paid $5.2 million to “stabilize” the fund in fiscal year 2007, a 37 percent increase over the previous year.

But some city employees are wary of changing to the riskier defined-contribution plan. Indeed, the 2007 task force report predicted that selling the idea to union employees through the collective-bargaining process would be “extremely difficult.”

Contracts between the city and its four employee unions expire on June 30, 2009, and city officials say the future of the pension fund will be a key part of the negotiations. At the urging of city employees, a new “task force” has been convened. Reps from the four city-employee unions are part of a six-member advisory group that is sure to play a role in next year’s talks.

Meanwhile, the advisory group created a year ago has not had much to say. Some members claim their work has suffered from an absence of clear direction from the city council.

Councilor Andy Montroll (D-Ward 6) disputes the charge. He said the advisory group has dallied, and the lack of action has caused the pension-fund problems to be “exacerbated.” Due to the current financial crisis, investment returns declined by 8.5 percent, causing the fund to drop in value from more than $129 million to less than $120 million.

Some councilors, including Montroll, say they would support switching to a defined-contribution plan for new city hires while keeping current employees under the old system.

But Steve Goodkind, director of Burlington’s Department of Public Works [3] and one of two non-union members of the advisory group, hinted that he would oppose that option. While he’s not surprised to hear that union workers want to protect their benefits, Goodkind cautions against doing so at the expense of new hires. “Are they going to be second-class employees?” he asked.

For now, market declines haven’t affected the roughly 800 former municipal employees who receive pension benefits or the 820 active employees who contribute to the fund. If they’d been on a defined-contribution model, it might have been a different story.

For that reason, Ben O’Brien, a Burlington firefighter who serves on the pension advisory group, opposes a defined-contribution plan. Most Burlington residents, he said, don’t understand that uniformed policemen and firefighters aren’t eligible for Social Security benefits and rely exclusively on their city pensions for retirement.

O’Brien said the possibility that he could lose his benefits in the stock market makes him nervous.

“We’re firemen,” he said, “not day traders.”