by JEREMY KOHLER - ST. LOUIS POST-DISPATCH
Posted: 03/23/2012 12:10 AM
ST. LOUIS • As city officials wrestle with cutting costs in the firefighters pension system, and taxpayers dig deeper for a record contribution to the fund, hundreds of retired firefighters or their families recently got something in the mail:
The checks are dividends from the pension system's Future Benefit Fund, which pension system trustees created in 1990 by diverting millions of dollars of 'surplus earnings" from the main pension fund.
About $5 million remains in the account to endow the bonuses, which are called "ad-hoc cost-of-living adjustments."
In any year when the Future Benefit Fund's investments gain value — regardless of the larger system's deficits — half of the profits are distributed to about 500 retirees, widows and children.
Vicky Grass, executive director of the pension system, said the payments are necessary to help the system's most vulnerable members. She said recipients "tell us how grateful they are for it and for the retirement system as a whole."
The fund has paid out more than $3 million since 1997. In boom years, the bonuses were as much as $1,854; five years saw no bonuses. This year's checks are modest — a maximum of $52 — reflecting a barely positive year for investments. The total payout this year is $16,000.
Although it has not garnered much attention outside City Hall, the Future Benefit Fund is a central issue in a dispute between Mayor Francis Slay and fire pension trustees that has simmered for two years.
City lawyers point to a state law requiring the Future Benefit Fund to pay for any benefit increases. However, the pension board has covered a 1999 benefit increase — a payout for unused sick leave time — from the principal of the main pension fund. A lawyer for the pension board argues that requirement was only in effect from 1990-94, the period when state law allowed moving pension system money into the Future Benefit Fund.
Slay froze the sick leave benefit in 2010, arguing that paying it from the main fund had increased the city's costs. Pension trustees sued Slay; the mayor countersued to try to force the system to pay the sick leave payout from the Future Benefit Fund. The case is pending in St. Louis Circuit Court.
Under a plan by Slay for the city to take control of the pension system, the Future Benefit Fund assets would be returned to the main pension fund, and the bonuses ended. (The pension board already has approved a lawsuit against the city if Slay's proposal is approved.)
In court filings, pension trustees have argued the "ad-hoc COLAs" are essential to the financial health of older firefighters — whose regular cost-of-living raises start to run out after age 60 — and widows and dependents.
A Post-Dispatch review of the pension system's financial records showed that the 102 retirees who got the biggest bonuses were already making an average of about $40,000, or 14 percent more than the average pension.
The group of 102 includes the second-highest compensated retiree, former Chief Neil Svetanics, whose annual pension is about $80,000. Svetanics, currently chief of the Lemay Fire Protection District, recently resigned from the city fire pension board. He has not returned several calls for comment.
Fire pension board Chairman Leonard Wiesehan also did not return a call for comment.
Jeff Rainford, Slay's chief of staff, criticized the setup of the Future Benefit Fund but acknowledged that the way it was funded was legal. "The fact that it's allowed under the law should tell everyone the law needs to be changed," he said.
ON THE TAXPAYERS
The Post-Dispatch last month disclosed how the firefighter disability program became a costly entitlement program for nearly half of retirees and how city leaders contributed to today's pension mess by adding benefit after benefit without worrying about cost.
The Future Benefit Fund is an example of those benefits won by firefighters through the political process, at the expense of taxpayers.
In 1990, firefighters and pension trustees struck a deal with city aldermen to move assets from the pension fund.
Firefighters and representatives of the pension system said that there would be no cost to the public, and that the earnings to be diverted were 'surplus," according to records kept in the legislative process.
In fact, the pension system had no surplus assets. Its unfunded obligations in 1990 were $63 million, according to financial records obtained by the Post-Dispatch through public-record requests.
The formula that set up the Future Benefit Fund was concerned only with the year-to-year performance of its investments, however, not with the pension system's long-term viability.
Under the formula, after each year between 1990 and 1994, the pension system would total its revenue — including city contributions — and subtract 1½ times its expenses.
The difference was labeled 'surplus." But it was actually about the same as what the city had contributed each year.
The total that went into the Future Benefit Fund was about $9.5 million.
An expert in local pension funding said taking profits out of an underfunded system would create bigger costs down the line.
"The fact that most of the excess revenues come from employer contributions implies a low level of assets compared to benefits," said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. That's "not good," he said.
"Generally, plans only do this when they are overfunded. Scooping off the top is going to increase (the city's) contributions going forward."
For an average person saving for retirement, it is akin to making an early withdrawal from a 401(k). To retire with the same nest egg, he would have to make larger contributions closer to retirement.
City leaders were complicit in the deal. For every dollar the pension trustees put into the Future Benefit Fund, they put one into another fund called the City Credit Fund.
The city drew from this fund for a few years to help make its annual contributions. It gave the city short-term savings but doubled the impact on the pension fund's assets — to $19 million.
The timing couldn't have been worse. The funds were diverted just as the values of U.S. investments started to mushroom.
St. Louis is not the only city where 'surplus" earnings were taken from pension funds to pay bonuses. San Diego faces deep pension debts because of its practice of paying a "13th check" to retirees. An independent auditor in 2004 said the 'seductive concept of surplus earnings" was "a snake in the garden." If a system withdraws funds in good years, the audit warned, it will suffer in lean years. Ultimately the bill comes due.
Slay was one of the aldermen who approved the deal with a 21-0 vote in June 1990. Today, the mayor says it was an example of how little was known about pension funding just two decades ago.
Former Mayor Vince Schoemehl said he knew it was a bad deal for the city, but he signed it because he was forced to.
"I would have never signed that Future Benefit Fund if I'd had a choice, but I didn't have any political choice," Schoemehl said. "I didn't want to sign that, but when you call the guys you've been working with in Jeff City and they say, 'Vince, we're going with them,' and you talk to your friends at the Board of Aldermen, and they say, 'This is better than it was, they're backing down some, so take what you can get,' then that's how this goes."
David Hunn of the Post-Dispatch contributed to this report.