Crystal Thomas
The State Journal-Register
For the first time, Springfield will be spending more on its fire and police pension payments in the next budget year than it’s expected to collect in property taxes. The pension costs are predicted to exceed property taxes by $600,000, according to Bill McCarty, Office of Budget and Management director.
During last Tuesday’s Springfield City Council meeting, aldermen voted to keep property taxes at the same rate. But they acknowledged the growing pension costs could mean the city will have to cut services or raise taxes. Others also questioned whether the city’s financial assumptions have been overly optimistic, raising the prospect of an even higher cost.
Some of the conversation at the meeting echoed last year’s budget deliberations, when the city cut positions and increased hotel-motel taxes by one percentage point to balance the budget. However, this year, the city is in worse financial shape. Not only will property taxes not cover pension payments, but the city also faces a projected $11.5 million deficit, according to McCarty.
Pay more now or pay even more later
Before passing the ordinance, aldermen brought up another worry: the city was choosing to believe its investments would reap more than what history has shown. Returns on investments help pay for pension benefits. The higher the rate, the less the city needs to chip in annually.
The city has assumed a 7 percent rate of return. However, aldermen pointed to a 2012 letter from actuaries that projected the rate at closer to 6.1 percent.
Ward 7 Ald. Joe McMenamin pointed out that the actual average rate of return for the last 10 years was 5.5 percent, a far cry from what the city has been suggesting. He called the practice “irresponsible.”
A projection from last year said that the city would need to contribute roughly $2.5 million more to the pension fund for each .25 percent drop in the rate of return on investments. But that number actually could be higher now, McCarty said.
McMenamin pointed out that 20 years ago, Springfield’s pension liability was 90 percent funded. Now, it’s at 45 percent, he said.
“What we are saying is to balance our current operating budget, we will in effect under-fund the police and fire pension funds,” McMenamin said. “Well, that catches up with you, so eventually we need a plan that fully funds our pensions and that doesn’t rely on unreasonable and fictitious rates of return projections in order to balance our operational budget.”
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Joe McMenamin for Ward 7 