Springfield Area Chamber of Commerce Questions

The proposal on the Nov. 3, 2009 ballot seeks a 3/4-cent city sales tax increase solely for the purpose of funding the City’s Police Officers’ & Firefighters’ Retirement System for a five-year period.

This proposal was one of two sales-tax alternatives recommended by the 16-member Police-Fire Pension Fund Citizens’ Task Force, which held 17 public meetings beginning in April 2009, along with two town-hall meetings to gather public input for its recommendations.
The Task Force and the City Council have been frank in acknowledging that this funding level will require at least one five-year continuation to reach the 60 percent funding level required by the State of Missouri.

This sales tax would generate about $28 million a year using the City’s budget estimate in the current economy. The pension system held $112.5 million in assets as of June 30, 2009. Its funding obligation stands at an estimated $351 million currently. That means the current unfunded liability is estimated to be about $238.5 million. (For reference, the City’s General Fund budget, which funds most City salaries, the pension contributions, and many other services, is about $70 million annually.)

In addition to that specific ballot issue, the City Council approved a resolution on Sept. 10 that provides a comprehensive approach to address the pension system shortfall and formulate a response to this shortfall. If the referendum is approved, the resolution pledges to close the fund to future hires to end the City’s involvement in the long run. The resolution followed the recommendations of the Citizens’ Task Force, which seek participation from all stakeholders in developing a long-term sustainability plan for the Pension System.

• The resolution states a commitment to increasing the contribution made by Police and Fire by 2 percent of pay for Tier I employees, who currently put 11.35 percent of payroll into the plan. (This assumes most Tier II employees – those hired after July 1, 2006 - will migrate to the statewide LAGERS retirement plan that covers all other City employees.) The upcoming five-year actuarial study, which sets the employee’s contribution rate, is likely to recommend a 1 percent contribution increase, which would comprise part of that increase.
• The resolution states that the City would contribute 35 percent of payroll for Tier I employees.

  Prior to the past two budget years, the City’s contribution rate was set at 28.88 percent. In order the make the full recommended contribution as the shortfall accelerated, the City’s contribution rate was increased to 50 percent and 52 percent respectively in FY09 and FY10, which is not a sustainable rate. The City’s pension fund contribution in the current fiscal year is about $13 million of the City’s $70 million General Fund budget.

• The resolution commits to closing the City’s self-funded plan to new hires, while offering the Tier II employees the option to voluntarily migrate to LAGERS. In addition, the Citizens’ Task Force has established a subcommittee to review whether it is feasible for Tier I employees to migrate to LAGERS.

  If it is not feasible to migrate Tier I employees to LAGERS, the City would still be required to maintain its self-funded plan for any remaining beneficiaries for an estimated 70 years.

  The reason the self-funded plan is not already closed is because the City cannot afford to migrate new hires or Tier II employees to LAGERS until a separate funding source is established to fulfill the obligations of the current plan. Closing a plan changes the actuarial assumptions and would further increase the actuary’s recommended contribution rate for the City.

• The resolution states the City will commit net proceeds from any future telecommunications settlements to the Pension Fund. In March 2009, the City Council designated $10.22 million in net proceeds for the pension fund from its settlement with AT&T Mobility. That contribution represented the amount needed, including interest, to make the City “whole” from four years in which the pension system was underfunded. The City has two additional cases pending with telecommunications providers over back taxes. The City recently reached a settlement agreement with Alltel Communications, LLC, for $5.9 million, which the Council is expected to appropriate into the pension fund.
• The resolution states that the City Council will review and consider the two alternate structures recommended for the Pension Board. Earlier this summer, several City employees who sit on the Pension Board were temporarily removed until assertions of conflict of interest are resolved.
• The resolution also states that the City will not propose any new citywide sales-tax increases for at least the first five years of the sales tax. This excludes renewals of existing taxes, countywide initiatives or state and federal mandates.
• The Council resolution will direct the City staff to put any legally available net proceeds from the sale of City assets into the Pension Fund.

This can be summarized in three key points:

• Restoring Public-Safety services by re-filling the frozen police officer and firefighter positions.

  Currently, there are 17 frozen positions in the Fire Department; the Police Department has 31 frozen positions, with another eight officers temporarily serving in the military. In addition to the budgetary issues that necessitated the hiring freeze, the City is reluctant to put more employees into the unstable pension plan and further exacerbate the problem. This vacancy rate is after the City Council approved adding back five firefighter and 10 police officer positions in the FY10 budget to reduce some of the stress on public-safety services. Those positions are funded by ongoing new revenue from the telecommunications settlements on gross-receipts taxes going forward. Those new employees are enrolled in the Tier II pension plan.

  The diminished staffing levels, however, have necessitated the need to close up to two fire stations per day on a rotating basis in order to staff the remaining stations at the minimum-required levels. The addition of the five new firefighters in September reduced the need to close two stations, except in extenuating circumstances, but there still will be days on which one station will be closed.

  The Fire Department is still awaiting the outcome of its ISO rating review, which, if lowered, has the potential consequence of adversely affecting insurance rates depending on individual policies.

  The Police Department has shifted a number of positions in order to provide as much patrol coverage as possible, but it still has cut the number of officers assigned to specific neighborhood areas. The staffing situation has affected response times and the ability to address lower-priority cases.

  It is unclear whether a direct correlation can be made between fewer officers on the street and the uniform crime reporting statistics for the first six months of 2009 that show crimes against persons up 15.7 percent; aggravated assaults up 20.5 percent; and burglaries up 21 percent.

  Factors such as the faltering economy likely contribute to the higher crime rates. It is clear, though, that with fewer officers available to respond to a greater number of crime reports, service has suffered.

• Maintaining control of the issue at the local level.

  There is strong reason to believe that if the pension shortfall isn’t successfully addressed with a long-term viability plan, the matter will fall into the courts.

  A St. Louis attorney who represents the Police and Fire employee associations stated during two presentations to the Citizens’ Task Force that a lawsuit would be the next step. In addition, he suggests that the Pension Board also has standing to sue the City over the pension obligation.

  One or more lawsuits would take a significant amount of time to move through the courts system, as well as expend resources of the City and possibly the Pension Fund.

  The worst-case scenario forecasts possibilities such as a Judge imposing a financial solution on Springfield; ordering civic assets to be sold; or imposing a court-directed sales tax. In the bleakest scenario, the City could be forced into bankruptcy receivership with a judge then controlling all City expenditures.

  While a lawsuit has always loomed as a possibility, the tenor prior to the February election was one of working collaboratively toward a mutual solution. The current efforts at negotiation and compromise between the City and the employee groups still suggest a strong mutual interest in resolving this situation without legal action. Nonetheless, the attorney for the associations has clearly stated his position if a solution is not developed in a timely manner.

• Restoring the City’s General Fund for its intended purposes beyond the unsustainable contribution rate of 50 percent or more of Police-Fire payroll for pension benefits.

  The Police and Fire departments comprise about 56 percent of the General Fund. Making the higher contributions over the past two years has resulted in budget cuts totaling about $12.7 million in the FY09 and FY10 budgets. (The General Fund budget is approximately $70 million.) The impact on the Police and Fire departments is well documented. All told, about 150 positions are currently frozen or eliminated and the General Fund transfers to Transportation, Parks and Health have had a serious impact on those areas.

  The impact on the Public Health department has been one of the greatest concerns to City Council, which authorized one of only two personnel budget priorities this year to add back a health epidemiologist in anticipation of a severe flu outbreak this fall and winter.

  The Transportation Fund has taken a nearly 23 percent reduction since FY07 for general transportation maintenance, including streets and sidewalks, pavement markings, signs, etc. Deferred maintenance will cost the community more in the long run. The General Fund contribution to the Transportation Fund is now zeroed out.

  Many of the budget cuts have been internalized to reduce the impact on service to citizens. Employee programs ranging from pay raises to the wellness program to training have been cut. The ultimate result of these cuts is the difficulty in recruiting and retaining well-qualified employees, particularly after the economy recovers and more job opportunities are available.

  The City also was forced to cut its contributions to a number of non-governmental organizations that provide valuable community and human-services programs in our community. Those organizations, also beset by the economic conditions, are struggling to meet increased demands for their services.

  The cumulative impact of these budget and service reductions will continue to erode the intangible “quality of life” measures that many Springfieldians value greatly about our community.

On April 2, 1946, Springfield voters approved a property tax of up to 15 mills to finance a self-funded retirement plan for police and firefighters; the employees were required to contribute 5 percent of earnings. After the fund reached $200,000, the City Council was authorized to reduce the millage, which it did to 1.5 mills. This was in lieu of enrolling these employees in the national Social Security system.

Citizens voted in 1958 to re-set the property tax at 15 mills; the City would make a contribution sufficient to cover all projected liability payments for the next five years, less the employee contribution, which was raised to 7 percent of salary.

Because of periods of underfunding that occurred over the next two decades, the City Council in 1977 adopted a minimum funding policy to ensure that the normal cost of benefits and the unfunded past-service liability amortization were made. In the early and mid ‘80s, the investment returns nearly tripled the assumed rate and the funded ratio rose significantly. It reached its highest funded ratio ever at 92 percent in 1990.

From 1990 to 1999, the fund slightly outperformed its assumed rate of return of 8.5 percent, but benefit increases granted in the 1990s began to affect the system and the funded ratio slowly began declining. Employee contributions were increased to 8.5 percent of salary and City contributions crept up to about 20 percent of salary.

Since 2000, the technology stock “bubble” bust and the Sept. 11, 2001 tragedy contributed to the fund underperforming the actuarial assumptions, which required the assumptions be adjusted lower. With the combination of poor market performance and lower assumptions, the funded ratio declined further. The shrinking asset base resulted in lower total investment income requiring additional City contributions each year. Beginning in 2004, the City failed to make its required contribution amount for the next four years, totaling $10 million in today’s dollars, and that further lowered the funded ratio.

In 2005-06, the City Council went through a rancorous effort to address the underfunding, which resulted in the creation of the Tier II plan detailed below. At that time, the Council made the changes it believed were possible under its authority without going to the expensive and divisive steps of a public vote to change the Charter or incurring legal action.

In July 2007, the funded ratio fell to 50 percent and in FY09, the City made its full contribution rate, which equated to about 50 percent of the police/fire payroll. A new state law was enacted wherein the state would withhold 25 percent of all sales-tax collections from cities with pension systems funded below 60 percent, if the cities did not make their full recommended contribution at least once every five years.

The City Council authorized a ballot question asking voters to consider a 1-cent sales tax increase in February 2009. The issue failed on a 52-48 percent vote.

In March 2009, the City received a $10.22 million telecommunications settlement noted above, which restored the four years of underfunding, with interest, to make the City’s contribution “whole” again.

Former Mayor Tom Carlson recommended creation of a Citizens’ Task Force to continue studying this issue. The 16-member Task Force began meeting in April in both Committee of the Whole and Subcommittee meetings through Aug. 13, when it made its recommendations to the City Council. The Task Force remains standing and will re-convene when the five-year actuarial experience study is completed this fall; in addition a subcommittee has been formed, as noted above, to work on the potential migration of Tier I employees to LAGERS.

The City is again making its full contribution to the Pension Fund, which is 52 percent, or approximately $13 million, in the FY10 budget.

It is important to note that plan participants do not receive any Social Security benefits through their employment with the City of Springfield. This plan is in lieu of Social Security.

Currently, there are two tiers of employees in the plan. The Tier I employees were hired prior to July 1, 2006. A series of changes made to address the underfunding included creation of the Tier II plan for new employees hired after July 1, 2006. The plan changes only affected new employees. Under the City Charter, the City cannot reduce or eliminate benefits already earned. It would require a public vote to reduce benefits promised, but not yet earned.

The normal service retirement benefits for Tier I employees include a 2.8 percent multiplier per year of service that is multiplied by their final average salary with a maximum of 70 percent of their final average salary. Employees are eligible for retirement by meeting one of the following criteria: a) age 60; b) 25 years of service; or c) 20 years of service and age 50. Employees must retire at age 60. Retirees receive a cost-of-living adjustment after age 56. Tier I employees currently contribute 11.35 percent of their salaries to the plan. The employees receive a return of actual contributions (without interest) they have made to the plan when they begin receiving benefits. The return of contribution was negotiated in 1994 and was based on an actuarial study that showed a higher contribution would cover its cost.

The primary benefits for Tier II employees include a 2.5 percent multiplier per year of service that is multiplied by their final average salary with a maximum of 75 percent of their final average salary. Employees are eligible for retirement by meeting one of the following criteria: a) after 25 years of service and reaching age 55; b) age 60. Employees must retire at age 60. Retirees may receive a cost-of-living adjustment of up to 3 percent if the plan meets certain performance criteria. Tier II employees contribute 8.5 percent of salary to the plan, but do not receive the return of their contribution when they retire.

Springfield would no longer have the lowest tax rate in the region or among the City’s major metros. With a ¾-cent addition to the base sales tax rate, Springfield would be in the middle of regional and major Missouri cities and would remain competitive on that basis.

Where it may impact economic development would be in using tools such as Community Improvement Districts or Transportation Development Districts where participants create a self-imposed tax district to pay for specific infrastructure improvements within a geographic area. A higher base tax rate may make an additional increment in a CID or TDD a less attractive option for some developers.

On the other hand, if the proposed sales tax is not approved, the cuts the City would need to make to fund its increasing pension contribution rate would likely reduce public funds available for economic development, including transportation improvements. Often, tools such as CIDs and TDDs are associated with cost-share projects and infrastructure improvements that couldn’t be funded unless specific projects were included in a future renewal of the capital improvements or transportation programs.

Any community’s public-safety services will factor into its economic development success. The 18-member Safety & Justice Roundtable comprised of Springfield-Greene County citizens issued its final report in July, which cited the pension fund shortfall as its top priority recommendation. The report stated:

“While there are needs and priorities throughout the criminal justice system, the Safety & Justice Roundtable feels strongly that solving the Springfield Police and Fire Pension issue should be our community’s first and highest priority. All other major advances within the system – many of which require additional funding – will be difficult to achieve before the pension issue has been resolved.”

• It gives the City the opportunity to close the self-funded plan and start the process of getting out of the pension business. As stated previously, the City cannot afford to close the plan without providing for its long-term sustainability.
• It maintains Springfield’s elected and constituent control over its municipal finances rather than facing the potential intervention of the court.
• It will allow public-safety services to be restored, primarily by being able to lift the hiring freeze on Police Officers and Firefighters by making General Fund revenue available again to fund the positions, and by assuring that new hires could be placed in the statewide LAGERS plan.
• It will restore the City’s contribution rate to a more sustainable level of Police/Fire Tier I payroll to to allow other important community priorities to be addressed.

For the last two budget years, the City has contributed $26 million to the Pension Fund. That, plus the drop in sales-tax revenue, has necessitated General Fund budget cuts of $12.7 million over the two budget years, with the impact documented above. Without additional revenue streams, the City’s contribution would expect to continue increasing in subsequent budget years to levels that would clearly cause further deterioration of the City’s ability to provide services funded by the General Fund.

As Missouri’s third-largest metro, Springfield also has additional priorities to address such as: Public safety needs outlined in the recent Safety & Justice Roundtable report; stormwater improvements; sustainability goals; and economic development activities to grow Springfield’s tax base and attract and retain young professionals.

Springfield currently has the lowest overall tax rate (combined city, county and state) among a number of surrounding communities and the lowest city tax rate among Missouri’s major metropolitan areas. A ¾-cent increase would put Springfield in the middle of major Missouri cities.

Springfield’s current city tax rate of 1.375 cents breaks down as follows: 1 cent General Sales Tax, which provides the basis of the City’s General Fund; 1/4-cent sales tax for capital improvements; and 1/8-cent sales tax for transportation.

(Sales taxes for other services such as E911 and Parks are countywide taxes included in the 1.250 county sales tax rate. The state collects 4.225 percent to round out the overall 6.850 combined sales tax rate.)

The 3/4-cent increase would equal 75 cents on every $100 in taxable purchases until the tax sunsets.

The cost to residents is the same as the cost to business cited above. It is worth noting that visitors to Springfield pay an estimated 50 percent of our sales tax revenue. By “visitors”, this includes anyone who lives outside of city limits – people who work and shop in Springfield, but live outside the city along with the tourists and visitors who come to the city. People who live outside of Springfield benefit from many public services when they are in the city.

The City is proud of its track record of accountability in delivering on commitments made to voters in its two sales tax programs to support capital improvements and transportation infrastructure improvements.

The ¼-cent capital improvements sales tax was initiated in 1989 and has been renewed by voters in 1992 (73 percent approval); 1995 (83 percent approval); 1998 (78 percent approval; 2001 (74 percent approval); 2004 (67 percent approval); and 2007 (78 percent approval). The City has fulfilled its commitment of “Progress as Promised” made in each of those referendums, which included a specific list of projects to be accomplished within the sunset timeframe. These projects range from City road improvements to school sidewalks to neighborhood improvement projects.

The 1/8-cent sales tax for transportation has made Springfield a national leader in its innovative partnership with the Missouri Department of Transportation. Voters first approved this referendum in 1996 with 57 percent approval. The program was renewed in 2000 with 82 percent approval; in 2004 with 81 percent approval and in 2008 with 81 percent approval. This program has delivered more than $100 million in high-priority transportation improvements including dual-left and other intersection improvements across Springfield; interchange improvements and pavement preservation. The City leverages its $20 million in tax revenues into an additional $40 million in county, state, federal and private funds.

In the late ‘70s, voters approved the 1-cent General Sales Tax. This is estimated to produce approximately $38.5 million a year for the City’s General Fund. (Other sources of revenue in the General Fund include the gross-receipts tax and other fees.) The General Fund pays for the City’s core services and general administration. Approximately 56 percent of the General Fund is dedicated to the Police and Fire departments. It also covers areas such as Building Development Services, portions of basic Public Works services, Finance, City Attorney, City Clerk, City Manager, Planning, Public Information, Human Resources and Information Systems. In General Fund departments, approximately 70 percent of the funding is for personnel and the remaining 30 percent covers equipment, supplies and services.

Yes. The state legislation that gave Missouri cities authorization to propose this type of referendum is very specific about how it can be used and how the ballot language can be worded. The enabling legislation allows cities to seek up to a 1-cent sales tax increase specifically for public-safety needs. Our ballot language specifies that the revenue can only be used for the Police/Fire pension fund and that it will be repealed or continued in five years.

The ballot language reads as follows:

Question 1
Shall the City of Springfield impose a sales tax at a rate of three-quarter of one percent (3/4-cent) solely for the purpose of providing revenues for the Springfield Police Officers’ and Firefighters’ Pension System, with said tax to sunset upon the Pension System fund reaching a fully-funded (100%) status as determined by an independent actuarial study conducted for the Pension System Board of Trustees?

Yes. The state enabling legislation restricts the ballot measure to a five-year time frame at which point voters would have the option to repeal or continue it.
Because the tax will likely need to be continued at least one time, state law restricts the language to allow a repeal. We cannot include the “five-year sunset” provision that was included in the February ballot language.

The Citizens’ Task Force and the City Council have been clear that with the delay and economic conditions since February and the lower revenue stream from ¾-cent, compared to 1 cent, it will most likely require at least one continuation. The goal is for the pension fund to reach a funded ratio at which the system can be expected to sustain itself through the ongoing contributions by the City and employees and the investment returns.

The Citizens’ Task Force reviewed a number of other issues that it voted not to recommend as potential revenues sources for the Pension Fund.

• The Task Force recommended not using or selling City Utilities’ assets to fund the pension system.
• The Task Force recommended not reinstating a 1.5 mill property tax levy once used to fund the pension system. (Additional information below on this item.)
• The Task Force recommended continuing the ¼-cent sales tax for capital improvements as it stands and not rolling back that revenue as a trade off for pension system revenue.
• The Task Force recommended not converting the pension benefit to a defined-contribution plan.
• The Task Force recommended the City not file for bankruptcy.

Prior to the Task Force’s work, the City Council and the City staff reviewed a number of other options. In summary, the changes the City Council made to the benefit plan in 2005-06, which included creation of the Tier II plan, were based on what the Council believed it had authority to do without going to a public vote for one or more City Charter changes and without incurring legal challenges.

Those previous steps included:

• Increasing the City contribution rate;
• Withholding two pay increases for police and fire employees so that funding would go to the plan;
• Reducing benefits for new hires, including the return of contribution and changing the multiplier, the minimum years of service, the COLA, and disability benefits.
• Changing the composition of the Pension Board;
• Changing the investment policy to give the Board greater investment flexibility and lowered investment fees.
• Capping excessive leave accumulation;
• Contributing $500,000 from an earlier telecommunications settlement; and
• Contributing $10.22 million from the AT&T Mobility telecommunications settlement in March 2009.

Using the tool of Pension Obligation Bonds (POBs) has been reviewed both prior to the Task Force’s creation and during the Task Force’s work. This is a strategy some plans consider to prop up their underfunding: In effect, bonds are issued and the funds then invested. The bonds are then repaid with the investment income. In effect, the system could come out ahead by using the spread between the interest paid on the bonds and the return of the investments. On the other hand, investment returns may be lower than the cost of borrowing the money, which would increase the unfunded liability rather than improving it. In the recent tight bond market, POBs went unsold, which increased the cost of this strategy.

Neither the Pension Board nor the Task Force recommended using this tool. In its executive summary, the Citizens’ Task Force specifically noted that it “does not recommend pursuing Pension Obligation Bonds due to the higher level of risk associated with this strategy.”

Also prior to the Task Force, the City and Pension Board studied the ordinance voters approved in 1958 authorizing the City to levy a property tax up to 1.5 mills. This levy would not generate enough revenue to stand on its own without an additional revenue source. The consensus has been that while Council may have authority to make the change, it would not be a wise move to re-establish it without a public vote. Property taxes are paid only by City property owners so non-residents, who do use public safety and other services when they are in Springfield, would not share in the cost.

A hotel/motel tax was briefly considered, but was also considered insufficient to address the issue. Visitors would bear all of the costs of addressing this issue, and it might negatively affect tourism revenue.

Many communities across the country are dealing with very similar issues for their public-employee pension systems. The City of St. Louis faced a court order to address its pension shortfall; in February 2008, voters there approved a sales tax increase for public safety needs, including its pension system. The City of Vallejo, Calif., declared bankrupty over a failing pension system. Springfield’s Police and Fire chiefs cite examples of other cities being in denial; they continue to recruit police and firefighters with promises of pensions that are also in underfunded plans. Several larger cities had even suggested that public pension plans be included in the Federal rescue plan for the financial industry. We believe that by addressing this issue now, Springfield will be at a competitive advantage over cities that are not proactively addressing similarly serious problems.

The City has implemented a General Fund hiring freeze, which includes 48 Police and Fire positions. The impact of this is outlined in the question above regarding benefits to the community if the tax is approved.

The obligation continues to grow to what will soon require an unsustainable City contribution from the General Fund that will further erode the services provided by the General Fund, including public safety, public works, planning and building development as the most externally visible. More specific information regarding the City’s future obligation will be available when the five-year actuarial experience study is completed in October.

Another area of concern continues to be protecting the City’s bond rating. Springfield currently enjoys an Aa bond rating; if this rating drops to A, the City would pay an estimated $13 million in additional interest expense over a typical 20-year bond issue. This means more revenue going toward interest that could be used for actual projects. The problem exacerbates if the rating were to drop to BBB or lower.

The most significant new consequence cited since the February election is the specter of legal action raised by St. Louis attorney Dan Tobben in two public meetings. In addition to his stated intent to file suit on behalf of the employee associations he represents, he also has publically encouraged the Pension Board to file suit against the City if the community fails to address this obligation soon.

It should be made clear, however, that there has never been an instance in which the City has not met its obligation for any employee’s retirement or disability benefits.