On maps, Kansas City sits at the eastern edge of the Great Plains. On balance sheets, it’s atop a mountain of debt and pension obligations.
City Hall’s credit card carries a balance of $1.5 billion in tax-supported debt, about triple what it was at the turn of the century. It comes to $3,100 in unpaid bills for every adult and child in the city –– and much higher than per capita debt in peer cities such as Fort Worth, Oklahoma City and Omaha.
That doesn’t include the cost of pensions for municipal employees. The city is $811.7 million short of what it needs to make good on commitments to current and future retirees — up from $587.6 million in 2014. In 2000, the shortage was $21 million. The escalating price tag will bring the city back to the bargaining table later this year, when agreements with employee unions allow for a reopening of negotiations on pension issues.
Over time, bond debt and the pension tab could destabilize the city’s finances, critics say, squeezing the cash available for basics like trash pick up, pothole repair and police and fire service.
“We’re pretty much off the charts relative to our peers,” said Crosby Kemper III, co-founder and chairman of the Show-Me Institute, a conservative think tank. “We have high debt and therefore high taxes.”
The sale of bonds has paid for signature downtown projects like Sprint Center, the Power and Light District and expanded Bartle Hall. The city will also use $800 million in general obligation bond funding, approved by voters last year, to upgrade flood control and rehabilitate badly deteriorated roads and bridges.
City Manager Troy Schulte defends that spending:
“Investing in infrastructure that will last 40, 50 more years is the correct use of debt. Just as people know that a mortgage is good debt as you invest in property to secure your family’s home and future.” Going forward, the city plans to pay off about $100 million in debt each year, while using $40 million annually in bond sales for the long-deferred repairs. Schulte said the goal is to eliminate most of the debt over the next 15 to 20 years.
Kemper noted that some of the debt-financed developments, like Sprint Center, have justified the public investment. But it will be many years before the city retires the debt it took on for Power and Light, the seven-block entertainment district built by Cordish Co. of Baltimore with the help of $295 million in bonds issued in 2006.
Kemper described the project as “a subsidy of the drinking habits of young Johnson Countians.”
The project brought in $6.4 million in revenues last year, not nearly enough to cover the $16.5 million in debt service payments. The city has since said it will no longer guarantee that kind of debt for big development ventures.
Pensions pose the bigger long-term challenge, officials said. While city revenues have grown an average of about 1.5 percent over the last ten years, pension expenses have risen by nearly seven percent.
In 2018, the city contributed $81. 2 million to its four employee pension plans (police, fire, municipal workers and police civilian personnel) in the current fiscal year. Most of it ($64.6 million) is from the general fund, where it comprises 12 percent of total spending.
Many factors have combined over time to dramatically escalate costs.
Until a few years ago, the city contributed less than the annual amount recommended by analysts for the pension plans, each operated by independent administrators and boards of trustees. Returns on investment of pension funds, also handled by each board, have been lower than predicted. People are living longer, which means they are drawing more payments.
Then there was the recession. While it officially ended in 2009, the funds never completely recovered their losses. In 2008, the four funds had money to cover, on average, 89.3 percent of future costs. That has dipped to 75 percent.
There are only a few potential fixes: higher contributions from employees or city government; reductions in benefits, or all of the above. Another option is switching to a 401K system in which the city matches a certain portion of employee contributions. Former City Councilman John Sharp cautioned that cutting too deeply into pensions means “irreparable damage to your recruiting and retention,” making the city less competitive for hiring top talent.
“I do think in the labor market you get what you pay for,” Sharp said. “Our salaries for many positions, especially the ones with hourly wages, are not what the private sector pays. And if you’re not going to pay competitive salaries, you better have a good benefit package.”
Wall Street is watching the situation. Moody’s, one of the ratings agencies that advises in investors on Kansas City’s financial health, downgraded its outlook last year from “stable” to “negative.” It cited the potential long-term effects of high debt and what it called “a significantly elevated pension liability.”
“These things will require more and more of the city’s resources,” said Kenneth Surgenor, an analyst for Moody’s public finance group.
Moody’s still gives the city a credit rating just a couple of notches below the coveted AAA standard. But without a plan to address pension obligations, that could slide, meaning that the city would have to borrow at higher interest rates. Those costs would ultimately be passed on to taxpayers.
Unfunded pension obligations will bring the city back to the bargaining table later this year, when contracts with its police, fire and municipal employee unions allow for a reopening of negotiations on pension issues.
“We’re losing ground,” said city finance director Randall Landes. “It’s time to think again collectively at what we need to to do as a city to make ensure were able to meet all the promises we’ve made for all the benefits we’ve negotiated.”
Other cities and states, including Kansas and Missouri, face the same dilemma. In 2016, local governments faced a pension investment gap of $3.7 trillion, according to Moody’s.
Last November, Houston voters passed a $1 billion bond referendum to fund public sector pensions. Dallas is looking at more than $3 billion in pension liabilities, worsened by bad real estate investments.
Kansas City thought it had worked out a long-term solution. Following some of the recommendations of a task force formed in 2010 by then-Mayor Mark Funkhouser, it negotiated with unions for changes in each of the plans.
In general, they required employees to contribute a higher percentage of their pay. New hires need to work longer to receive full retirement benefits. They will also receive a smaller annual cost of living adjustments when they start collecting their pensions.
And, the city agreed to pay the full annual cost as recommended by fund actuaries. It took three years to hammer out the changes with union leaders. But in 2013, officials hailed the reforms.
City Councilwoman Jan Marcason, who chaired the council’s finance committee, called the changes as a “milestone.” Schulte said the agreement “puts us on a path to address a $600 million underfunded liability over the next 30 years.”
Instead, the balance continued to grow, reaching $811 million in 2017.
“They’re not making the progress we hoped they would when we made our report five years ago,” said attorney Herb Kohn, a one-time adviser to former Mayor Kay Barnes, who headed the pension task force. He suggested that it might be time for another outside group to revisit the issues.
Pension finances have been hurt by overoptimistic forecasts of investment returns. City plans have predicted annual gains of about 7.5 percent. While markets have been hot recently, they’ve also been volatile. For the last four years, fire fighters returns have averaged 6.4 percent.
Other cities are making those adjustments. Last year the Los Angeles pension board voted to cut its assumed rate of return to from 7.5 percent to 7.25 percent.
“Our assumptions about the market need to be as close to reality as possible,” said Mayor Pro Tem Scott Wagner, perhaps as low as six percent.
Others suggest that the city didn’t go far enough. An analysis by the Citizens Association, a non-partisan government reform group, called the task force recommendations “thoughtful but modest.” The group called for more fundamental changes, such as lowering of pension “multipliers”–– numbers applied to annual salaries and years of service that determine the size of a retiree’s payment.
Fire Captain Bill Galvin president of the International Association of Fire Fighters Local 42, and Brad Lemon, president of the Fraternal Order of Police Lodge 99, did not respond to multiple requests for comment.
The last round of pension talks, completed in 2013, took three years. City officials said they expect the coming negotiations to be just as complex and contentious.
“Hard and political,” Landes predicted.