Kansas City’s next mayor will inherit a municipal budget stretched to cover a lengthening list of urgent needs.
Council members Jolie Justus and Quinton Lucas, the two candidates in the June 18 runoff, take frequent questions from voters who are keenly aware of these and other issues.
One budget line item that gets less attention from both voters and candidates: the cost of pension plans Kansas City offers its employees.
Pensions were underfunded by more than $733 million when the last fiscal year ended in April 2018. And while the city’s four pension funds — which cover police officers, civilian police employees, firefighters and non-public safety city employees — are in better shape than they were a few years ago, the cost to keep them in that shape is projected to grow.
Ten years ago, pensions accounted for 8.5 percent of spending from the city’s constrained general fund, according to the city’s finance department. Now, they absorb more than 13 percent, and by 2024, they’re expected to take up 15 percent of that fund.
“We have to figure out something to do to slow this growth in projected employer contributions because our taxes aren’t growing as fast as this single line-item grows,” said Randy Landes, the city’s finance director.
It’s a problem significant enough that Moody’s, which rates the city’s credit, warned continued pension obligations, along with other debt, could risk the city’s overall credit rating — though it raised the city’s credit outlook from negative to stable in that report.
“Unfunded pension liabilities represent a significant portion of the city’s balance sheet leverage and will likely continue growing unless the city materially increases its contribution levels or enacts reforms, posing a potential long-term budget challenge,” the report says.
Finding a way to fund city employees’ retirements and manage the rest of the budget will be a major task when the new mayor — either Justus or Lucas — takes over in August. Just weeks ahead of the swearing-in ceremony, they’ll get the recommendations of a task force appointed by Mayor Sly James to address the issue.
“Some cities have taken bankruptcy, largely because of their pension liability, and obviously, we don’t anticipate anything like that,” said Herb Kohn, an attorney for Bryan Cave Leighton Paisner who chairs that task force.
That task force could come back with an array of options, including progressively higher city contributions, benefits reforms or finding a way to get a higher return on the city’s investments.
Justus declined to stake out a position on benefits reforms, saying she wanted to see the task force’s report first.
“I feel completely comfortable saying that I am a clean slate right now when it comes to options and opportunities,” Justus said. “I am not going to say that I am in favor of one over another. I am not going to say I am totally ruling anything out. I think that...would be a disservice to the people that are doing the task force right now.”
Lucas, who has been endorsed by the police and fire unions, the biggest beneficiaries of the current system, did not respond to a voicemail or text messages requesting comment.
How did we get here?
The early 2000s marked a time of underfunding. For several years, the city didn’t make the full annual payment deemed necessary — called the actuarial required contribution — to keep the plan on track toward full funding.
Despite that, the plans were in relatively good health. In 2008, all four of the city’s pensions were more than 83 percent funded. Two were more than 93 percent funded.
The next year, The Great Recession knocked the legs out from under them. Assets in all four plans lost tremendous value, and in one year, they plummeted from more than 83 percent funded to between 69 and 73 percent funded.
The city kept funding the pension plans at steady or climbing dollar figures. But when the value of the funds tanked, the amount of money the city needed to pay to offset the losses spiked.
It didn’t meet those figures for several years, meaning the annual pension payments weren’t enough to keep the plans on track. Sometimes the city paid as little as half of what was necessary.
Clawing back from a drop off like that, city finance director Randy Landes said, is tough.
By 2018 the firefighters plan was 70.8 percent funded, police 76 percent. Pensions for civilian police and municipal employees were more than 80 percent funded.
“The hole that we dug in 2008, 2009 was so deep that it has taken a decade to sort of get back what we lost and then sort of get back to moving into positive territory,” Landes said.
For a while, the gap between the unfunded and funded portion of the pension plans remained relatively stable.
But now, Landes said, it’s starting to grow again. Landes cited a couple of reasons.
Pension plan officers calculate required contributions based on a set of assumptions, including life expectancy for retirees, inflation, expected returns on investment and the number of participants in a plan.
Three of the city’s pension plans expect a 7.5 percent return. The firefighters lowered their assumption to 7.25 percent.
But Kansas City’s funds aren’t hitting that mark every year. When the funds don’t get that return in the investment market, it puts the plan behind. That’s what happened in 2009.
Pension plans also do “experience studies,” Landes said, which look at other assumptions about inflation, the number of participants in the plan or how long retirees will live. All of the plans, he said, have adjusted those assumptions to be more accurate and bumped up the amount of money the city has to contribute.
What’s the solution?
The city has already enacted a slate of reforms, including requiring that the budget include the full recommended pension payment each year, raising the retirement age for new hires, minimizing cost-of-living adjustments and requiring employees to put more of their paycheck into the fund. It’s unclear what the city and unions that represent their employees might be able to agree to this time.
Mayor James’ task force is expected to issue recommendations in July, just weeks before either Justus or Lucas takes office.
The challenge, Kohn said, is balancing the interests of four groups: current retirees drawing monthly checks, active employees counting on their pensions to be there later, active employees who are working toward pension eligibility and future workers the city hopes to recruit.
“Pensions are important,” said Brad Lemon, president of the Fraternal Order of Police Lodge 99, the union representing Kansas City officers. “These guys don’t work for a lot of money. You look across the country, we’re definitely not paid top of scale by any means, so pensions are important. It’s how we recruit, how we retain people.”
To Tim Dupin, president of the International Association of Fire Fighters Local 42, it’s simple. The city needs to make the required contributions every year, which it has been doing since it enacted pension reform.
“If the city would concentrate on their obligation to, their promise to, their employees as much as they do some of the TIFs that they give away, we wouldn’t have a pension issue,” Dupin said, referencing the city’s often-critiqued economic development incentives.
Landes said while pensions are a budget and financial issue for the city, the situation isn’t dire and he did not suggest retirees’ benefits would be at risk.
Justus said as she weighs pension options, she’ll be looking through the lens of ensuring there are benefits for the city’s retirees.
“I’ve talked to all of the unions that are organized here with our city employees and told them that our top priority is making sure that their retirement is protected,” Justus said.