MERIDEN — Taxpayers for years have paid a steep price to atone for the city’s decades-long failure to adequately fund its employee pension obligations.
In this year’s budget alone, the city will spend $9.3 million of its overall $197 million budget on catch-up payments to chip away at its unfunded pension liabilities. The city has a total estimated liability of $120 million between its three funds — two for police officers and firefighters hired before 2003, and a third for all other city employees, including officers and firefighters hired after 2003. The funds collectively had $249.6 million as of May.
The catch-up payments, made in addition to the roughly $4 million “normal payment” the city would otherwise be making each year, are part of a plan Meriden began in 2007 to catch up. From 2007 to 2017, the city paid a total of $44.3 million in catch-up payments, according to documents provided by the Finance Department.
“It has a significant, noticeable detriment to the budget every year, the fact that this issue was not addressed from the very beginning,” City Manager Tim Coon said.
The city’s pension gap was largely created because past leaders chose to put less into pension funds for police and fire than what was recommended by the city’s actuary. Each year, actuaries recommend a certain contribution — the “actuarially determined employer contribution” — based on how much the plans are currently funded. In nearly every year from the 1980s up until 2007, the city only paid between 60 and 80 percent of the recommended contribution into its fire and police pension plans. In 2000, Meriden did not put any money into the plans despite actuaries recommending a payment of $7.2 million, according to data provided by the city.
“They don’t go away,” Finance Committee Chairman Brian Daniels said about unpaid pension bills. “They just get kicked down the road to the next generation.”‘Old sins’
In 2007, leaders put their foot down and addressed the issue by enacting the city’s current plan for paying off its pension liability. Each year since 2007, Meriden has paid its normal contribution, in addition to actuarially recommended catch-up payments. At the current rate, the city will need to continue making these catch-up payments, in addition to the standard annual contribution, for roughly another 20 to 25 years — 19 years to close the gap in the city employee pension plan and 24 years to close the gap in the plans for fire and police hired before 2003.
When the city first began making payments “toward the old sins” in 2007, the payment amounts were just under $2 million, city Finance Director Michael Lupkas said. The amount of the required catch-up payments calculated by actuaries has since steadily climbed to almost $10 million as a result of several factors, including the market crash of 2008, Lupkas said. For each year that the pension plans are not adequately funded, Lupkas added, the city loses out on earning interest. The city has invested nearly all of the $250 million in its pension fund and assumes an annual rate of return of 7.75 percent.
It’s reasonable to assume required catch-up payments the city will need to pay each year will trend upward in future years, Lupkas said, adding it will depend on the city’s investment returns.
“If we have spectacular years in market gain, it could go down,” Lupkas said.
In addition to the catch-up payments, the city makes a standard, actuarially recommended contribution annually of about $4 million, about half of which comes from deductions taken from employees’ pay.
The “normal payment” represents the additional cost brought on by each active employee in the pension funds working another year, Lupkas said. While the cost is expected to gradually come down as more employees retire, Meriden will begin to bear a larger portion of the cost as the retired employees no longer contribute into the fund, Lupkas said.
This year’s “old sins” payment of $9.3 million equates to about three mills of tax revenue, or 7 percent of the city’s overall mill rate of 40.86, according to Lupkas. In other words, seven percent of residents’ tax dollars go toward making up for past underpayments, Daniels said.
The $9.3 million catch-up payment, Coon said, is money that could otherwise go back to taxpayers or be spent on services.
“The pensions are what’s killing our budget year after year,” said longtime We the People Councilor Walter Shamock, first elected as a Republican in 1989.How we got here
Meriden, as with many Connecticut municipalities and the state government, has a long history of shorting its annual pension payments, usually to avoid tax increases, and leaving large unfunded liabilities for future generations to resolve.
Up until 1980, the city used a “pay-as-you-go” system for funding the pension of retired police officers and firefighters, which meant it took the money each year out of its general fund rather than annually putting money into a pension fund that would earn interest over time, according to Record-Journal stories published at the time. Prior to 1980, the city only had one pension investment fund — the one for municipal workers.
After years of the city’s actuary, Martin E. Segal Co. of Farmington, sounding periodic warning signs that the pay-as-you-go system would need to be changed, the city in 1980 established a pension fund for firefighters and police. Meriden began contributing $500,000 each year, which went against the advice of actuaries, who determined the city would need to contribute $2 million into the fund annually in order to earn enough interest to pay retirees. Then-Police Major Adam Sokolowski urged the council to put more money toward pensions, expressing concern that the “well will go dry” at the current contribution of $500,000.
“Nobody has wanted to bite the bullet,” Sokolowski said in 1980.
Then-City Manager Dana Miller opted not to increase the payment at the time because he felt the city couldn’t afford it. Taxes would need to be raised one mill for the city to follow the actuaries’ advice and contribute $2 million, Miller said. Republican Mayor William Tracy went along with Miller’s recommendation, telling the Record-Journal at the time, “My feeling is that this has to be done gradually. For the last 1,000 years, no one has paid any attention to it. It would set the city on its ear to fund it in full.”
With the new fire and police retirement funds in place, the city’s pension gap only continued to climb throughout the 1980s as city leaders in most years continued to budget less than what actuaries recommended.
According to records maintained by the city, the fire and police pension funds were underfunded by about $11 million, while the fund for municipal employees was underfunded by about $2 million at the time. By 1992, the police and fire plans were underfunded by $23.2 million and $22.9 million, respectively, with the city employee plan overfunded by $9.3 million.Flat taxes, butat what cost?
Throughout the 1990s, the city continued to pay between 60 and 80 percent of its annual required contribution into the fire and police plans, underfunding the two plans each year by between $1.6 million and $2.2 million from 1991 to 1999.
Former city leaders said the underpayments were largely a result of a push by city leaders, namely Democratic Mayor Joseph J. Marinan Jr., to control spending and keep taxes flat. The city did not raise property taxes for a five-year period from 1995 to 2000, keeping the mill rate at 35.8.
“Joe felt that the taxes needed to be held level … and one of the ways that was achieved was not funding the pension,” said Larry Kendzior, city manager from 2005 to 2016.
Marinan said he felt immense pressure to keep taxes down during his time as mayor from 1993 to 2001. When he took office, Meriden’s tax rate of 64.5 mills was one of the highest in Connecticut. Following a city-wide property revaluation, the tax rate dropped to 45.1 in 1994 and 35.8 in 1995.
Marinan’s determination to fight off tax increases was popular among residents, former Democratic Councilor and later Mayor Mike Rohde said, but it came at a high cost.
“We had a mayor whose political aspirations were No. 1, even if it meant kicking the can down the road,” Rohde said. “It was 100 percent him. He wanted to have no tax increase.”
Marinan disputed Rohde and Kendzior’s statements during an interview last week, saying the city’s annual contribution was determined each year in meetings between the pension board and then-City Manager Roger Kemp. Kemp couldn’t be reached for comment.
“That was the responsibility of the pension board and city manager,” Marinan said. “... I can’t recall the council ever cutting a city manager-recommended pension contribution.”
Rohde, at one time the council’s majority leader, conceded the council could have done more to address the city’s growing pension liability.
“I think we were riding Marinan’s popularity. He was getting elected and people liked what he was doing, so there was a certain acquiescence. But in retrospect, there should have been pushback on that and a better approach to funding the necessary pension obligations,” Rohde said.
Shamock, elected to the council in 1989, said the council was “between a rock and a hard place” in deciding whether to fully fund its pension or control taxes.
“Taxes would have skyrocketed because we were so underfunded,” he said.
Daniels, who got on the council in 2007, lambasted past councils’ decisions to short their pension payment to keep taxes flat.
“That’s not being between a rock and a hard place. You have to pay your bills, period,” Daniels said. “... You do not have an option to not pay your obligations. While you’re always under budgetary pressures, that’s just not an option. If everyone just takes care of their bills as you go along, that’s how you get through.”
Bonding pension liability
In what some councilors considered a “desperation move,” the council in 1999 decided to address its unfunded liabilities by issuing pension obligation bonds, an option made possible by a state law passed in 2000 allowing municipalities to invest bond proceeds in hopes that the return on investment would exceed bond interest rates.
City officials proposed the idea as the council was putting together its 1999-2000 budget as a “tool” to avoid a tax increase for the fifth consecutive year, according to archived news accounts. Issuing pension obligation bonds, which other Connecticut municipalities have done with mixed results, is considered a high-risk gamble because a municipality could end up worse off if bond proceeds don’t yield a high return. However, some municipalities prefer bonding because it allows them to limit their annual contributions to a manageable figure.
“Pension bonds are sort of a gamble. You’re basically saying you can bond this and make money back over a period of time,” Kendzior said.
Kemp and councilors later abandoned their bonding plan after determining it would cost less to continue paying into the fund. The reversal came after the city chose not to put its budgeted $2.4 million contributions into the police and fire pension funds during the Fiscal Year 1999-2000 because it had planned to go the bonding route instead. As a result, the fire and pension funds were underfunded in that year by $7.2 million, which exacerbated the city’s pension gap, Kendzior said. The lack of any contribution in 2000 puzzles city officials looking back.
“I don’t even know how that’s an option,” Daniels said.
A major disadvantage to bonding pension debt at the time was that Meriden’s bond rating had dropped to one of the lowest in the state as a result of its pension liability, meaning the city would have to pay a higher interest rate on pension obligation bonds, giving it less margin for error in trying to earn that money back on the market.
While the police and fire pension plans were consistently underfunded throughout the 1990s, the city’s other plan at the time, the city employee plan, was overfunded most years through the late 1980s and 1990s. In the late 1990s, the plan was overfunded by about $25 million, which allowed the city to save money by not contributing to the plan from 2000 to 2005 and contributing about $1 million to $2 million less than usual from 2006 to 2013. It’s unclear why the city employee pension plan was overfunded while the other plan was being underfunded.Ripple effects
Many officials interviewed credited Kendzior, who became city manager in 2005, Lupkas and former councilor Brian Kogut for leading the push to enact a plan for addressing the city’s pension debt.
“It takes a lot of discipline to pay the bills that are due. It’s not easy, nobody wants to increase taxes,” Daniels said.
Tax increases of recent years are often seen through the lens of the 1990s, Rohde said.
“People got used to, ‘Yeah, we can just run the city on no increases,’ ” Rohde said about the 1990s. “Well, it was a false reality that they were living in. Looking back, I wish we would have been more like the Kendzior years where we said, ‘No, we can’t underfund these things, and we’re going to have to raise taxes.’”
The retirement incentive program offered to longtime non-public safety employees last year, Lupkas said, won’t have a major impact on the city’s long-term liability payoff plan. For the program, retirees agreed to forfeit their “separation payment” for unused sick and vacation days, which is usually paid out upon retirement. In exchange, the employees will get that payment rolled into their pension, resulting in a larger payout.
Lupkas said prior pension liability calculations already had built-in assumptions that the participating employees would retire in the relatively near future.
“Assuming you make your market return … the only thing the incentive plan will do to the pension plans is if you had somebody that was going to work until they die and they left right now and collected a pension, that would be the effect,” Lupkas said. “Otherwise, there are all the actuary assumptions in place on what your expected (retirement) date is.”
As of June 2016, the most recent figures provided by the city, Meriden’s employee pension plan had 1,124 members (531 active employees), the pension plan for police employees hired before 2003 had 192 members (46 active), and the plan for fire employees hired before 2003 had 169 members (47 active).
In addition to making payments each year to close its pension gap, the city has also sought to address the problem over the years by moving from defined benefit plans to less costly defined contribution plans.
Police and fire employees had their own pension fund up until 2003, when the city closed the old fire and police pension funds and placed new hires into the city employee plan. At that time, the benefit calculation for police and fire employees was also changed in an effort to save the city money. In 2011, the city employee pension plan was closed to non-public safety employees hired after 2011 and those new hires have since been put on a defined contribution plan, according to Lupkas. Around 2014, the city reached a deal to move new police hires to a “hybrid” defined-pension and defined-contribution model, again changing the benefit calculation to reduce costs. The city later did the same for fire employees in 2016, according to Lupkas.
Presidents of the city’s police and fire unions couldn’t be reached for comment.
Since the city began paying its pension bills in full in 2007, the city’s bond rating has risen several tiers, allowing it to receive better interest rates for large projects, such as the Platt and Maloney high school renovations.
Pension liabilities are one of the many factors agencies look at when assessing a city’s ability to meet its financial commitments. In 1999, Moody’s credit rating agency gave Meriden a rating of BAA1. In 2016, the agency gave Meriden a rating of A1, up three positions from BAA1.
“The improved bond rating saved the city a lot of money over the course of time,” Kendzior said.
The upswing in bond ratings, Coon and Daniels said, is evidence that the city is on a good fiscal track.
“We’re on a path, a path to success,” Coon said. “We’d rather not be on this path, but it’s where we’re at.”