City of Guelph pension challenge?

Posted by Phil Andrews

We're exploring a media release issued surrounding pension issues  purportedly faced by the City of Guelph. It was sent out by an activist group that is seeking public pension reform.

I have kept the element in the release as we received them - i.e. - all-caps and bolded bits. Here's the release:

 

Guelph's PENSION PICKLE : Why Guelph Taxpayers can expect double-digit tax increases.

New stats show a hidden $ 41.7 million tax bill

GUELPH: The group Fair Pensions For All has dropped a bombshell on City Council. FPFA is hard at work at what they expect to be the single largest challenge to City Council in the coming years - City employee pensions.

While it’s not the first time they have brought the issue front and centre, FPFA is ringing the alarm bells over the latest findings involving the Ontario Municipal Employees Retirement fund (OMERS). The pension fund is underfunded by billions, and Guelph taxpayers will be expected to pick up their share of the shortfall.

FPFA is a pension reform advocacy group that sees its job as educating Council and the Mayor on the urgency of the pension issue. Bill Tufts, founder of FPFA, says he has seen his share of blank faces.

“We have spoken to Councilors and Mayors throughout the province, and while they are starting to come around, clearly they are in the dark on the gravity of the crisis,“ he says. “The situation is staggering. Last year, despite $2.7 billion in contributions, the shortfall increased to $7.3 billion – up from only $4.5 billion the year before.”

Each city is responsible for pickling up their share of the pension shortfall. With 263,000 current municipal employees in the plan, this works out to a shortfall of $27,750 for each employee. The City of Guelph had 1,506 employees at the end of 2011. This makes Guelph's share of the shortfall $41.7 million rising to $51.5 million by year end.

Recently the Province launched a full review of the OMERS pension system in recognition of the burgeoning pension deficit. All municipalities were asked for input and to exchange dialogue. According to OMERS, nobody from Guelph has engaged them on the issue.

“We have sent emails to several members of council, including the Mayor. The prevailing opinion is that it’s a provincial problem. That is simply naïve and irresponsible.“ said Tufts. "The deficit will prove unsustainable, and is on track to being the big issue for our next civic election."

One of the challenges, as Tufts points out, is that City Councilors themselves are entitled to an OMERS pension, although not all city's participate. " it is estimated the top 10 paid employees of City Hall could be entitled to lifetime pension benefits of over 40.1 million dollars.“ Tufts said. “Does that seem reasonable in this economy?” 

Bill Tufts, Founder of Fair Pensions For All and co-author of Pension Ponzi (Wiley & Sons) has studied other cities as well.

“Saint John, NB, is actually considering bankruptcy, Regina has a major problem, and Montreal is in trouble too,” he points out.

Tufts is hoping that individual conversations with Councilors will bring attention to the problem. “It’s not too late to fix things. It will take layoffs, and it will take pay cuts, but most of all, it will take the will of a concerned Council to fix the problem,“ he said.

Comments

[Doug]

Say it with me now:

WELCOME TO CALIFORNIA!!!

[Lucky]

This has got me worried about my workplace pension plan. Oh wait, I am self-employed. I forgot that I don't get one. Looks like I am on my own. Poor me.......

I know, I will start saving and not live beyond my means. All the financial gurus say it is easy, but only if there is no tax increase to pay for the pension of everyone else!

[Steve]

Do some research on Bill Tufts first. He's an ultra- conservative member of the right-wing think tank, The Fraser Institute. He's not interested in fair pensions for all...this is just his usual anti-union rhetoric.
I wonder why he's targeting Guelph...or is this just a personalized form letter he's sending out to every municipality in the province? More likely he's just spamming the newspapers for free publicity for his book.

[D C]

Is this the same group that sends out that junkmail about pensions which is intentionally packaged to look like it came from the federal government?

[Cal]

Steve and D.C. - stay tuned. This isn't fiction. Ask U of G employees in a similar boat.

[D C]

Ask anyone, Cal. Pension shortfalls are a reality everywhere. Old style "defined benefit" plans require pension fund managers to pay specified retirement benefits, regardless of how well the investment portfolio performs. And demographically, with fewer paying into funds and more drawing benefits, lower returns on investments are made that much more problematic.

Virtually every employer has reverted to a "defined contribution" plan over the last five to ten years where they provide a certain level of pension contribution matching for each year employed and it is up to the worker to find a place to park those funds till retirement. That takes the pressure off fund managers.

But let's keep in mind that these defined benefit plans were agreed to years even decades ago by way of contract negotiations and it isn't simply a matter of an employer/fund manager now saying "oops, sorry, we know we promised to pay you these amounts when you retired, and you did contribute a lot yourself, but well, we really cannot afford it anymore." Especially hard for retired folks to swallow when these same fund managers paid themselves million dollar bonuses year after year.

[geo]

There is a good post on the ward 2 blog regarding this issue

[Cal]

Agreed, D.C.- "defined benefits" with OMERS resulted in the problematic audit. But the problem for the City coffers still remains unresolved - and nobody at City Hall appears to be addressing it - at least in public? Local taxpayers will be on the hook, not the Province. Again, stay tuned.

[Steve]

The OMERS shortfall is already being addressed with a temporary contribution rate increase (split 50/50 between employees and employers) and temporary benefit reductions for some employees (who terminate employment before being eligible for early retirement). These are expected to bring the plan back to full funding within ten years.
The City of Guelph isn't on the hook for anything else. This is scaremongering, pure and simple.

[geo]

If it becomes law that public sector employees can not use tax dollars to make up shortfalls in their pension plans, then I'll stop worrying.

[Craig Chamberlain]

Question: What is the employee contribution to this as a percentage of their pay (% of Gross)?

[RM]

Scaremongering is never good.  Perhaps Steve would help everyone here understand this issue better if he could explain what this means to the taxpayers of Guelph over the next 10-15 years.  If it's only going to cost $100,000 over 15 years then this really is scaremongering.  Are you able to quantity this number Steve?

[Puma]

Craig for 2012 its 8.3% up to CPP earning limit, and 12.8% above the CPP limit, see link below:

http://www.omers.com/pension/employers_news_article.aspx?newsid=5611

[Louis]

Say goodbye to all city services.

[Steve]

RM: I'm not an expert or an insider...I've just been doing my own cursory digging into this issue. If anyone knows better, feel free to correct me.

I believe the shortfall is supposed to be corrected by staged contribution increases (shared by employees and employers, aka taxpayers) over three years, with this coming year being the last. The new levels are supposed to stay in place until the plan comes back to full funding, estimated at 10-15 years.
Everything about this is an estimate, however. Future hires and increases, how many employees leave or take early retirement, investment returns and future private equity valuations, they're all based on projections. If the economy and stock market do well over the next few years then the temporary contribution increase period will be shorter. If it stagnates or tanks then it'll be longer.
In any case, the taxpayer is not responsible for replacing the entire funding shortfall. That will be a combination of investment gains, employee contributions, and employer (taxpayer) contributions...and, if necessary, benefit cutbacks.
The sky is not falling.

[RM]

I asked if you were able to quantify the impact on the City. Clearly you are unable. No shame in that.

While scaremongering is not good, comments like "the sky is not falling" without knowing anything is worse.

The only numbers we have are a $10 billion deficit on a plan with roughly 300,000 active members. Guelph has roughly 1,400 employees. While certainly not a linear calculation, it is fairly easy to ballpark the scale of our problem.

This is a huge number - huge. It will have a significant impact on municipalities over the next few years.

[D C]

Where are you getting your #'s from, RM?

[Paul]

RM:
According to the City Guelph has 1506 FTEs as of the end of 2011. So D C asks a valid quesion.

[RM]

Paul, DC

The $10B came from the staff comments on the Ward 2 blog. The 1,400 came from an old City report that is clearly out of date. The 300,000 came from an OMERS annual report - just over 400,000 members of which just over 100,000 are retired.

I was not trying to get a detailed, down to the penny number, just simply a ballpark assessment of the situation - sorry if I implied otherwise. I would encourage those who may have better information to share. I am quite confident the City would have a much more accurate number, although the probability of them sharing that with us is even lower than this pension fund eliminating its deficit without a serious public handout.

[johny]

RM - if you're looking for the amount of FTE's at the City, they release a report every year with the actual stats http://guelph.ca/careers.cfm?subCatID=1996&smocid=2570

[Steve]

And if you're looking for info on how OMERS plans to eliminate its deficit without a serious public handout, it's on their website: http://www.omers.com/pension/OMERS_Strategy_to_Return_Your_Plan_to_Full_Funding_Members.aspx

[John]

And if you're wondering why most people avoid commenting in these forums: http://www.alternet.org/media/why-online-comments-are-so-toxic

[geo]

Steve
I read through all that nonsense only to find that the whole thing depends on a 6.5% return.
Unless their planning on investing in Mexican drug cartels that's not gonna happen.

[Steve]

That's actually a good conservative estimate, geo. Their average return over the last eight years was 7.5%/year, and that includes the 2008 collapse. The long-term Dow Jones average is 10%/year.

[geo]

An average return of 7.5% over the last 8 years? Then why is OMERS in so much trouble now?

[geo]

Steve
Your silence is deafening.

[Steve]

Why is OMERS in trouble now?
The short answer is the financial crisis of late 2008...the one caused mainly by idiotic financial deregulation in the US, similar to what Bill Tufts and other conservatives (including one Stephen Harper) wanted to implement here in Canada.
General consensus is that OMERS is one of the best managed pension funds in the world. They'll probably get through this.

[Stephen]

Steve, you didn't answer Geo's question. If their annualized return over the past 8 years, which includes the 2008 crisis, was 7.5% how on earth could they have a $10 Billion deficit.

[Steve]

Because most of those gains came early, before the crash. So much so that they became highly overfunded, and were forced to correct that by stopping contributions and increasing benefit payouts for a while. Right at the peak of those corrective measures, the global markets tanked and the pendulum swung hard the other way, into a funding deficit.
So now the correction is to increase contributions and scale back payouts. If their recovery plan is based on estimated returns of only 6.5%, it shouldn't be a problem.

[geo]

Steve
6.5% is not realistic. Half that is overly optimistic.
Are all the members on board with scaled back payouts?
How do you scale back payouts when you have to honour a contract?

[Steve]

If a balance of equities can't average 6.5%/year over the next ten years then we'll all have much bigger problems than public service pension funding. The historical long term average is close to 10%.
And yes, all stakeholders have agreed to the increased contributions and scaled-back benefits.

[The Viggen]

So, who tops up my RRSP when the markets tank?

[geo]

Steve
How about you guys go to a defined contribution plan and work to 67 like the rest of us.

[Steve]

Us guys?
I don't have a pension plan.

[geo]

Steve
Why would someone who is not a member of OMERS defend them.

[Steve]

I'm not defending them. I'm countering (with actual facts) the misleading claims and outright lies propagated by Bill Tufts and his ridiculously named "Fair Pensions For All" organization.

[geo]

Why is fair pensions for all ridiculous?

[Steve]

Because they aren't advocating for fair pensions for you or me or anyone else who doesn't already have one. They're just complaining about the pensions that unions, particularly public service unions, have.
And they spread misinformation like this letter to do so.

[Serious Cynic]

Steve:
Once again you have it ALL WRONG.
FPFA is pointing out that over the past decade or so we - THE VOTERS AND TAXPAYERS
have been betrayed by the people elected to serve us As a result the pension liability for public employees - Federal, Provincial and Municipal is breaking the bank. Take a look locally and understand the damage that the GCL has done. Most of the candidates with a concern for the taxpayer have been removed from elected office. The free spenders supporting the Mayor's free spending agenda have the balance of power.
Steve, you are typical of the voter today, you claim not to be a member of a Municipal Union, but your actions of support for them speak volumes. Are you just another socialist wolf in Conservative sheep clothing?

[geo]

Do you really think the taxpayers of Ontario are going to work until at least 67 while shouldering an ever increasing tax burden so that public sector employees can retire in their late 50's while enjoying a guaranteed inflation proof pension?

[geo]

I think Mr.Drummond should look into this matter.