Public park and recreation agencies in America are facing a gathering storm, long in the making, but no less threatening because of the long time it has taken to develop. Unfunded pension liabilities could affect the annual operating budgets of park and recreation agencies, the ability to take on new debt for capital improvements, the capacity to continue to offer good retirement benefits to workers, and in some extreme cases, the ability to continue to pay full benefits to retirees in the future. Left unchecked, these liabilities could threaten the long-term financial well-being of park and recreation workers as well as the agencies that employ them.
The cost of unfunded pension liabilities may play a significant role in the ability of agencies to fulfill their mission to serve their citizens as tax dollars previously allocated for operations may have to be diverted to fund pension obligations. In addition, many affected workers will be required to contribute ever-increasing amounts to help keep their pension fund afloat. Regardless of what point you are in your career, this looming crisis could impact when you will be able to retire and the financial resources you will have for your retirement years. And yet, many park and recreation professionals are unaware of how much this crisis could affect them.
“The costs of these pensions are obligations that are going to come due,” says Bob Johnson, former chair of NRPA’s Board of Directors and a vice president for Cobbs Allen, a national risk management and insurance fund. “If you are an employee counting on a pension or if you are an official who is trying to figure out how to deal with these obligations, you have a stake in how this plays out.”
The Big Picture
Some cities, states and special park districts have managed their pension costs prudently and responsibly. Unfortunately, many others have not, and their performance raises deep concerns about the long-term viability of their pension plans.
Some of the largest cities and counties in the country have significantly underfunded pensions, including Chicago, Dallas, Phoenix, Houston, Los Angeles, Jacksonville, Austin, Clark County, Nevada, and Fairfax County, Virginia. States with the largest shortfalls relative to their revenues are New Jersey, Illinois and Texas. Many other cities and states have persistently underfunded their pension obligations and are now only contributing enough to “tread water.” Estimates by the Federal Reserve place the shortfall for unfunded defined benefit pension plans at nearly $1.9 trillion. State and local defined benefit plans are on average 33 percent underfunded.
The causes of the funding shortfall have been simmering for a long time, including years of not setting aside sufficient funds to cover the future costs of generous benefits, overly optimistic projections of investment returns, financial downturns and rising costs of other key employee benefits such as healthcare. These factors have all worked to weaken the financial health of pension plans of many cities and states.
If pension plans remain partially funded, the unfunded liabilities can affect the ability of cities and states to deliver top-quality services to their constituents and threaten the long-term fiscal health of the city or state government. Unfunded pension costs can put great stress on the operating and capital budgets of local and state park and recreation agencies and, in turn, reduce the ability of agencies to deliver needed and planned services to the public.
The long-term implications are serious. For example, unfunded pension liabilities have already affected some cities’ ability to issue debt for large-scale park and recreation capital improvements or public/private partnerships. Unfunded pension costs can sometimes lead to higher borrowing costs for local and state governments due to lowered bond ratings and debt affordability ceilings, which restrict the amount of general obligation bonds a city or state may issue. Finally, troubled pension plans are likely to adversely affect agencies’ ability to recruit and retain top-quality workers who may seek employment where retirement savings plans are not at risk.
In answer to the question if unfunded pension obligations will affect the ability of park and recreation agencies to provide services to their communities, Mike Kelly, general superintendent and CEO of Chicago Park District, says, “Will there be harm to our mission? Potentially, yes there will.”
Retirement Benefits Delivery
One of the defining benefits of a public service career, including in parks and recreation, has been a secure pension. This benefit has been nearly as important as salary and quality health insurance.
Historically, park and recreation agencies have offered pension plans known as defined benefit (DB) retirement plans, to their employees, and nine out of 10 city and state governments still do. In DB plans, employers offer a specified payout — determined by formula that includes age and length of service — that employees receive at the time of their retirement and which continues as long as they live. Workers in DB plans must be employed by the agency for a minimum number of years before becoming eligible to receive full or partial retirement benefits. DB plans frequently include an annual cost-of-living increase that is intended to protect the retiree from inflation.
In most cases, both the employer and employee make regular contributions to fund the DB plan. Importantly, many public employees with defined benefit pension plans frequently do not pay into Social Security. Their pension is the only retirement benefit they will receive.
In contrast, the overwhelming majority of private sector employers have moved away from DB plans to offer defined contribution (DC) plans. In DC plans, the employer may make a regular contribution into a retirement account owned by the employee and the employee puts aside a fixed amount of their earnings. The funds held in DC plans cannot be withdrawn without penalty by the worker until a certain age, typically 59.5 years old. In addition, the taxes on the income earned by these plans are typically deferred until the worker withdraws funds from the plan.
DB plans have become much more popular in the private sector due to lower long-term costs and less long-term obligation by the employer. They are also attractive to employees because they are portable if an employee changes jobs. Unlike DB plans, DC plans do not guarantee a specific payment amount at retirement, but they do give employees the ability to choose how to invest their retirement savings.
According to the Bureau of Labor Statistics, most private-sector companies have replaced DB pension plans with DC plans, while the overwhelming majority of publicsector employers, park and recreation agencies included, still offer DB plans. Nine out of 10 public-sector employers offer direct benefit plans while just 6 percent offer only DC plans to their employees, but an increasing number of governments are moving toward DC plans. About 30 percent of public-sector employers have added DC plan options to their DB plans. By comparison, just 21 percent of private-sector employers provide a DB plan and 71 percent provide a DC plan to their full-time workers.
401(k), 403(b) and 457(b) plans are the most widely offered DC plans, but doubts have been raised recently that such plans alone will provide sufficient funds for retirement. Critics of these plans note that such plans have not performed as well as originally expected because of lower than anticipated participation and savings rates, high investment fees that eat away at earnings and lower than expected rates of return on plan investments. Herbert Whitehouse, a former executive at Johnson and Johnson and an early proponent of DC plans, expressed regret in a January 2017 Wall Street Journal article at how poorly these plans have served workers.
How Retirement Benefits Are Funded
Local and state government retirement plan sponsors must set aside funds equal to the net present value of the expected payouts for the life of their pension plan. These funding plans are actuarial estimates that reflect the expected payouts to current and future retirees, the age of the employees, the expected lifespan of the employees and a discount associated with the expected rate of return on investments.
Estimates of the local and state governments’ pension liabilities vary widely. But a report from Moody’s Investor Services notes that half of the states did not contribute sufficiently to reduce Adjusted Net Pension Liability. Further, pension liabilities relative to a capacity-to-pay more than doubled in the last 10 years for local governments.
In just 10 years, the average cost of the employer’s share of contribution to a DB plan has nearly doubled, going from 6.3 percent a decade ago to more than 10 percent of salary today. Some plans are now requiring employee contributions of up to 13.5 percent of an employee’s salary. Troublingly, half of the states and many localities are only making enough contributions to “tread water,” meaning they are not incurring any additional deficits, but, at the same time, they are not paying down future obligations. In these scenarios, plans will remain underfunded indefinitely and higher employee contributions are likely.
How Local and State Governments Are Responding
Cities and states with underwater pensions are taking a variety of actions to forestall a crisis, although frequently only after reaching an agreement with workers’ unions. These actions can include increasing employer and employee contributions. Each of these actions is fraught with problems, however. Increased employer contributions often must come at the expense of operational funds, thus decreasing the ability of the agency to serve the public, and increasing employee contributions is effectively a pay cut.
Cities and states may decide to change the benefits of DB plans for existing and entering workers. Such changes might include increasing the number of years an employee must work before retirement, reducing payouts for sick and annual leave, and simply reducing benefit payments. Two-thirds of state and local pension funds reduced benefits after the Great Recession (2009–2014).
More commonly, states and localities will close or freeze existing plans and only offer lesser benefits to entering workers. Current beneficiaries continue to receive agreed-upon benefits as long as they live, but not new workers who may be offered an opportunity to enter a DC plan such as a 401(k), 403(b) or 457(b) plan to supplement reduced-benefit DB plans. In worst case scenarios, cities and states may unilaterally rescind current benefits, an action that causes great harm to workers who have no other retirement income.
Johnson cuts to the chase about what the impacts of growing pension liabilities will mean to parks and recreation: “Parks and recreation has always had to fight for funds relative to other public services — police, fire, roads, sanitation and other services. A dollar is a dollar. You can spend your dollar any way you want, but at the end of the day, you still have to provide all those services. When you have to make the hard choices, what will you cut?”
Importance of DB Plans to Parks and Rec
Even with the present funding difficulties DB plans are a very important part of public worker compensation. These plans are essential to attract and retain highly qualified and mission-critical employees who may otherwise take higher paying, private-sector jobs. John Jenkins, deputy director of the City of Dallas Parks and Recreation Department, who is also the chair of the city’s retirement board fund, says, “You really need to offer a defined benefit plan to recruit and retain top-quality workers such as architects, engineers, financial managers and other professionals. For some positions, there is no way we could compete with the private sector without it.”
But, to meet pension obligations and keep existing benefits available to current employees, local and state governments must dedicate increasing amounts of their operating budgets to meet financial obligations associated with their pension plans. Mike Kelly says, “Underfunded pension plans like ours will take additional resources from the taxpayer and from other sources to make up the difference. Our services are so tied to staffing levels that if we cannot make up shortfalls, we may need to cut staff, reduce hours or devise other ways to generate new revenues. And, we are the model of managing within our means.”
Willis Winters, director of Dallas Parks and Recreation, says that the city of Dallas, which is one of the cities with the largest ratio of adjusted net pension liabilities relative to operating budget, says that to overcome its challenges, the city will be implementing a variety of solutions to reduce unfunded liabilities, including creating a two-tier system in which new employees will have fewer benefits and raising the retirement age, as well as other changes. “It is in everyone’s interest, the city as well as the employee’s, to make sure that our pension plan is sound,” he says.
How Will This Affect Me and What Can I Do?
Park and recreation leaders agree that DB plans are vital to attracting both young professionals and well-qualified specialty occupations. However, many of these agency leaders also say that most young people working in parks and recreation give little thought to how much they will actually need for retirement.
Mike Kelly says, “I am alarmed. We employ a lot of young people, and I wish I could tell them, ‘You really need to take notice of this!’” He cautions, “Yes, it is complicated, but people cannot just have blind faith that benefits will be there when they retire.”
How can you take better charge of your own future? Among the things you should do are to inquire about the financial soundness of your agency’s retirement plan options. You should find out how long it will take your benefits to vest, and what options are presently available to you to supplement pension benefits. “Live on less than you can make and save a lot more for the future,” Johnson advises. “But it is not easy and it is not fun. You cannot assume that what you put aside will be sufficient. Match any contributions to individual plans that your agency makes such as to 401(k) and 403(b) plans and then, on top of that, put as much as you are able into them.” He says, “Live below your means and save vigorously. The day will come when you need it.”
Richard J. Dolesh is NRPA’s Vice President of Strategic Initiatives. Kevin Roth, Ph.D., is NRPA’s Vice President of Research and IT.