In The News › Pension fund for New Orleans firefighters on shaky ground after missteps

Oct 1, 2012


Filed under: City Government, Government Finance, Orleans Parish

Pension fund for New Orleans firefighters on shaky ground after missteps

By Richard Thompson, Staff Writer
October 1, 2012

Of every $9 the city of New Orleans spent on general operations last year, $1 went to pay firefighter pensions. The $54.1 million that went to the Firefighters’ Pension and Relief Fund last year was about 11 times as much as the city spent on fixing streetlights last year, and more than five times what was budgeted for its beleaguered recreation department.

The outsized impact of firefighters’ pensions on city taxpayers has a couple of root causes. When the program was created by Mayor Chep Morrison more than a half-century ago, firefighters were promised pensions, but the city set aside no money for a fund, instead paying them on an as-you-go basis.

Starting in 1968, firefighters began paying into the plan, and their contributions were invested, the usual practice. But the fund was never robust, and city and pension officials over the years have been tempted into risky – and sometimes downright horrible – investments.

Perhaps the worst of them was a decision by the City Council in 2000 to sell $171 million in bonds and invest the money in what was then a bull market on Wall Street as a means of shoring up the fund.

The city had counted on 11 percent returns. Instead, the market tanked, and the fund collapsed. Last year, nearly half of city taxpayers’ annual burden for fire pensions — $22.3 million – went toward paying off the debt on those bonds.

The board that oversees the fund has also been drawn into some ill-advised schemes. It has tended to invest heavily in real estate, and board members also decided to put millions of dollars into a New York hedge fund whose manager promised eye-popping returns.

Instead, he’s been accused of running a pyramid scheme, and when the firefighters asked for their money back, they got an IOU instead. The matter is tied up in court right now.

Exacerbating those considerable problems, New Orleans’ firefighter pensions are remarkably generous. Firefighters can retire after 12 years and get a lifetime pension of 30 percent of their highest-earning years. Once they’ve been on the force 20 years, they no longer have to contribute to the pension fund, and at 33 years, a firefighter gets a full pension for life.

Janet Howard, president of the Bureau of Governmental Research, called the pension’s benefit structure “off the charts.” The BGR recently examined 19 retirement systems around New Orleans for an upcoming report and found the city firefighter plan “far and away the most generous” of the bunch.

Of course, New Orleans’ pension problems are far from unique. In recent years, public pension systems have put a heavy burden on taxpayers in cash-strapped cities across the nation. A day of reckoning is fast approaching, budget writers and fiscal watchdogs warn: People are living – and working – longer than ever before, and making more money, but their share of the costs, in the form of employee contributions, has remained steady.

But New Orleans’ firefighters’ pension fund is in especially dire straits, and rising pension costs will be front and center when the city’s annual budget season gets underway next month. A top official in New Orleans Mayor Mitch Landrieu’s administration told City Council members last November that the spiraling cost of pensions is “one of the most serious challenges that we face as a city.”

Since then, the state’s legislative auditor has also jumped into the fray, issuing a report in May that ripped the investment practices of the fund, as along with three other Louisiana pension systems that share the same consultant.

That report also showed that the fund has nearly $140 million tied up in real estate. Those holdings took a financial hit in the wake of the housing bubble’s 2008 collapse: Through last October, the investments had lost about $29 million in market value, according to the auditor’s office.

The question is how to fix the problem.

Andy Kopplin, Mayor Landrieu’s chief administrative officer, acknowledged in a recent interview that the city is looking for ways to reduce its liabilities, though its options are fairly limited.

Unlike New Orleans’ other retirement systems, the firefighters’ pension fund was created by state law. Local officials can’t force the fund’s board to change their rules, which would be possible only through legislative action or by negotiating an agreement.

That means any solution will likely include increasing the amount employees must contribute or making the formula used to determine an employee’s pension less generous.

The firefighter fund’s problems can’t all be blamed on bad investments. Pension officials say the city has underfunded the firefighter pension system for years, leaving it $17.5 million short in 2012 alone. After more than a year of on-again, off-again negotiations, the pension board filed suit in July against the city in Orleans Parish Civil District Court.

Pension fund officials have “been both sympathetic and patient in understanding the economic woes of the city while attempting to work out a viable solution to addressing the funding needs of the pension plan,” Richard Hampton Jr., CEO of the firefighters fund, wrote in a letter to Landrieu before the suit was filed.

Despite the litigation, both city and the pension board agree that sweeping reforms to the system are needed. Board members have proposed changes that would trim $15 million in annual costs, including reconsidering cost-of-living increases.

How the savings would be applied is the main sticking point. The city wants the money to go toward drawing down its annual obligations; the pension board insists that it be spent to shore up the fund’s solvency.

City officials also want to add three more members to the pension fund’s board, a push toward ensuring “an independent and responsible board that balances the number of different perspectives,” Kopplin said.

The city has already taken steps to rein in the fast-rising cost of benefits for other city employees.

Last year, for instance, the City Council voted to increase employee contributions to the retirement plan for city workers from 4 percent of a workers pay to 5 percent this year, and to 6 percent in 2013.

A second ordinance changed the formula used to calculate a retiree’s monthly pension payments, which were based on an average of each member’s highest salary over 36 consecutive months of his or her employment. That changed to 48 months of salary starting in 2014, and 60 months starting in 2015.

The result will be lower benefits for many workers; Kopplin believes the city will save about $3 million from the moves this year.

With the firefighters’ pension, city officials have alleged that the problems owe largely to poor decisions. In court filings, the city says the pension board has made bad bets and missed opportunities, sometimes on the advice of an investment consultant who has a shaky history with federal regulators.

The consultant, Joe Meals, executive vice president of the Memphis-based Consulting Services Group, was censured in 2007 by the Securities and Exchange Commission for instructing employees to back-date ethics forms.

And under a 2009 settlement with the Department of Labor, part of which barred Meals from working with corporate pensions, the firm repaid $278,000 to private pension plans for not providing timely commission rebates between 2002 and 2006.

Hampton has said in the past that Meals, who has advised the fund for more than a decade, discussed the details of his SEC settlement with officials from the pension fund system, who were “pretty comfortable” that it “had not affected his ability to be a consultant on our investments.”

Some state officials have called for a fresh look at how public pension systems manage their investments since word spread last summer that trustees of three Louisiana retirement systems, including the New Orleans firefighters’ fund, had invested a combined $100 million in a New York hedge fund manager who promised to deliver every investor’s dream: high returns with low risk.

Instead, the local firefighters’ system, as well as the state Firefighters’ Retirement System and the Municipal Employees Retirement System, have been in court for most of the year, after requests to pull their money out were met with IOU’s instead of cash. It’s not clear if the fund manager still has the money.

Such decisions have led to increased scrutiny of the credentials pension board members bring to their work – as well as their sometimes lucrative salary packages. WVUE-TV reported last week that Hampton received a $70,000 pay raise in 2010 when he agreed to a four-year, $156,000 annual deal.

The station also questioned whether state law allows Hampton to be both under contract and paid for his service on the fund’s board. Some legal experts say the arrangement could run afoul of state ethics laws.

Hampton and the board’s lawyer have said the arrangement is permissible. And Hampton has defended the board’s investments, including its substantial holdings in real estate.

However, he added that the pension board is looking to unload “those things in which we can get increased value on.”

Nearly a decade ago, the pension board bought the Lakewood Golf Club, with plans to develop the property into an upscale resort, including golf villas, a luxury hotel, condominiums and more. The overall price tag was to be around $200 million. The development still hasn’t materialized.

The Algiers course is one of more than a dozen examples of multimillion-dollar real-estate investments on the part of the pension, which has also made a practice of making high-interest loans to local developers.

Though the golf course development has yet to be built, the fund managers haven’t lost hope. They have lease agreements in place for about a third of the planned 30,000-square-foot office development, which would include a new office for the fund. But they don’t plan to build unless they have more of it rented.

Still, Hampton is optimistic that the fund’s various real estate investments will produce results. The Algiers golf course, he said, is “very close to breaking even, or showing some profit this year.”

This month, the BGR will release its report examining 19 retirement systems in the greater New Orleans area, in hopes of determining what the plans cost taxpayers of each parish and comparing the benefits to private sector counterparts.

Howard, the head of the nonprofit public policy group, said the Firefighters’ Pension and Relief Fund stood out from the pack.

“Almost all of the plans can be considered quite generous, but the local firefighters’ plan was far and away the most generous of the 19,” she said.

The benefits will have to be reined in, observers warn, as will those of many other Louisiana pension funds.

“It’s an unfortunate thing that the city has to deal with,” Howard said, “and they don’t have a lot of flexibility with how they do it.”

But while the two sides have been combative in court, Hampton said the pension board is happy to work with the city to help bring in its costs.

“We’re not going to solve this problem overnight, but we can continue to look at ways to solve it,” he said

Oct 1, 2012


Filed under: City Government, Government Finance, Orleans Parish

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