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The importance of Rawlings-Blake's pension reform

Baltimore's active and retired police officers and fire fighters got a good bit of news this week with the release of an annual report on their pension system's finances. Thanks to strong investment returns and increased contributions from both the city and plan members, the system's net liabilities are shrinking and its funding ratio — the amount of current and future benefits it could cover — jumped from 69.2 percent to 74.2 percent. Considering the nosedive the system's funding took during the recession and the difficulties state and local governments are facing nationwide to afford their commitments to retirees, it should be comforting to the more than 10,000 people who do or will rely on these benefits that they now appear more secure.

Ironically, though, a significant part of this year's gains would have been wiped out if the police and fire unions had been successful in a lawsuit challenging Mayor Stephanie Rawlings-Blake's pension reforms, and the ability to make such gains in the future could be hampered if they pursue additional litigation to bring back a ruinous benefit that tied cost of living increases to market gains.

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In 2010, Baltimore faced a massive increase in its required contribution to the police and fire pension system. It would have been difficult to afford under any circumstances, but given the fiscal squeeze of the recession, it was almost impossible to cover without a major property tax increase or big cuts to other vital services. Acting on recommendations from a Greater Baltimore Committee-led task force, the mayor and City Council enacted changes that gradually raised the required contributions of police and fire fighters from 6 percent of regular pay to 10 percent, changed investment assumptions in a way that requires larger contributions from the city, lengthened time of service requirements and generally reduced the cost of their pension benefits.

Some of the results of those changes are easily visible in the newly released report on the fund's fiscal 2014 performance. Active police officers and fire fighters contributed $28 million to the fund this year, or $11.3 million more than they would have under the old system. The city's contribution also reached a record level of $113.8 million, $6 million more than the previous year.

But the biggest difference in the fund's fiscal health relates to the end of the so-called "variable benefit." Conceived in the early 1980s and signed into law (despite reservations about what would eventually come to pass) by then-Mayor William Donald Schaefer, the variable benefit was a means of providing cost of living increases for the plan's retirees. But instead of offering a fixed percentage or one tied to Social Security cost of living increases, this benefit offered retirees increases in years when the fund's investment performance exceeded 7.5 percent but did not take them back in years when it didn't. The result is that the fund didn't get the full benefit of replenishing its accounts during good years but took the full hit in years when the stock market was down.

When the unions sued to overturn the 2010 reforms, a federal judge in Baltimore upheld all of the law's provisions except the elimination of the variable benefit, which he found to be unconstitutional not because its elimination amounted to a violation of a contract but because it was replaced by fixed cost of living increases that varied based on a retiree's age. An appellate court overturned that decision, and the unions appealed to the Supreme Court, which last week declined to hear the case. Still, the unions have remaining legal avenues they could pursue.

How big a difference does the variable benefit make in the system's fiscal health? Quite a lot, particularly in a year like this one when the fund's investment performance was strong. It earned a return of $313 million, or 14.2 percent. Under the mayor's reforms, all of that can be plowed back into the fund. Under the old system, about $97 million of it would have gone toward increased benefits. That is to say, in this year alone, eliminating the variable benefit is almost nine times more significant to the fund's health than the increased employee contributions. Over the long run, because the reform both helps maximize assets and hold down expenses, its importance is magnified even more.

Mayor Rawlings-Blake won few friends by taking the action she did to reform the police and fire pension plans, but it's one of the most important things she's done, both in terms of improving the city's financial health and providing security for retirees. The unions could continue to fight in court, but as this year's fund performance should underscore, they should be careful what they wish for.

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