Marissa Yaremich, Register Staff 07/10/2005
WEST HAVEN — The city’s three independent fire districts have racked up $78.6 million in unfunded pension liabilities that could bankrupt their services or leave taxpayers footing the bill if left unresolved, financial experts say.
"These unfunded liabilities must be assumed by someone," said Thomas S. Coe, Quinnipiac University associate professor of finance. Typically, tax increases are the ultimate answer to filling such a financial hole.
The potential fiscal burden derives from what some see as the districts’ failure to plan for the long term, including their reluctance to raise taxes high enough to make the pension systems solvent.
The districts are contractually obligated to make pension payments to firefighters when they retire.
"You have to pay at some point … or later on you’re going to suffer" financially, Coe said.
All retirees will continue to receive their pensions as promised in their contracts.
Mayor H. Richard Borer Jr. said that, no matter what the districts decide to do about the issue, their failure to act quickly has put the burden on the taxpayers.
"They basically have only three options, that is: No. 1, raise taxes; No. 2, raise taxes; and No. 3, raise taxes," Borer said. "They don’t have the revenue … to pay what the debt’s going to be."
The most recent actuarial reports of each district’s retirement plan calculated the unfunded liabilities to be $16 million for the Allingtown Fire District, $25.8 million for the West Shore Fire District and $36.8 million for the Center Fire District.
Each district is independent and has no city budget to lean on, so the districts impose their own tax rates. Those bills are added to residents’ city taxes.
Coe said taxes would inevitably, if not dramatically, increase to pay for the accrued liabilities, even if management devises financial plans to avoid insolvency.
If the districts default on their pension obligations, it becomes debt on their books, and Coe said a federal agency charged with protecting private pension benefits could be called upon to intervene.
"Either way, the taxpayers are going to have to pay a part of it, whether they’ll be sharing the costs either with other taxpayers across the city or nationwide," Coe said.
GETTING OUT OF A HOLE
While Coe analyzed worst-case scenarios, fire and city officials hope that several potential solutions will prevent disaster.
In an attempt to gain ground on the shortfall, each district factors into its annual budget several pension-designated accounts.
The districts budget their contractual share of their pension obligations as well as payments to current retirees. In addition, budget records show the districts are attempting to pay down the past liabilities in amounts ranging from $20,000 to $400,000 as of this fiscal year.
As for other fund-raising options, the fire chiefs acknowledged that they could raise taxes, adjust the firefighters’ pension contributions, enroll future hires in 403(b) plans — like 401(k) plans, except that pensions are determined by contributions rather than based on salaries — or a combination of the three. None has made any such changes to date.
Allingtown, however, appears to be making the largest strides to address the issue.
"We are taking steps in the right direction," said Elmer Henderson Jr., who retired as Allingtown fire chief on June 30 to move to North Carolina.
Before Henderson left, he and what he called an open-minded Fire Commission turned to their pension investor, Merrill Lynch, to explore the possibility of selling bonds.
In that way, the district could invest the proceeds from the bonds, with the returns going into its pension plan. The city did this for a $67 million unfunded police pension, which city officials said grew to more than $100,000.
Allingtown also has capped new hires’ pension benefits in its union contract since 2002, and mandated a retirement age of at least 47 in order to collect a pension. The district also incorporated a cap on cost-of-living increases.
Older Allingtown firefighters and firefighters in the other districts do not have such a cap on pension benefits.
West Shore Fire Chief William S. Donegan agreed that contractual changes to curb pension payments are an option for his district, but he declined to comment on whether the district is heading in that direction because the contract is in negotiations.
West Haven Fire Chief William S. Johnson Jr. is less optimistic about district-led solutions. Instead, he said the districts must recognize that the situation is out of their control.
"If (we) needed to fund this thing right now, you’d need to raise the taxes by 40 mills!" he said.
The Center District’s contracts are in arbitration.
Johnson’s ultimate proposal is to consolidate the three fire districts, a controversial issue he’s long supported. City Finance Director Richard A. Legg tentatively supports the idea, even if the merger is not under the city’s purview.
"There’s no other single opportunity to reduce the tax rate that is (more) promising than to consolidate the fire districts," Legg said.
If the districts stay independent, Legg said they could amortize the unfunded liability. This would require them to commit to set annual budget contributions for a 20- or 30-year stretch. Legg noted that the city attempted to do that twice with the police pension, but failed because of a fear of raising taxes.
DIGGING THE HOLE
How did the districts get in so deep? It’s the question many taxpayers ask, but fire officials can’t specifically answer.
Though each district’s details differ, all agree that preceding administrations were short-sighted in funding the pensions in order to keep taxes lower.
Former administrations also failed to invest their pension money early on. Though the districts had pension plans, fire officials said the retirees would receive money directly from tax dollars, which plunged the districts into financial despair when the number of retirees doubled.
The Center District established an invested plan in 1984 — followed by the other districts — after inheriting what essentially was an unfunded liability, the chief said.
Coe noted that low interest rates might also have hurt the districts’ investments in recent years.
West Shore’s previous contract expanded the payments on which pension benefits are based. The contract includes, for pension purposes, special-duty earnings, longevity and holiday pay. The negotiated contract overrules the district’s home rule ordinance, which prohibits including those earnings, and ultimately commits the district to higher pension payments.
ANSWERS
For several decades, fire union President Michael Spoldi, who represents all three districts, has heard the doomsday comments on the districts’ problems. However, he said unfunded pensions have become an increasing issue everywhere, "down to Social Security," with no real answers being thrown out to correct the overall issue.
Spoldi said even consolidation isn’t an answer because there’s no guarantee the City Council will borrow the $78.6 million.
He said the union might have more influence to make changes if the three different pension boards allowed more than just one union representative out of six total members.
As for the districts’ potential demise, he disagreed that it would occur anytime soon.
"I do not think tomorrow, next year, or five years from now that ... this is going to make the district circle down the drain and die, but I do think it needs to be resolved," he said.
Marissa Yaremich can be reached at myaremich@nhregister.comor at 789-5742.
İNew Haven Register 2005