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- A continued look at the
history of the city's financial
problems tonight on
Behind the Headlines.
[theme music]
I'm Eric Barnes, publisher
of the Memphis Daily News.
Thanks for joining us.
Today is the second of a two
part show that follows the
Financial Mess series that
was in The Commercial Appeal.
I'm glad to have Marc
Perrusquia at the table.
Thank you for being here.
- Thank you very much.
(Eric)
Projects reporter for The
Commercial Appeal and the lead
reporter on the whole series.
Thanks very much.
We've also got Tom Jones, a
sometime consultant to Memphis
and consultant to cities
all around the world
and the country.
Thank you for being here.
Rick Masson is a former chief
administrative officer for the
city during the
Herenton administration.
Thank you for being here.
And Marlon Mosby, a former
finance director for the city.
Thanks for being here.
Also, a consultant to
other administrations,
I believe so.
We'll get to that.
And Bill Dries, senior reporter
with The Memphis Daily News.
And so, the series --
and it's still
on The Commercial
Appeal website.
And the previous show we
did is on the KNO site.
It's on The Memphis Daily News
site if you want to track along.
But it covers some broad areas.
How it happened, how the city
got in to the financial mess.
Annexation and population loss.
And then, the rise
of debt and spending,
to some degree track that.
We went through that
in last week's show.
We'll focus this
show on pension,
the drop part of the pension,
the rise of spending with the
police department and a look at
some of the pain ahead and the
pain that's going on
right now in budget season.
But again, I'll ask you, Marc,
to kind of frame why the series
was important and
what your thoughts,
takeaways from this series are.
- Well, I think, you know, one
of the driving forces for the
current financial crisis that
the city went through was the
whole pension issue is why
we spent some time talking
about that.
You know, the state legislator
had mandated that cities have to
meet their annual
required contribution.
They had this unfunded
liability sitting there.
They hadn't made all our paid
all the money that they owed
the pension.
But now you've got
to meet it by 2020.
And so, this is what
the city is up against.
And so, we really focused on how
they got there with the pension
system that they are now
and some of the very generous
benefits that they
gave over the years.
And how they stopped
funding it really.
I mean, before the
financial crisis,
the economy crashed in 2008.
A couple of years before that,
they were already severely short
changing the pension system.
So, we tried to drill down
on some of those issues.
- And all of that
against the backdrop of,
as we talked about
on the last show.
And Bill, you had the
advantage of watching the show.
As we joked, you can fact
check us on how we did.
Henry Evans, the
former CAO was here.
But all of that, that spending
and the rise in pensions and
there was a rise in staffing.
All of that was against a
backdrop of annexation,
of population loss and
again, that spending increase.
Your thoughts when
you watch the show?
I mean, you
reported on much of that.
But what did we miss and
what did it remind you of?
- Oh, I'm not going to say
anyone at this table for that
show missed anything or now.
It was a pretty
lively discussion.
Context, to me, is
really king on this.
And I think that you all
talked about the priorities
at the time.
The city was a changing
creature during those years.
We're talking about a span
from 1960 all the way up
to the present.
There are issues present today
in running a city that folks in
1960 never even dreamed of.
There are things that cities
do today that they didn't do in
1960 and vice versa.
And also, if you look at
our city in particular,
the city of Memphis,
look at all the history
that we've been through.
Look at all the turmoil
that have all played a part in
determining what
our priorities are.
Mayors get elected based on
several things that they want
to do.
Usually three or four big things
I think even though some folks
campaign on a much larger scale
of things that they want to do.
And people make choices on that.
And they make changes
based on that, as well.
- Well, so against that backdrop
of the history of 40 years,
there's a pension program.
There's a pension
that is underfunded,
as Marc said better than I will.
It's a national
phenomenon in some degree.
It's a national debate.
But there are a lot of people
who say now and I'm sure watched
last week's show and said,
"Yeah but what about pensions?"
That's the smoking gun.
If you're going to talk
about the financial problem in
Memphis, it begins
and ends with pensions.
You were finance director.
Do you see that?
And you've consulted
with other administrations.
Do you see that pension
somehow is the smoking gun
of all our trouble?
- No, I think it's
much broader than that.
I think it's more fundamental
in the way our revenue base
is built.
But it is the point that when
they stopped funding it at the
level that they
needed to fund it at,
it is the hole that
they dug themselves in to.
Uh, and that is very
difficult now to get out of.
- We got a chart again from
the series that shows over the,
what? -- 40 year period here,
the number of people
on the pension program.
So, we'll put that up.
Rick, you were faced
with tough choices as CAO.
I mean, you all had a whole lot
of land that had been annexed,
as you said, that you guys
really weren't part of that.
But you received it.
The city was massive.
I mean, as we said
in the last show,
bigger than the
whole of New York City,
as least physically.
So, there are a lot of service
and a lot of people had to be
hired, I suppose,
from your point of view.
But did you all look
and say, "You know,
"we're creating a potential
pension liability that's going
to get out of hand here."
Or what sort of
thinking went in to that?
- Well, first sort of following
up on what Bill said here,
you know, to put this in
context over this time frame.
Originally public employees
received higher pension or
benefits if you will primarily
because they were under the
market in salaries.
That was kind of
an understanding.
In order to recruit and
retain, not with some,
but recruit and
retain employees, you..
For whatever reason,
the salaries were lower.
And pensions and
benefits were higher.
That probably began to shift
with the coming of the public
unions and as that occurred.
We faced, you
know, pension issues.
But, I mean, in our
situation, we fully funded,
you know, the
pension that was required,
that the actuary
said we should fund.
And we funded that.
As it relates to a..
In fact, for several years there
even after all these changes in
the pension plan..
Several years we overfunded.
As it pointed out
in the article,
we overfunded the pension plan
in order to protect it against
future downturns in the economy.
No one could have
ever anticipated,
I don't think.
Our actuaries did not.
That the economy would have
such a tremendous downturn.
But we were fully putting
additional funds in to the plan
to get it ready for eventual
downturn in the economy.
- And Tom, I mean, your take.
Is pension the smoking gun that
some people want to say it is?
- I agree with Marlin.
I think it's a problem.
I don't think it's
the smoking gun.
I just think there's always a
political benefit in beating up
public employees.
[laughter]
- Some of it is, you
know, you talk about.
You, Rick, talked a little bit
about the public employee unions
getting involved.
There got to be, what?
-- I think a lot of people would
see some excesses in some of the
benefits, the 12 year program.
Why don't you
describe the 12 and out?
Yeah.
- It was a brief program that
they had that lasted I think
three years.
It was done for the..
It had been 15 and
out before that.
And the council approved
it in 2001 for elected
and appointed officials.
And basically, you could retire
after 12 years of service.
It was very unpopular.
- Except for those
people who got it.
- Well, in the big
picture, I mean,
it really is a small.
I mean, you're not
talking huge amounts of money.
I think there were about 300
people or so over the years that
qualified for it.
But, I mean, it
was very unpopular.
[cross-talk]
Emblematic of the, you know,
the overspending that people
thought was going
on in the city.
- Is it also emblematic?
I mean, you've got..
You start, I think,
that story with
or it's in the story certainly.
There's a 40-something-year-old
former police officer who
retired after 25 years.
Not 12 years, after 25 years.
He gets a pension for the
rest of his life in the $40,000
range and he works in Florida
as -- I think in banking.
(Marc)
You can't
fault him for that.
He took advantage of
what the system allowed.
I think one of the interesting
things that we found in that is,
you know, when we got a spread
sheet of all the retirees,
a third of them
retired in their forties,
which I thought was eye-opening.
Because you think about in the
general public and you've got to
try to be fair about this,
too, like Rick is saying.
I mean, they don't
get social security.
Although, a lot of them
have access to social security
through second jobs or spouses.
But, I mean, the typical person
is not going to retire in their
forties, you know, with a full
pension payable immediately for
their rest of their life.
They're going to be working
now until their sixties
and seventies.
And so, that was
very eye opening.
And it creates quite a
drain on the pension system.
- But that's been removed.
That retirement
age has been moved.
Is that right?
For new hires, it's at 52 now.
So, politically, I'll go.
I'm going to pick on Rick here.
I mean, politically,
you're in the administration.
Things like that are going on.
You guys put forward I think.
I mean, it's quoted.
Herenton's quote is saying
we didn't vote for that
12 and out thing.
But you must from a political
point of view must sort of see
that there's this growing kind
of hot button back in the '90s
or is it not at that time?
And in to the 2000s.
Was it?
- It wasn't hot button.
I mean, there had been a 15 and
out for 20 years before that.
And, I mean, there's a
three years difference.
So, for 20 years
prior to the 12 and out,
there was a 15 and out.
And Marc had seen some employees
that had retired as early as 40
under that plan.
So, but it was the council.
I'm not going to defend it.
It was something that
the council wanted to do.
We were certainly content with
the keeping the 15 and out that
had been in place
for 20 plus years.
- Do you remember, Bill?
I mean, we've done
a lot of shows on..
And you've obviously written
about a lot about all this
debate in the last few years of
trying to reign in the pension
program, cut benefits as the
unions and them at the table
saying, uunfairly
cutting the benefits,
taking the -- breaking the --
trying to fix the budget on
their backs and so on.
But do you remember when these
plans -- any other time when
you've been following city hall
that the debate about pensions
was this lively?
- No.
No, it's not been considered a
quote unquote sexy issue to get
in to.
But at some point, I think
someone was going to drill down
to the essence of it.
I mean, school funding wasn't
necessarily a sexy issue either
until the city council decided
to make a point about it.
And it's figured
prominently in to this.
- And the gamer changer was
when they changed the law.
You've got to fund it
at the full amount.
That's what changed it all.
They had to deal with it.
- Other cities?
I mean, you work
with other cities.
This is, again, by no
means a Memphis problem.
I mean, the state of Illinois
for instance has just horrendous
problems and other cities.
- Yes, some cities are
going bankrupt over this issue.
I did some work on
this in the beginning,
not for the city of
Memphis but for someone else.
And, you know, it looked like
Memphis sort of fell in the
middle, you know.
It wasn't quite a crisis but it
was headed that way if nothing
was done to deal with it.
- And everyone's take on what --
the changes that have been made
so far.
Again, they haven't all stuck.
I mean, some were
passed last year.
But the city council is
kind of debating now.
I mean, Marlin, are they
going in the right direction,
a necessary direction, in terms
of how they're trying to reign
in not just pensions but the
health insurance spending and so
on and so forth?
- Uh, I think they're going
in the direction they have
to go in.
Uh, they..
Is it the right one?
I don't know the answer to that.
Um, if you're talking about
employees and what's right for
employees, that's truly..
They appear to be coming
out on the short end of this.
If you're looking at it from
a budgeting standpoint or a
finance standpoint, how
do you balance a budget,
they've got to do it.
- In part..
And we'll get to more specific
about police spending later and
the rise of police spending.
But what is it now?
Thirty-eight percent, give or
take of spending within the city
budget is police, fire.
EMS takes up a whole
other section of that.
Again, Rick, you've been there.
Do people want quick response
from their fire department?
They want the crime
problem addressed.
All that costs money.
How, you know, when you're
weighing those kinds of issues
in an administration, you
know, you've got somebody who's
putting in their life
on the line every day.
Do they not deserve
a lifetime pension,
a pretty generous pension?
I mean, it's not like somebody
who is just a clerk at a,
you know, typing
somewhere at a company.
It's a different type of job.
And that's sort of it the point
that the unions are screaming
about right now that
these are not typical jobs.
So, you can't look at the
spending and these pensions
through a typical lens.
- Yeah.
Traditionally, that's the
way it's been approached.
I mean, Memphis is not unusual
in that they have a 25 and out
for police and fire.
I mean, that's standard across.
I would venture to say there
are very few cities that have --
vary significantly from that.
You know, when I was CAO, we
received calls continuously from
the business community, the
crime commission and so forth.
We need more policemen,
we need more policemen.
I think they did a study that
showed we needed like I want to
say 2,000 or something.
An outrageous number.
Eight hundred, I'm sorry.
Eight hundred new
police officers.
And so, there was a clamoring
for new police officers.
And that's what drove that.
And yes, I mean, when
you hire a police officer,
not only do you pay them but you
also accept this liability of a
pension for their life.
- Go ahead, Tom.
- I was just going to say Rick
mentioned something about how
the pensions were historically
used to counteract low salaries.
And the five year that the city
conducted with PFM showed that
some of the jobs are -- pay
more than the private sector.
Many are still lower.
It seems like somehow it would
-- might in the midst of all of
this someone would look at
how do you stabilize or balance
those jobs.
If you're going to
cut pension benefits,
what salaries do we need
to become more competitive?
- Well, and the other one, and
it's in the story and it's in
headlines and it gets
reported, I'm sure,
some would say over reported.
But the rise in the
number of six figure jobs.
The people who make
100,000 and above.
And then the drop program,
which was viewed as this really
lucrative huge pay outs to
former police director Larry
Godwin, former
head of the airport,
Larry Cox.
Talk about those and
the perspective on those.
- The drop program, it's
the deferred option plan.
And what it is is it..
A lot of people view it
as a golden parachute.
I mean, but someone who has
25 years of service can enter
in to it.
And there are regular..
They're essentially collecting
a salary and a pension
at the same time.
They're paying pension in to an
account that when the employee
leaves, they take with them.
But the city stops.
This is kind of the interesting
rub of it is that the city stops
making pension
contributions to it.
And so, arguably, I don't know
if anyone has taken a fine pen
to it.
It's cost neutral.
I mean, it doesn't
really cost the city more.
But I think the big question in
there is whether it meets its
purpose which is
secession planning.
Being able to anticipate when
somebody's going to leave and
then replace them.
And what's happened in a lot of
these cases is like Alan Benson,
the fire director.
I mean, he signed up for three
years and then left like half
way through to a nice paying
job with the county and took his
pension and his drop payment.
There's no penalty
for leaving early.
And so, you really..
It really doesn't
meet its mandate.
- But your quoted in the article
saying people don't understand
it does save the city money.
It looks..
The political perception of it
is terrible but it saves the
city money.
- Yeah because you don't get
out of habit to contribute.
You provide the same job.
It's essentially hiring that
employee back to do the job and
you don't have to
pay them any benefits.
It's parts that were
implemented incorrectly.
These employees should be
treated like new employees.
Like if they were employees that
were just brought in to finish
out this job for three years.
And I think in terms
of secession planning,
I think it's good
in fire and police.
The trouble is you know you're
going to lose X number of police
officers or firefighters.
And you really do need
the lead time to do that.
What happens is budgetary
considerations get in the way.
So, you have this information.
You know we're going to lose
X number of police officers,
X number of fire fighters.
We have to have a training class
because there's a lot of lead
time in hiring these folks.
But you can't do it because
the budget won't let you.
- Go ahead, Marlin.
- Another thing that happened is
we confused health benefits for
retirees with pensions.
Those are not the same thing.
And the law changed between '08
and today on health benefits.
Health benefits were always
treated as if they were paid out
of current budget money.
It was not considered that
you needed to budget for future
health benefits.
And that changed.
I mean, it changed nationally.
And now part of that liability
is that they have to fund that
future liability where before
they were just simply funding
the current amount each year.
And the rules changed.
The accounting rules changed.
- And just to piggyback, there
was an OPEB amount in 1980.
Okay?
It was there.
It just wasn't recognized.
But there was a liability that
was existing for the city
of Memphis.
And it probably was a
pretty big number in 1980.
And here we are in 2015.
The city hasn't gone bankrupt.
But that was a large OPEB
number that existed in 1980.
And, you know, that's something.
I'm glad you brought that up.
- I'm sorry.
Go ahead.
- But to me, it raises a
question about the accounting
for both of these.
I mean, currently the city is
not under any state requirement
on OPEB.
It likely will be at some point.
But you have to show
this on the financials.
And the argument that the unions
have made is there's no way that
all those
employees are going to,
in the case of the
pension, retire all at one time.
Is it legitimate that local
governments have to show this
and have to pay for it now?
- I mean, I think it..
The way I thought it should have
been implemented is whatever was
on the books at that point in
time should have been somewhat
grandfathered in
in some fashion.
And then any additional benefit
packages that were added to the
retirees that that council, that
administration was responsible
for, they should
have to fund that.
But to just sort of have this
catch up over 20-something,
30-something years that
had been building up
and started way back.
I mean, this is
something that started in..
The council at one point I think
in the '80s were talking about
free insurance retirees.
You remember.
They passed that resolution
to have free insurance
for retirees.
So, can you imagine what the
OPEB would have been for that?
So, I mean, I think there should
have been some sort of grace
period or some sort of
recognition of this or
grandfathering in this amount
and then going forward to cause
cities to make sure that
when they approved a benefit,
a long term benefit, they
actually have to wait and come
up with some way to fund it.
- Well, we've heard a lot
on the show about people.
And we're going to
have to switch to police.
But people on the
show are saying,
"Look, I mean, the health
benefits now that the city
employees have is so much
better than the private sector."
I mean, so that argument we
talked about before with the
pensions and it was a retention
thing because the pay was lower.
Well, now it's
really kind of shifted.
I think most of us..
I mean, certainly those of us in
the newspaper industry have seen
our deductibles go sky high.
And that's just a general trend.
And so, I think it's interesting
to see the frustration people
have with that.
But let's switch to
one of the big drivers.
We mentioned this before.
And I think they put the chart
up which was police department
spending going from..
These are inflation adjusted
dollars from about 100 million
in 1970 to 230
million, 240 million now.
And a lot of that took place
in the -- it's on the chart --
during the
Herenton administration.
Because there was this
huge rise in violent crime.
I mean, there was a sense that
that was driving people out of
the city.
We get back to the
population loss and so on.
You were all quoted
considerations at that time.
I mean, really painful anecdotes
in the story about the shootings
and the killings and so on.
And the way to address that
was to double the size of
essentially the
police department.
- Yeah.
I mean, we talk about
responsive government.
We were trying to be responsive.
As I said earlier, I received a
number of calls and the mayor
received a number of calls
from business leaders across the
community demanding, expecting
us to hire more police officers
to address the
rise in crime issue.
And it declined there
for some period of time.
You know, I think it somewhat
paid dividends because in the
mid-2000, after all these
police officers are on board and
actually out there
working, it did decline.
I think there is something to
say about crime prevention as
initiatives that should be
implemented along with that.
We tried some of those things.
You know, community
policing and so forth.
And I think, you know, trying
to address crime in any city,
major city across this country
has always been and will always
continue to be a challenge as
we saw in the headlines today.
So, it's something that we
need to continue to fight.
We felt like we needed
to address it by hiring
new police officers.
I think it helped.
But at the end of the day, I
think we also have to have some
preventative measures.
- Again, cities, some
perspectives around the country.
I mean, the perception of
crime and the reality of crime
sometimes are different.
But it's a huge
issue in Memphis.
But it's an issue in
any kind of urban city.
I mean, it killed
New York in the '70s.
- Yeah, Memphis's violent crime
rate and high violent crime rate
goes back a
hundred years almost.
Memphis has just
always had that.
It's just part of the
culture for some reason.
But the city's own five
year financial plans said that
compared to cities that size,
Memphis is an outlier in the
size of its police force
compared to other cities.
And so, even after the Herenton
administration increased the
police personnel
and budget, it seemed
like the arms race continued.
And so, Memphis today is
essentially public safety poor.
If you take all the sales
taxes that the city of Memphis
collects, all the property taxes
the city of Memphis collects,
you're still $70 million short
in funding police and fire.
- It's pretty interesting, too,
because Rick brings up the build
up that we went through.
In the 1980s during the
Hackett administration,
there were also calls from the
business community including a
study that was funded by Ira
Lichman from Guardsmark that
basically made the case that the
city needed more police officers
then in the 1980s.
And the Hackett administration
was pretty vocal in saying that
he didn't think that
was the right strategy.
He didn't agree
with that at all.
- Marc, I don't mean to
give you the last word.
Where are now?
They're trying to grow.
Financial problems aside,
they're trying to get back to a
comparable environment of 2,600.
- And they're having
problems retaining people.
We keep hearing that, you know,
because of the reduced health
care benefits,
officers are leaving.
They're being
recruited by other cities.
And so, it's a
constant struggle.
But, I mean, this is
one of these things,
you know.
Is the glass half
full or half empty?
You have these
budgetary constraints but,
you know, public safety
is priority number one.
And if you don't have
that, you don't have anything.
So, um, you know.
- The current budget increases
the police budget $16 million.
- Alright, we
will leave it there.
Tom Jones.
Marc Perrusquia, it's a
great series of stories.
Thank you and to
everyone at the CA.
Marlin Mosby,
Masson, Bill Dries.
Thank you all.
Thank you for joining us.
Join us again next week.
Goodnight.
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