While Mayor Jerry Sanders’ plan to pay down the pension deficit at an accelerated rate is admirable, the tens of millions of dollars extra he is shuffling toward the system each year could be better allocated elsewhere, according to a new report from the Office of the Independent Budget Analyst.
The report foreshadows what could be a tough budget battle in the months ahead between the mayor and City Council over Sanders’ plan to aggressively pay down a host of looming deficits while at the same time laying off employees and cutting services.
In a five-year financial plan released late last year, the mayor forecasted putting an extra $27 million into the pension system each year in order to pay off the pension deficit in 20 years rather than 27 years and avoid the extra financing costs of negative amortization during the first years of the pay-back schedule.
The mayor’s financial plan forecasts a budget deficit of $87 million in 2008 and more than $100 million after that. The deficits are largely due to the mayor’s plan to begin dedicating large sums of money annually to eight significant long-term liabilities.
According to the mayor’s plan, the infusion of $540 million over 20 years is estimated to save the city $1.1 billion in interest costs.
The report states:
This plan has clear financial advantages: it saves the City a significant amount of money over 20 years. However, seeking solely to save money through the acceleration of the amortization period is not necessarily a prudent approach. Amortization serves a valuable function in that it enables person or entities to pay down a debt over an extended, but sensible period of time. …
In the proposal presented in the (mayor’s) Financial Outlook, the City will have to reduce $20.8 million in the General Fund each year to avoid some of these financing costs. As a point of comparison, $20.8 million is nearly two-thirds of the Library Department or about one-quarter of the Park and Recreation Department. A decision to implement this plan and save on financing costs could come at the expense of reduced services to citizens.
Sanders has warned that painful cuts will be ahead in the city budget in order to make up for past neglect.
The IBA report says that the increased pension funding is the most arbitrary of the eight significant funding areas identified by the mayor. It continues: “we believe the City Council should consider competing needs, such as taking an even more aggressive funding approach to Storm Water compliance, ADA compliance, and other deferred maintenance above this discretionary plan for the pension liability.”