From its office in Clayton, Missouri, Danna McKitrick, P.C., delivers legal representation to new and growing businesses, financial institutions, non-profit and government-related entities, and families throughout the greater St. Louis region and the Midwest.
Danna McKitrick attorneys practice across many areas of law, both industry- and service-oriented.
On January 2, 2013, the Firemen’s Retirement System of St Louis (FRS) and its trustees filed a lawsuit against the City of St. Louis regarding its recently-passed pension ordinance, Board Bill 109 – which is now known as Ordinance 69353.
According to the press release from FRS:
The lawsuit seeks a temporary restraining order and preliminary injunction during litigation to prevent the amendment of [the] city ordinance [affecting] … the existing pension plan, as well as to order the parties to continue to operate under the existing FRS plan during this litigation.
In addition, the lawsuit asks for a declaratory judgment that Board Bill 109 is illegal, unconstitutional, and that it fails to correct the multiple flaws pointed out by Judge Robert Dierker when he issued an injunction against enforcement of Board Bill 12.
Less than one day after FRS filed its lawsuit against the City of St. Louis and its most recent ordinance involving the firefighters’ pension plan, Judge Robert Dierker issued an injunction against the City, prohibiting the City from proceeding with Ordinance 68353. He also consolidated this latest lawsuit into the existing litigation involving two other city ordinances relating to the same issue. Read the official press release from FRS.
Dan Tobben, principal with Danna McKitrick and attorney for the Firemen’s Retirement System, commented in the St. Louis/Southern Illinois Labor Tribune on changes the City of St. Louis made to its firefighters’ pension bill after a circuit court judge for the City of St. Louis issued an injunction against the City from implementing the original bill.
FRS attorney Dan Tobben noted there will be appeals regarding the “local control” issue, the rights of firefighters with less than 20 years of service, and for other legal and constitutional reasons as well, even if the new board bill passed out of committee last week is approved by the full Board of Aldermen.
The amended bill concedes many, but not all, of the issues being argued by FRS. Continue reading »
A St. Louis judge has entered a preliminary injunction against the City of St. Louis in all matters relating to Board Bill 12. Board Bill 12 (Ordinance 69245 of the City of St. Louis) was passed by the Board of Aldermen and signed into law by Mayor Francis Slay to allegedly reform the firefighters’ pension plan. The Firemen’s Retirement System litigated this case because it strongly believes the City of St. Louis did not have the right to make the proposed changes under Missouri state law and based on both the Missouri and the U.S. constitutions.
A St. Louis judge has ruled that the Firemen’s Retirement System of St. Louis can sue the City of St. Louis to stop reform of the pension. The Board of Aldermen for the City of St. Louis has passed ordinances to reform the pension. Firefighters believe that the city does not have the legal right to make changes to the pension system under Missouri state law.
There is a lot of distortion going on these days regarding public pensions. A recent You-Tube video captured this well, especially as regards the current battle in Wisconsin and the ongoing disputes in New Jersey (two places with very different situations–Wisconsin’s plans are actually rather well funded for state employees).
Seeing the effects the smear campaign is having on the general public, the International Association of Fire Fighters (IAFF) has responded back and has begun an ad campaign to educate people about the truths and myths of public safety pensions. Harold Schaitberger, president of the IAFF, made a lot of important points in his interview featured on the video and it is worth listening to.
After watching this video, I turned on the local St. Louis news to find a story about a 20+ car pile-up on a local highway. The news crew reported that the St. Louis City firefighters rushed to the scene, rescued over twenty people from their cars, and handled the catastrophe quickly and efficiently. After seeing both of these items, it makes me think that people should not rush to judgment regarding public safety pensions until they know all of the facts. The level of the rhetoric in St. Louis hasn’t reached the level in the two previously mentioned states, but the City’s distortions have been there for quite awhile. Add in the fact that the police have to go on the streets of America’s highest crime city, and it makes you wonder ‘what are these City officials thinking or are they thinking at all.
According to the SEC, offering documents connected to the bond sales created the false impression that the state could fund pension obligations with existing resources. However, the SEC alleged that New Jersey could not make contributions to its public pensions without raising taxes or cutting services that could impact its budget. As a result of failing to properly disclose its pension obligations, and the related financial issues, investors were not given adequate information to gauge the state’s ability to fund the pensions or assess the impact on its financial condition.
For several years now, cities and states have watched the funding of their public pensions worsen and many have filed to take any substantive action. Some of these public pensions have become dramatically underfunded, leaving the city or state in a fiscal crisis, but politicians continue to minimize the severity of these problems. They have glossed over the issues and are trying to push these issues off into the future, but the SEC has now sent out a warning that public pension underfunding can result in serious consequences. Besides penalties and fines, governmental units or responsible individuals may be criminally charged for securities fraud, which raises the stakes for the individuals involved. If the city or state creates a false impression with its citizens about its fiscal health when issuing bonds, it is also creating this false impression with potential investors.
In particular, the state of Illinois should be concerned by the SEC’s fraud charges brought against New Jersey. Recently, the state of Illinois issued a $3.5 billion bond issue and will issue another $11 billion bond issue in 2011. During this time, the state’s unfunded pension obligations have been estimated to be between $61 billion by the Illinois General Assembly’s Commission on Government Forecasting and Accountability and $166 billion by independent parties. If the state of Illinois makes misleading statements regarding its public pension underfunding issues when it issues bonds, Illinois may be the SEC’s next target. Full disclosure can solve these problems, but that would almost surely the raise the cost of borrowing funds during this time of economic uncertainty and reduced tax collections.
The SEC has taken a very important step to deal with how some cities and states mischaracterize their public pension obligations to its citizens and bond investors. Cities and states cannot be allowed to mislead investors about its pension obligations when it issuing bonds. Although there were no criminal charges or a financial penalty in the case of New Jersey, there is no guarantee this will occur again when the SEC files charges against another state or city. In fact, in San Diego, the SEC based remedies were much more severe. From this point forward, cities and states must be careful when they make statements about their public pension obligations and their ability to pay such obligations, because they could be the SEC’s next target if there is not proper and full disclosure.
Last year, the Illinois Commission on Government Forecasting and Accountability conducted its first biennial study of the underfunding issues plaguing the Illinois police and fire pension systems. The report reviewed the following six Illinois municipalities and their police and fire pension underfunding issues: Arlington Heights, Bellwood, Champaign, Springfield, and Wilmette. Obviously, a number of the causes cannot be controlled by the municipalities, including past investment return and employee benefit increases which are set at the state level. However, the municipalities’ own insufficient contributions and failure to reduce the future rate of return has increased the UAL as well. The municipalities must correct their own contribution issues, especially now when many of these funds have only approximately 50% of the assets needed to pay the pension benefits already earned.
Even though it may not surprise many individuals given how the stock market has performed in the past three years, inadequate investment return was a significant cause of the UAL increase for all of the municipalities’ police and fire plans. Investment return alone caused 33% of the UAL increase for Arlington Heights and 31% of the UAL increase for Bellwood. In fact, investment return caused 51% of the UAL increase in Springfield with nearly two-thirds of that amount caused by a reduction of the plan’s assumed future rate of return from 8% to 7%. This reduction was required because it was determined that the plan going forward could not earn an 8% rate of return. Although this issue may correct itself for the municipalities after the economy has recovered, there is no guarantee.
Unfortunately, the investment return may continue to cause problems for Illinois police and fire pension plans unless the municipalities lower the plans’ expected rate of return to a reasonable rate. All of the six municipalities have an expected rate of return between 7% and 7.5%. This is the rate of return the actuary assumes the plan will earn each year. If this rate of return is not earned, the plan will have fewer assets than expected and the UAL will increase. In comparison to the 7% expected rate of return, the actual rate of return earned from 1997 to 2008 was in the 5% range for five of the six municipalities. Wilmette actually had a rate of return of 3.3%.
Although these figures may be misleading because the stock market had a steep decline in 2007 and 2008, the municipalities should reduce the expected rate of return going forward unless there is some indication that the plans will be able to begin earning those types of returns again. Otherwise, the municipalities’ contributions are held artificially low because the actuary assumes the plan assets will increase at a much higher rate than what will occur. If this continues, the municipalities will be able to make lower-than-needed current contributions to the police and fire plans and delay paying their obligations these plans.
The unfunded accrued liability (UAL) of all of the police and fire pension funds in the study increased due to insufficient employer contributions as well. With Champaign having only 6% of the UAL increase caused by the insufficient employer contributions and Arlington Heights with 19%, all of the municipalities had issues with employer contributions. Although there may be larger causes of the UAL increase, the cities are only worsening the police and fire plans’ underfunding issues by their own contributions.
Although there may be other causes of the UAL increases, the two causes that deserve the most attention are the employer contributions and future investment return. For employer contributions, these municipalities should be required to contribute an amount that will decrease the UAL, instead of increasing it, especially given the 2033 Illinois deadline to fully fund pensions. There is no reason why the municipalities’ contributions should increase the UAL for police and fire pension plans. For future investment return, the pension plans have been devastated by the recent or present recession, and the market declines of 2007 and 2008. It has been nearly three years since the beginning of this recession and it is still uncertain when the economy will return to its pre-2007 condition. With such a high level of uncertainty, the actuaries should decrease the expected rate of return so that the UAL actually reflects the true amount the municipalities owe to the police and fire pension plans and the municipalities begin paying the proper amount owed to the police and fire plans.
Although municipalities cannot control every cause of the UAL increase, the municipalities should support the financial stability of these police and fire pension plans and make the contributions needed to make these plans financially stable. Otherwise, the municipalities are just passing off even larger problems and debts to the future citizens of these municipalities. Since pension benefits are constitutionally guaranteed in Illinois, there is no basis for cities trying to delay or escape their funding responsibilities.