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Warning signs abounded in pension flap

January 23, 1997

Bob Maginnis

Editor of The Herald-Mail's Opinion page

If you're not worried about the recent revelations that Hagerstown is in hock to the state pension fund for $9.9 million, you ought to be, for two reasons.

Beginning in 1981, your city government spent a ton of its time and money fighting to get this issue straightened out. For example, if the city government not been preoccupied with this issue, the fairgrounds might have been developedsooner, and at a much lower cost. Citizens ought to rail at the idea that all that time and tax money were wasted.

The second reason is that what happened shows that unless rural areas' officials are vigilant and serve notice that they're ready to go to war for their constituents, they will get their butts kicked. Based on interviews I've done and information received, there is plenty of blame to go around, at all levels.

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According to Eric Marburger, the city's personnel director and Tim Carey, a consultant who worked with the W.F. Carroon Company to study city pension issues, this is what happened.

In larger metropolitan areas where there's a lot of turnover in government jobs, local officials realized that they were paying the state system a lot more than necessary to fund their own employees' retirements, in part because so many workers were leaving before they were "vested" in the system. These governments saw an advantage in withdrawing from a system which "pooled" liabilities and rewarded governments like Hagerstown, where turnover is low.

To dissuade governments from leaving, the pension system quietly had legislation prepared which turned the system on its head. Instead of pooling the liabilities, they were figured up on a per-capita basis and assigned to the member governments. City officials say the bill was introduced late in the session, and even after it passed the House, they were told it wouldn't meet Senate deadlines.

They also say that they were told prior to passage (in a February 1996 memo from pension system chief Peter Vaughn) that the city's liability would only be $270,000 additional a year, which as Mayor Steve Sager said, was not welcome news, but not a tragedy either. Now, the city has learned that it will be $270,000, plus about $500,000 more, Sager said.

Whose fault is all this? Certainly the pension system people, who worked to change the rules to keep other governments from leaving the system, and in the process penalized the city for having a stable work force. It is like finding out that your mortgage has suddenly been changed from a fixed-rate to a variable-rate, and by the way, you don't have the equity you thought you had either. It is unfair and something the larger jurisdictions would not have stood still for.

That brings us to the legislature. The House floor report on the bill clearly shows that Hagerstown will be one of "four units with large increases in costs." Our delegation supported the bill, with the exception of Del. D. Bruce Poole, who didn't vote.

Finally, there's the city government itself. In a letter which appears on Page E-4 of this section, the Hagerstown police union's executive board says that Carey, an actuarial consultant working on possible alternatives to the state system, told city officials years ago that they weren't paying enough in to the state.

I faxed Carey a copy of the letter, then interviewed him by phone. Did you, I asked, warn city officials?

Carey said yes, he had warned them. When I asked him how he could have known enough to do that before the state did any calculations, Carey said that he was familiar enough with the demographics of the organizations in the state system, and with methods of tracking pension liabilities, to make that judgment.

Although Hagerstown was paying at the same rate as everyone else in the system, Carey said, "they were amassing liabilities much more rapidly." Carey said he warned city officials that in the future the state might come back and change that arrangement.

Getting out of the state system now would be a lot tougher, Carey said, because law changes made it more expensive for the city to "square up" its debts with the state. What he proposed previously to get the city into its own system wasn't "cost neutral," as the mayor and council had requested, because it wasn't possible to build something new using the artificially low costs the state was charging then as a basis.

Can the city just pay its debts and chuck the state system? Not really. State law prohibits the city from forcing existing employees into a new system. Anything new would have to be attractive enough to entice them in, which also means it would be more costly, Carey said. In my view, the city's only option is to cry foul, and hold out for a better deal.

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