More County Doubts About City Financial Situation

“I don’t envy the city. I don’t see how they can get where they are trying to go. I really don’t.”
– Harvey Kennedy, Chief Administrative Officer, Shelby County Government

A number of Shelby County elected officers and administrative personnel have expressed serious concerns about the economic viability of the City of Memphis given the city’s multi-hundred-million dollar unfunded financial obligation in its pension plan.

City and county government officials criticizing other is not uncommon, more often it seems, county officials speaking critically of Memphis officials. Given the city is both the population and the economic force of the county, serious financial difficulties of the city and any remedial efforts are likely to affect county government indirectly, too.

As has been well reported, it appears the unfunded pension liability accruing to the city is somewhere between $300-million and $700-million, depending on which analysis one uses. The city administration proposes to begin a five year process to address the gap, ramping up the budgeted amount for the pension plan, currently at $20-million per year, by about $15-million each of the five years, eventually reaching a plateau of a total yearly contribution of $100-million. Not surprisingly, the city does not have an unbudgeted $100-million dollars available to it, and even the $15-million annual increase will likely put serious strains on the financial decisions. As the 2015 fiscal year budget is being considered, the city administration says it is not asking for a tax rate hike. At least a couple of members of the city council say what is in store is a huge tax increase in a couple of years, after the next city election cycle in 2015, and by huge they mean something on the order of eighty cents per $100 of assessed valuation. A tax rate hike of that amount would increase the city tax bill on the owner, for example, of a home valued at $150,000 by $300. At least two of the most outspoken on the prediction of a major tax rate rise in the future are proposing funding the annually required contribution within a couple of years instead of five and are offering budget amendments cutting spending in other areas.

The State of Tennessee has passed a law requiring municipalities to fully fund the actuarially determined contribution annually as of June 30, 2020.

In addition to putting much more money into the pension program, the city administration proposed to discontinue the traditional defined benefit pension plan for newly hired employees and those who have less than 10 years service with the city and therefore are not vested in the defined benefit plan. Instead, the city wants to go to a defined contribution retirement plan. While doing so will not reduce the already obligated millions of dollars to retirees under the old plan, the new method would not be adding to that problem.

Whether a large tax increase, extremely reduced services, or even bankruptcy is in the city’s future may be anyone’s guess, but it may be worrisome that some in county government who may be in a position to understand governmental finances are apparently not able to think of a satisfactory way out of the problem for the city has. Furthermore, they apparently do not have confidence in the city’s proposed way out.