WASHINGTON - The Clinton administration's proposal to bail out the District of Columbia includes a provision to take over the city's pension plans and its $4.3 billion unfunded liability.
In fiscal 1998, assets at the $4 billion District of Columbia Retirement Board, which covers the district's police officers, firefighters, teachers and other government employees, will be transferred to a third-party trustee appointed by the federal government to administer the plan and invest the assets. Existing assets would be liquidated as needed to pay beneficiaries, an administration source said.
The district would be responsible for setting up a new system to accommodate new and existing employees. Office of Management and Budget Director Frank Raines said at a press conference that the district would be required to fully fund the new plan "from day one, going forward."
In addition, in 2007 the federal government would start making annual contributions of about $400 million to pay off the district's current $4.3 billion unfunded pension liability, Treasury Secretary Robert Rubin said at the press conference. About $2.6 billion of this was foisted on the district by the federal government when the pension board was set up and home rule was established in 1979.
"What this means is that the home rule arrangement that was created in 1979 has proven not to be a successful arrangement," Mr. Raines said. "And what we are doing is readjusting that arrangement to give it a greater chance to succeed."
In the overall package, the federal government would pay the district $3.9 billion over the next five years, a net gain of about $339 million from what the district normally receives from the federal government. In exchange, Congress would stop its annual payment to the district - now $660 million - and its annual $52.1 million payment to the retirement board. The federal government would soak up some other district-run programs, including its prisons, district courts and 70% of the district's Medicaid payments.
"Over five years, this plan will save the district about $770 million," Mr. Raines said at the press conference. "Federal costs will be somewhat less than the district budget savings, in part because pension assets will be used to pay the pension payments between 1998 and 2007."
The federal government's plan "is explicitly conditioned" on the cooperation of the district government and the retirement board, a Clinton administration official said.
Mr. Raines said at the press briefing that a "memorandum of understanding" would outline the district's responsibilities, which would be ratified by the federal government, the district government and the D.C. Financial Control Board.
For the retirement board, that would mean providing all materials necessary, including employee records, for a smooth transfer of authority.
But the retirement board's executive director said it would be better if the federal government funded the $4.3 billion unfunded liability.
"I am very happy the federal government (would be) assuming responsibility for the unfunded liability," said Executive Director Jeanna Cullins. "But rather than taking over the trust fund, I believe they should fund the unfunded liability," Ms. Cullins added.
Currently, Congress pays the retirement board $52.1 million each year for the unfunded liability. The payments are scheduled to end in 2004.
Ms. Cullins said she could not comment further on the plan because the board had not met to discuss the proposal, nor did board members receive details on the proposal.
But even if the federal government goes through with its proposal, it shouldn't need to liquidate assets before it hires a third-party trustee.
Jon Lukomnik, deputy comptroller for the New York City Retirement Systems, said that if a third-party trustee is hired, it's likely that very little would need to be liquidated.
"Without knowing the (retirement board's) holdings, I suspect it would be a minor percentage, and substantially below 50%," that would need to be liquidated, Mr. Lukomnik said.
First, the new trustee would need to do an asset allocation study to see which current investments would fit in the asset allocation model.
"Even when we reallocate, liquidations tend to be zero to 40% with a lot of it being in the 10% range," Mr. Lukomnik said.
"Usually we can do a security transfer" for a good portion of the assets, he added.
The Clinton administration's proposal came with mixed reaction from Capitol Hill and the District Council. District Delegate Eleanor Holmes Norton said in a statement to Pensions & Investments that she supports the proposal in general, but is awaiting the details.
District Council Member Harold Brazil applauded the proposal, but didn't want the federal government assuming the responsibilities of the district's main programs.
Sen. Lauch Faircloth, R-N.C., chair of the Senate subcommittee for the District of Columbia, called the proposal "a great ripoff."
"Any plan that increases the federal deficit is a non-starter with me," Mr. Faircloth said. "How can we plausibly discuss cutting Medicare and the cost of living adjustment for Social Security recipients, and at the same time provide a multibillion-dollar bailout for a mismanaged city?" he added
So far, no legislation has been crafted to match the president's proposal. The Financial Control Board is expected to come out with its recommendations for the district's pension system Jan. 31.