Unions Sue Baltimore for Underfunding Pension Plan

June 4, 2010 (PLANSPONSOR.com) - Baltimore's police and firefighters' unions have filed a lawsuit against the city in federal court, contending that officials "knowingly underfunded" their pension plan over the past decade, ignoring the advice of financial experts hired by the city.

The Baltimore Sun reports that the lawsuit names the mayor and City Council, pension board members, city finance director Edward J. Gallagher and public safety pension system director Thomas P. Taneyhill as defendants. In the suit, the unions allege that from 2003 to 2008, pension board members and city officials disregarded repeated recommendations by actuaries to reduce the pension fund’s assumed rate of return because it would have forced the city to contribute millions more to the plan.

The lawsuit alleges that the actuaries warned pension board members in 2006 that the plan was underfunded and laid out four ways the problem could be averted: an increase in the city’s contributions; a decrease in benefits; an “incredible actuarial experience,” such as many members retiring later or dying younger; or the funds earning “a lot more,” which actuaries said was unlikely, according to the news report. Despite the recommendations, city officials did not boost funding to the plan even though Baltimore had a $61 million surplus that year, the suit says.

The lawsuit demands that the city retroactively fund the plan at rates proposed by the actuaries for the previous seven years, with interest, and “cease and desist from enacting, executing or enforcing improper and illegal legislation” to alter the plan.

The filing of the lawsuit comes as City Council member Helen L. Holton, chairwoman of the taxation and finance committee, is preparing to introduce a bill to overhaul the pension system. She described the legislation as a revision of an earlier bill that was unpopular with the unions. That measure would have increased the age of retirement and replaced the existing “variable benefit” with a set cost-of-living increase (see Baltimore Officials Ponder Pension Cost-Saving Changes).

If officials do not make drastic changes to the pension system by July 1, the city will owe $65 million that it cannot pay, the news report said.