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Thursday, October 21, 2010

Norwood Pension Flap Class-Action Settlement In Works: City And Retirees Ask Judge For 'Fairness Hearing'

CINCINNATI (TDB) -- The argument was over complaints that Norwood illegally shifted  increased costs for health care insurance to its pensioners.  Former police and fire department workers said they took lower pay in the 1970s in exchange for promises of medical benefits after they retired.  When the costs rose, Norwood broke its promise.  Judge Charles Kubicki has not set a date for the fairness hearing in Hamilton County Common Pleas Court, but the joint request filed last week signals that the conclusion of the lawsuit is near.  The case -- which involved about 150 city workers -- is important, although it has not attracted a great deal of attention.  The Norwood case shows that attempts by state and Cincinnati officials -- who are battling an explosion in pension expenses for public employees -- to chop retirement benefits for government workers will likely wind up in court.

The Norwood lawsuit is Case No. A 098881 and was filed by retirees who started working for that city before 1975.  The city promised health care benefits as part of the pension package.  The retirees said said they gave up pay raises and cost of living adjustments in exchange for the health care benefits.  The retirees claim that in 2005 Norwood forced them to begin paying a portion of their health care insurance premiums:

"Sometime in 2005, the city, without any notice or process being provided to the retirees, implemented a policy that certain police and fire retirees that were non-Medicare eligible would not be reimbursed for all health care premiums.  Indeed, the evidence [to be presented at trial] will reveal that the City reimbursed these premiums since at least 1990 as part of its contractual obligations that were made when induced the retirees to continue to work for at as well as certain language contained in police and fire labor contracts.  Many retirees were made aware of this newly adopted policy not by the City, but by the third party administrator that handles their claims and paperwork."

Norwood said it agreed to pay up to $2,250 a year for co-pays, deductibles and medical expenses not covered by the pension insurance, which came from the Ohio Police and Firefighters Fund.  Norwood contended:  "Any medical expense not covered by the applicable insurance policy or in excess of the ($2,250 a year) would be paid for  by the retirees. . . The plain language of the plan limits benefits to $2,250 'per plan year for each plan participant.'  The language could not be any more clear or unambiguous."

Kubicki was scheduled to try the class-action Oct. 7 without a jury.  The trial was canceled.  The case was originally filed in U.S. District Court where Judge Michael Barrett spent three days holding unsuccessfully settlement talks.  It was moved to Common Pleas Court last year, were the parties tried to mediate a deal.  They have explored a possible settlement, and the Oct. 12 request for a fairness hearing indicates they reached an agreement.  A fairness hearing is unique to class-action litigation -- it requires the judge to determine that the settlement is fair, adequate, reasonable and not based on collusion between the lawyers.  The judge is supposed to act as the protector of the class, and once the settlement is presented, the judge make his evaluation.


  1. --------------------------------------------------------------------------------
    Subject: Norwood Pension

    Your article is the only one I found about the injustice occurring with regard to the Norwood Pension Fund. My name is Joe Sorrell, and my father, Robert Sorrell is one of the retirees affected by the lack of funding for the Norwood Pension fund. He was diagnosed in January of this year with terminal lung cancer. As his power-of-attorney I have become involved in learning about his finances and insurance. I was outraged when I learned what was happening. He was a police officer for over 25 years, and they told him many years ago that instead of getting a raise, he would get these medical benefits when he retired (this was verified in the recent lawsuit by the then Safety Service Director of Norwood). Last week, my parents received letters from collection agencies for non-payment of their medical bills (which were supposed to be covered by the pension fund). So my parents are left in the middle, while Norwood City Council fails to provide sufficient funding for the pension. There are less than 35 retirees still living that are covered by this plan, and this is a point that I really want to publicize because I understand and agree that setting up such a system for today's workers is not sustainable. I would never advocate this benefit system for today's workers, but it is not fair to take away benefits from those already at retirement age. The real travesty is that the judge agreed that the city should fund the pension, but they continue to under-fund it. When the retirees' representative (a non-lawyer) contacted the judge's bailiff to see who should enforce the judge's finding, she instructed the representative to hire another attorney! The number of retirees in this pool is less than 35, and in ten years it will be a negligible amount, but it is not right to take away a benefit they were promised, especially when they declined raises in lieu of it.

    Do you think this is newsworthy? I think with today's political climate, this story of a loyal police officer of 25 years, dying of cancer and being sent to collections because of a city's broken promise resonates. If you interested in the story, I can provide you with the names of the relevant parties. If you are not interested, please let me know and I'll write the article.

    Thanks in advance,

    1. What does it look like when a city of almost 300,000 flirts with becoming America's largest ever city to go bankrupt? Welcome to Stockton, Calif.

      An inland seaport in California's Central Valley, Stockton exemplifies the fiscal hole that many municipalities have dug for their taxpayers. Starting in the mid-1990s, the city began attracting frenzied bargain hunters who drove up home prices nearly threefold. Then the California home market crashed spectacularly in 2007. Foreclosures soared, tax revenues declined, and Stockton discovered that the weight of its fiscal commitments might spell bankruptcy.

      The city's fiscal history "has eerie similarities to a Ponzi scheme," says Bob Deis, the city manager Stockton hired in 2010. Over the years, the city promised employees huge—and unfunded—salaries and benefits, so when trouble struck officials began cutting back on services such as police and fire protection, plus libraries and parks. Stockton's current leadership, which has already suspended some payments to bondholders and is negotiating with creditors and unions, is frank about its past shortcomings. In last year's budget, Stockton admitted that its biggest problem has been a lack of transparency resulting in a host of "hidden costs" in labor agreements for "obligations that are often difficult for citizens to identify or understand."

      The city recognizes more than 100 different categories of "additional pay" that employees can earn to boost their salaries but that still make basic compensation packages appear reasonable to the outsider. A fire captain earning an annual base salary of $101,000, for example, can easily increase that by $35,000 thanks to additional pay for everything from automatic annual stipends for uniforms (regardless of need) to more schooling.

      Stockton safety employees with 30 years of service receive 90% of their highest working salary as a pension, with cost-of-living adjustments up to 2% annually for the rest of their lives. And while the state requires workers to contribute between 7% and 9% of their salary toward pensions, Stockton agreed in a series of agreements with various municipal unions going back to the 1990s to pay the worker portion of the contribution along with its 20% employer share.

    2. Part 2

      Stockton couldn't afford this rich program even in boom times, so officials played risky investment games. In 2007, the city borrowed $125 million and put the money into Calpers, the giant California pension fund, betting that investment managers could earn more than the interest Stockton owed on the debt. When the market tanked, Calpers lost 24%-30% of the loan's principal, according to city budget documents.

      Now Stockton is stuck with interest costs on top of pension obligations that pile an additional 48% onto basic employee pay. Thus a public safety worker earning $70,000 annually costs the city another $33,000 in interest and pension-borrowing costs.

      Perched precariously atop this mountain of obligations are retiree health benefits. Stockton officials awarded these to city employees in a series of votes in the 1990s but made no effort to fund them, intending simply to pay costs out of their budget as workers retired. As hundreds did just that over the years, the costs grew. Next year, the city's fiscal documents project, retiree health costs will surpass those of the city's regular work force. At last count the city's unfunded liabilities for retiree health care are above $400 million.
      Related Video

      Manhattan Institute fellow Steve Malanga on Stockton's fiscal crisis.

      Stockton Mayor Ann Johnston voted for these expensive measures when she served on the city council. "We didn't have projections into the future what the costs might be," she told the Record, a Stockton newspaper, earlier this month. She added, "I learned that you don't make decisions without looking into the future."

      Council votes to approve ever-greater benefits were often unanimous, according to Record columnist Michael Fitzgerald. "Nobody gave thought to how it was eventually going to be paid for," says Mr. Deis, the city manager.

      The future is bleak, as the city has only $165 million in its general budget to provide police, fire and other basic services to 292,000 citizens. The police force has shrunk by about 100 officers, or about 25%, in the last two years. Residents report long wait-times after making 911 calls, and police only respond to emergencies.

      "Let's say you come home and find your house burglarized," Stockton public information officer Pete Smith said recently. "The front door is open but the house is safe. There's a good chance that you won't get a uniform officer" to come investigate. Stockton's unions have seized on residents' fears: "Welcome to the second most dangerous city in California," blared billboards posted around town by the police union.

      Stockton is the first city required by a new, union-backed state law to try to avoid bankruptcy by entering into mediation with creditors and employees. The law dictates that only the results of these negotiations—not their proceedings—be made public, forcing Mr. Deis and other officials into a quiet period that may last several months. This is a final indignity for a city trying to turn itself around with "transparency."

      The big question is whether Stockton is only the tip of an iceberg. The 50 states alone have promised their employees retirement health-care benefits amounting to a $627 billion future liability—and funded only 4% of that cost, according to a recent accounting by Bloomberg Data. Unfunded state and municipal pension liabilities range up to $4 trillion, depending on what future investment assumptions you make.

      Most local governments may never reach insolvency, but the rising costs of these benefits already crowd out other spending, including on police and fire protection. Thanks to unaffordable promises made by politicians who never bothered to total up the costs, we're in a new era of local government in America: Taxpayers can expect to pay more but get less.

      Mr. Malanga is a senior fellow at the Manhattan Institute.