Metro’s rising pension costs threaten its future operating position, potentially hampering its ability to provide service if the agency fails to rein in unfunded retirement and health-care liabilities, according to a report from the Government Accountability Office released Monday.
The 53-page report raises concerns about Metro’s nearly $3 billion in unfunded retirement and health-care costs, and notes that its $4.7 billion in total pension liabilities represents about 6.5 times what the agency spends annually on salaries and wages.
Metro’s annual pension costs grew by an average of nearly 19 percent from 2006 to 2017, the federal report said, making pensions the agency’s fastest-growing workforce cost as its total labor costs grew about 3 percent a year.
With the scale of the obligations, the report posits that in the event of an unfavorable financial market, Metro could be backed into a corner to cover its obligations. The scale of the pension liabilities means that a drop of less than one percentage point in Metro’s investment return on its pension fund could squeeze its operating budget to the point that the agency would need to reduce service or ask the jurisdictions that fund it to cover the shortfall.
“Due to their relative size, proportion of retirees compared to active members, and investment decisions, these pension plans pose significant risk to [the Washington Metropolitan Area Transit Authority’s] financial operations, yet WMATA has not fully assessed the risks,” the GAO concluded. “Without comprehensive information on the risks facing its pension plans, WMATA may not be prepared for economic scenarios that could increase its required contributions to an extent that might jeopardize its ability to provide some transit service.”
The GAO warning comes a month after a labor arbitration panel rejected the agency’s proposal to reduce its pension burden by shifting from a defined-benefit to defined-contributions system for future hires. Metro Board Chairman Jack Evans has repeatedly highlighted the pension issue as one of the major challenges facing the agency, along with dedicated funding, a need that was fulfilled after Metro secured $500 million in annual dedicated funding from the region.
“I’ve been telling you guys this since I became chairman 2½ years ago,” Evans said. “In five to 10 years, the amount of money that we have to pay out of the operating budget to fund the pension will be so high that we won’t be able to run the system.”
He said the arbitration ruling was a major disappointment because it failed to address the problem.
“They kicked it back to us. They said, ‘We don’t want to deal with it,’ ” Evans said. “We’re stuck with the same old pension system. . . . The arbitrator was our last resort.”
Evans said the best way to deal with the problem would be for the federal government to assume the unfunded liability, as it did when it took over the District government’s pension liability during the city’s financial crisis in the 1990s.
Rep. Gerald E. Connolly (D-Va.), whose office pushed for the GAO report’s release, said that pensions are among the “pressing financial issues facing Metro.”
“Every change in decimals has costlier consequences, and we’re going to have to look at that,” Connolly said. “All parties have to recognize that this is not sustainable going forward. And we’re going to have to wrestle with that issue.”
Rep. Barbara Comstock (R-Va.), who supports switching to a less-generous pension plan for future hires, said she intends to include the proposal in a revised version of a Metro reform bill that she will introduce this week.
“How many times do we have to ask the same question and expect to get a different answer?” Comstock said in a statement. “Metro’s liabilities are unsustainable and fundamental changes need to be made. We have had nearly 40 different reports on Metro from the past decade telling us that. This report took over a year and a half to complete to say what has been said before.”
The GAO report says that if Metro’s rate of investment return on its pension fund were to decline from 7.66 to 7 percent, for example, the transit agency would have to pay $42 million more into the fund — increasing its annual pension spending from about $161 million to $203 million, leaving the agency in an operational bind.
But Connolly hinted that Democrats in Congress were unlikely to take up the issue of pension reform, a measure that could be seen as anti-union.
He said the battle over pensions should be waged between the unions and Metro management. The shift from defined benefit to defined contributions, he said, represented a “Republican solution.”
The report recommends that Metro General Manager Paul J. Wiedefeld order an assessment of the “financial risks” posed by the agency’s pension plans and unfunded liabilities, “including under potentially adverse economic scenarios,” which appears to essentially be a call for a more detailed version of the GAO report.
“In general, WMATA concurs with the findings and conclusions presented in the report and has already taken actions to address a number of issues raised in the recommendations,” Metro wrote in an Aug. 28 letter responding to the GAO’s findings. “With respect to our growing pension liabilities, management is doing all that it can to relieve the pension burden, and will work with our Board and jurisdictions on a long-term solution.”
Metro’s largest union, Amalgamated Transit Union Local 689, faulted the GAO report as misleading.
“This is a deceptive report and it’s not the fault of GAO, but of Metro, who provided the information,” union spokesman David Stephen said. “The GAO report is based on the information that Metro gave them, so they are able to manipulate that report into saying whatever it is they want it to say.”
Beyond pensions, the GAO said Metro has failed to develop a strategic plan to guide its hiring and recommends that it develop a plan that explains its direction and uses data to lay out the “critical skill and competencies” it needs in its workforce.
Further, Metro should develop mechanisms to make sure supervisors conduct thorough employee performance reviews, and do so in a consistent and timely way. The report also calls for consistency in the agency’s workplace goals, including employee “performance objectives” that align with its larger agency goals.
Finally, it calls for Wiedefeld to institute a process for tracking employees’ progress toward carrying out those initiatives.
The GAO notes that Metro has existing systems to track employee performance but said they fail to hold workers to a larger set of standards. Further, the office said, Metro doesn’t have a handle on whether supervisors are conducting accurate and timely employee evaluations.
“For example, in 10 of 50 performance evaluations we reviewed, we found scoring errors where employees were assigned a performance rating inconsistent with the supporting review,” GAO said. “Without comprehensive policies and procedures or sufficient controls over its performance management systems, WMATA lacks tools and information to move employees toward achieving WMATA’s strategic goals.”
Connolly said the finding underscores how a “culture of mediocrity has been allowed to descend on Metro.”