Sunday, March 22, 2009

City Pensions

The city pension systems continue to be a hot topic in council meetings and the press, as well they should. While I believe that the city must continue offering retirement benefits in order to attract the best workers, we must ensure that the benefits meet our goals without bankrupting the city. The issue is complex—a puzzle with many pieces, not a problem with one key to solving it.

While the unfunded liability and, hence, the city's annual payments to the funds are very large, we are currently limited to acting only on a small sliver of the pension pie. We cannot touch the benefits promised to retirees; we are obligated to keep the prior commitments made to existing employees (as we should be); and any changes in a large chunk of our benefit packages are subject to union negotiations.

Our options are limited in other ways as well, sometimes by state law. In particular, state law makes converting new police and fire hires to the Florida Retirement System fiscally unattractive. However, in digging into this problem, I have learned of an opportunity for opening this option for us. But if we are to have this option, we need to act quickly.

First, some background

The city has three separate pensions: general, police, and fire. A few years ago, the city’s general pension was closed to new hires. Existing employees could elect to continue with the general pension or be transferred to FRS (Florida Retirement System). All new general hires are now enrolled in FRS.

This change was desirable for the City and employees for many reasons, most notably the differences in benefits between FRS and the city general pension, the ability to spread risks state-wide, and the options available to participants (defined benefit and defined contribution).

Police and Firefighter Pensions

It seems logical that the City might have moved police and firefighters to the FRS when the change was made for general employees. Both the City and these employees would have accrued the same benefits from this plan that general employees reaped. However, action was postponed on the city police and fire pensions because state law makes this a risky move for the city. Here’s why.

Problem#1: A $1.4 M unfunded liability passed on to the City.

The State of Florida charges an excise tax on casualty insurance. This money is distributed to municipalities for their fire and police pension plans. Currently the state provides the city with about $800,000 for fire and $600,000 for police for their unfunded liability (roughly the difference between employee contributions and what we will need to pay out to retirees).

What this money is and how it is distributed is complex (and this whole thing is complex enough), so suffice it to say that we get the money, which means we have to follow state law that regulates whether we get it, how we spend it, and what happens if we don’t get it any more.

If the city chooses to close the police or fire pensions and require new hires to enter FRS, this will trigger a change with respect to the casualty insurance—the most obvious being that the city will no longer receive $1.4 million from the state. If we do not receive this money, we will need to make up the difference out of city coffers.

However, there is another problem that also crops up with possible major (much more than $1.4M) financial implications

Problem #2: A mandated reorganization by the pension board.

If the city begins letting new hires go into FRS, it would trigger (per state law) a reorganization of the pension by the pension board. The board could do one of three things.
  1. It could continue to operate the existing pension investments and the subsequent contributions from the grandfathered employees as it had before the change, with some adjustments based on the actuarial rules.
  2. It could terminate the pension and pay cash to the participants, sufficient to fund their retirements, again based on actuarial calculations.
  3. It could invest the money in annuities at a level sufficient to pay retirement benefits.
The last two options are scary for the city. Both require the pension board to demand a large lump sum from the city, money we don’t have. It is unclear which option the board would choose, and they do not have to make their decision before we vote to close the funds! By closing the fire and police pensions to new hires, we could be on the hook immediately for large sums (tens of millions of dollars at minimum). This conundrum is dictated by state law.

What can we do? (I’m finally getting to that.)

There is currently a bill before the House Governmental Affairs Policy Committee, HB 673, that would give cities the option to enter new police and fire employees in FRS while letting existing employees continue in the current plan without triggering the loss of the state money or the restructuring.

I urge the city to support this bill which will give us the flexibility we need to address this weighty problem. A companion bill, SB 1572, has been filed in the Senate and is currently in the Governmental Oversight and Accountability Committee.

Bills in the legislature routinely die before the end of session. I do not want to see the legislature end their session without giving us one of the tools we will need to address one of the biggest financial challenges before this city, not to mention other Florida cities in our same circumstances.

Do note that one of our local representatives, Dave Murzin, is in the council over the committee where the House bill currently is. Along with other legislators, he needs to be made aware of how important this bill is to our community and asked to help expedite its passage before the end of session. Please contact him and any other legislators you know and let them know your concerns.