Monday, May 25, 2009

Pension and benefits changes

In November the voters called for sweeping change—including an unprecedented turnover in the Pensacola City Council. Resonating through local races was a call to reform the serious pension problem that was threatening to gobble up the city budget. I continued to hear “No more studies, please take some action.”

Since being sworn in we have discussed, debated, and dissected the pension issue. We have expanded the deliberations to include the entire benefits package. Meanwhile uncertainty looms over the heads of City employees in an already tough economic time.

Rumors have been swirling that the general City employees are contemplating union—which, among other things, would further complicate any future reforms by adding another layer between policy and practice. At the same time a proposal is being submitted by the Charter Review Commission to fundamentally change the structure of city government—further adding to the climate of uncertainty in City Hall.

I believe it is time to take decisive action to 1) save the taxpayers’ money, and 2) restore some stability to the city workplace.

I suggest that we
  • approve two reforms to the pension plan that should save $2.5M per year,
  • adjust leave accrual and payouts so that these benefits will be more consistent with the benefits in the private sector, and then
  • make a commitment to City employees to take these issues off of the table for the duration of this term.

We have a clear mandate from the voters to tackle the pension problem and to do so swiftly. I propose that we act now to make the two changes to the pension I outlined in my previous post:
  • adjusting spousal benefits and
  • implementing 5 year averaging
The combined impact would save $2.5M annually in pension costs, an overall savings of 20%. These changes must be applied equitably to all of our pension plans: general, police, and fire. (While making this change to fire requires legislative action, we should adopt the policies now and enact the changes as soon as we can in each case.)

Adopting these changes now will send an unambiguous signal that we are committed to making the changes necessary to ensure the fiscal stability of our city and that we intend to deal fairly and equitably with all city employees. And we will begin accruing savings immediately.


The press has documented some of the most excessive pensions. Often the most bloated retirement packages have been coupled with huge payouts for accumulated vacation/sick leave. So it makes sense to examine this part of the benefit package while we are doing pension reform.

How do we compare?

In comparison to the private sector, the City allows the accumulation of a large amount of vacation/sick time (combined as paid time off—PTO), and it is paid out at the end of employment. This structure, which defers to the future costs incurred today, doesn’t make for sound fiscal policy. That’s why most other employers—both public and private sector—have limited accumulated leave.

Certainly, there is some value to accruing leave time, allowing employees to have a cushion in case of catastrophic illness for themselves or family members, but a reasonable benefit should not balloon into a golden parachute. We can't afford it.

My Proposal

I propose bringing our leave accrual and payouts closer to the private sector. The Family and Medical Leave Act allows employees 3 months leave for illness or caring for a sick relative, so it is a valid benchmark. I suggest that employees should be able to accrue up to 12 weeks of leave, which pegs this benefit to a national norm.

(The payout cap is just one component of leave. Other issues include separate sick and vacation time, leave accrual rates, and mandatory vacations. These are primarily policy issues, with little long-term budget impact. We should leave the tweaking of these minor issues to future councils. Simply changing the payouts for accruals will make a significant change to our system and prevent the “sticker shock” that has occurred recently regarding payouts.)

What about employees whose cumulative hours exceed the new cap?

We need to honor previous obligations. Therefore, I propose that we pay out employees’ accumulated time in excess of the new cap over the next two years. This payout will cost approximately $1.5M per year for only two years. The ongoing $2.5M per year savings from the pension could offset these short term costs. What’s more, this change—which will benefit the taxpayers in the long term—will put cash in the hands of nearly 600 of our 850 employees (employees who have not seen a raise in two years, who have had the opportunities for overtime pay reduced, and whose longevity benefits have been put on hold).

So why not embark on a study?

Sure, it would be nice to know precisely and exhaustively how the rest of our benefits and salaries compare, but much of that information is available without paying a consultant. City staff has already provided data on other cities, and this information is available as public record. Many local employers have shared their pension and benefits packages with me during the past week. I have reviewed the plans from Gulf Power, Baskerville-Donovan (who also furnished data on benefits for engineering firms nationwide), O’Sullivan Creel, Escambia County, and others, and my proposal regarding leave is based on that research.

Benefits are not an exact science; they reflect the current situation of the particular employer. No matter what a consultant reports, in the end we will likely be in the same position we are today—faced with enacting cuts that are fair to both employees and taxpayers. However, it is clear the issues I propose changing are ones that are most out of line with other employers and promise to take a big bite out of current and future costs.

We could tinker. But while we tinker we lose time. We lose money. And we allow the climate of uncertainty to persist.

Moreover, the benefits in taking decisive action far outweigh any minor additional savings that a study might uncover.


In summary, I propose several changes:
  1. enact the Life Annuity Normal Form (choose whether spouse is part of pension calculation)
  2. adopt 5-year averaging for pensions (as opposed to current 3 year averaging)
  3. cap leave accrual/payout to 12 weeks
  4. make no further changes to pensions and benefits during this council’s term.
The benefits?

For employees:
  • a pension system that values an employee’s work and dedication,
  • stability and protection from other changes,
  • for most, a pay out of accrued leave now during a time with tightened budgets.
For the City:
  • reduced annual pension payments
  • reduced future payouts for leave accrual
  • short- and long-term financial savings.
And, for the taxpayers:
  • stabilized, reduced future costs on pensions and benefits
  • improved ability of the City to provide superior service at the lowest cost.
This council has already shown it has many creative ideas, but we have been bogged down by this huge problem which we have inherited. If this Council proves equal to this task, we can set our eyes on the future and the exciting challenge of making Pensacola the great, vibrant city that we can become.