July 28, 2014

Up Front - The Publisher's Column

On Municipal and State Pensions

Andrew P. Corty | 5/9/2013

This month, I want to talk about pensions — both municipal and state. If you are terrified of this topic, you still need to read on because pensions are a huge issue and simply too big to ignore.

I’m worried that pensions are a ticking time bomb waiting to explode on all citizens of Florida. We need to get a handle on the situation now while there’s still time. Otherwise pensions will take a bigger and bigger chunk of government spending, perhaps even causing some cities to declare bankruptcy, as has happened in other states.

A great majority of companies have moved away from traditional “defined benefit” pensions, a paternalistic system that guarantees workers a steady paycheck for the rest of their lives after they retire. Why? Because there’s too much risk on the backs of these companies. They must absorb the risk of poor stock market performance, lousy investment choices, weak corporate earnings and longer lifespans.

Most companies, including Trend, have already concluded that pension costs were not sustainable. They wanted to shift retirement responsibility to the workers, a less paternalistic system that also allows portability and thus conforms with the job-hopping culture common today. So they closed or froze pension plans and moved toward “defined contribution” plans such as the 401(k).

But governments have not been so nimble. They have used pensions as a tool in labor negotiations, pushing costs into the future when current elected officials would be long gone. However, we need a system where we pay today’s costs today — we need to quit fooling ourselves.

Florida TaxWatch in conjunction with Florida State University’s Leroy Collins Institute recently issued a thoughtful report on municipal pensions. It points out that underfunding is rampant in dozens of city and county plans, that some Florida statutes restrict the rights of cities to bargain for reduced pensions, and that gamesmanship sometimes drives an individual’s pension higher. This last point is called “spiking,” when an employee is allowed to use overtime or sick time to pump up his final pay, increasing the pension for all subsequent years.

The report also lists possible reforms to reduce pension costs. Employees could increase their own contributions, cost-of-living adjustments could be eliminated or reduced, the pension formulas could be changed or spiking could be prohibited. Of course, cities could also simply pay more by raising taxes to keep the plans afloat.

While all of these ideas are valid, the long-range solution is to simply switch to defined contribution plans as for-profit companies have done. That eliminates all the gamesmanship, forces mayors and city councils to pay today the full cost of each employee and prevents the citizens from an unhappy surprise some years hence.

Of course, we can’t make the switch overnight. There needs to be a glide path to protect current workers while instituting a revised plan for new employees. Right away we need to get out of the business of “spiking” and overly generous cost-of-living adjustments.

TaxWatch notes that this is a state government topic as well, and it recommends reform of the Florida Retirement System. With more than 600,000 participants, the system simply must be sound.

For the state, when times are good, the Legislature enhances benefits. When times are tough, there’s not enough state money to contribute. And the state’s defined benefit pension plan has all the challenges that cities face.

Right now, the stock market is in our favor. It’s a perfect opportunity to make the switch.

This month, Florida Trend highlights a city on the move — Orlando. Please click here to read a portrait of the vibrant Orange County region.

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