As pension obligations balloon, governments face pressure to explore alternatives to their defined benefits plans.
Pensions for West Palm Beach firefighters rose from an average of $42,000 to $73,000 from 2001 to 2008. [Photo: Lannis Waters/The Palm Beach Post]
Between 2001 and 2008, the average West Palm Beach firefighter’s pension rose from $42,000 to $73,000. The city’s generosity to its former workers comes with a cost to taxpayers: Over the same period, the city had to increase its annual contribution to police and firefighter pension plans from $3 million to more than $8 million.
West Palm Beach City Commissioner Kimberly Mitchell says such increases are unsustainable. She is encouraging her colleagues to consider reforming the city’s pension system in order to avoid a financial crisis. “It’s a ticking time bomb, and it’s blown up in a lot of cities in California and up north, where pensions have been generous or pensions are older. You can learn a lot from the west and the north. You just have to look to them to see what’s coming our way.”
West Palm Beach City Commissioner Kimberly Mitchell wants to change the way pensions are calculated. [Photo: Damon Higgins/The Palm Beach Post ]
Palm Beach Town Manager Pete Elwell, for one, is recommending that the city make several changes to its plan — a move he says is “perhaps the single most important aspect of ensuring the city’s continued financial health and avoiding budget deficits that had been projected for 2012 and beyond.”
|Defined Benefit vs. Defined Contribution
» Defined Benefit: An employer promises a specified monthly retirement benefit based on an employee’s years of service, age and salary. When returns from the stock market fall, the government must chip in money to shore up the investments that support the pensions.» Defined Contribution: An employee contributes part of her salary into a retirement plan and bears the investment risk. Benefits are based on the amount contributed by the employer and employee plus any investment earnings on the money in the account.
Like most public sector employees, those who work for the town of Palm Beach receive a defined benefit retirement plan, which promises a specific monthly payment to the retiree based on the employee’s earnings history, length of service and age. Each year, the municipality contributes to the investment pool that sustains the promised level of benefits. When the stock market fails to produce the needed returns — or as the government offers more generous pension benefits — taxpayers have to contribute more money to ensure the retirees will get what they’ve been promised.
During the late 1990s and early 2000s, many local governments put in place particularly generous pension benefit formulas so that they could better compete for talent with the private sector and satisfy public employee unions.
In a recent 38-page report, Elwell recommends that Palm Beach retain its defined benefit plan for existing employees but freeze it at current levels, so that workers’ future raises and years of service wouldn’t increase the town’s pension obligations. The report also suggests that the defined benefit plan be modified: Pensions should be based on a worker’s base earnings, excluding bonus pay and unlimited overtime from the pension calculation.
“Multipliers” — the formula factor that determines the size of the pension received — should return to 1990s levels, the report says. It also recommends that employees serve longer before they can retire. The town should also offer a 401(k)-style defined contribution plan as an option for employees, the report says.
An analysis by an independent consulting firm reckons that the changes would allow the city to its reduce 2012 pension contributions by nearly half, from $9.8 million to $5.4 million. The town’s pension obligations for 2020 would also decline by 45% from an estimated $14.8 million to $8.2 million. Instead of paying $39.3 million in 2039, taxpayers would be on the hook for only $16.8 million.
Some in Tallahassee are proposing more sweeping pension reforms for all local government employees in Florida. Rep. Tom Grady (R-Naples) has introduced legislation that would provide an incentive for local governments to move to defined contribution plans. His bill, HB 1319, would also give local governments more flexibility in their negotiations with employee unions to work out more affordable benefits.
Rep. Juan Zapata (R-Miami) has authored a bill that would make numerous changes to pension calculations, including redefining “compensation” and “average final compensation” to exclude overtime, accumulated annual leave and other forms of pay currently used in pension calculations.
Sumter County Sheriff Bill Farmer, president, Florida Sheriffs Association
Ray Edmondson, CEO of the Florida Public Pension Trustees Association, contends that the Legislature is “trying to fix something that’s not broken” and that all the worrying about unfunded liabilities is overblown. “The idea that every employee is going to retire on the same date is totally ridiculous. Public entities do not go bankrupt and out of business. Private ones do.”
Elwell acknowledges that Palm Beach’s proposed pension reforms could make it less competitive in recruiting and retaining top-quality employees but says other public-sector employers in the area will also have to reform their pension plans. If municipalities don’t make changes, he noted in his report, they’ll have to make “enormous tax increases or widespread service reductions, either of which will almost certainly be unacceptable to their local taxpayers.”