Are Too Generous Pension Plans a 'Prescription for Disaster?'

Mike Vogel | 3/1/2009

“There’s a daisy chain of people that don’t want attention drawn to the fact these funds are being mismanaged,” says Edward Siedle, founder of Benchmark Financial Services in south Florida. [Photo: Scott Wiseman]

Police officers and firefighters in Jacksonville can retire after 30 years on the job and receive a pension amounting to 80% of their salaries. In 2008, the police and fire pension paid out an average of $40,484 to each retiree, surviving spouse or child. In addition, a deferred retirement option program allows current employees to begin drawing their pensions before retiring and put the money into a tax-deferred account; the city guarantees that funds in the accounts will generate a 8.4% annual return.

All those benefits are etched in stone: State law requires Jacksonville and other municipalities to pay their retired workers what it has promised — even if it means cutting services or raising taxes to do so. But by the end of last September, the city owed an expected $765 million to cover unfunded pension costs. And since then, the value of the city’s fire and police pension fund has fallen dramatically, sliding 10% in the fourth quarter alone. Today, the gap between obligations and assets may be near $1 billion.

Florida’s Government Pensions
Number of plans	488
Total assets (market value)	$22.4 billion
Number of municipalities	206
Number of special districts	48
Number of active employees	102,901
Number of retirees, beneficiaries	60,697
Annual retiree payroll	$1.2 billion
Average annual pension	$19,737
Municipality payroll	$5 billion
Annual required contribution as a percentage of payroll	23.1%
Sources: 2008 Annual Report Florida Local Government Retirement Systems, Florida Department of Management Services, Division of Retirement

Taxpayers, of course, are on the hook: A 2-year-old study, which doesn’t account for last year’s market losses, projects the city’s annual contribution into its police and fire pension will rise from $57 million in 2006 to $160 million in 2028, with most of that sum coming from taxpayers. That increase is roughly a tenth of the city’s 2009 budget.

“An unsustainable financial obligation,” Alan Mosley, the city’s chief administrative officer, wrote in a January memo. “We could face long-term financial consequences that do not bode well for Jacksonville.”

Jacksonville’s pension problem stands out among big Florida cities, but the question is whether it’s the bad apple in the barrel or just the first among many to come. All told, Florida cities and special districts (counties are part of the separate state retirement system) run 488 pensions totaling $22 billion in assets.

Cities won’t be able to pay the retirement benefits they’ve promised without slashing city services or jacking up taxes, says Florida TaxWatch CEO Dominic Calabro. Dominic Calabro

The typical plan is small, covering 50 or fewer employees, with assets below $10 million, according to a 2007 Florida Senate report. Four out of 10 plans have a funded ratio — a measure of assets to liabilities — less than 70%, which is considered weak. Thirty-three plans in the 2007 report had a funded ratio under 50%, and the market’s decline since October likely has increased the ranks of the weakly funded. Jacksonville’s police and fire pension funded ratio as of Oct. 1 was 49%. The subsequent market collapse means it’s worse now.

Dominic Calabro, CEO of Florida TaxWatch, a government watchdog group that criticized Jacksonville’s pensions in a study last year, says pension reform is needed in municipalities throughout the state. Cities won’t be able to pay the benefits they’ve promised without slashing city services or jacking up taxes — and either approach will make them less competitive economically, Calabro says. “It’s a prescription for disaster.”

Tags: Politics & Law, Banking & Finance, Government/Politics & Law