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

Some fear that local governments will have to shift their missions from providing services toward providing retirement benefits to workers. “This is an enormous problem here in this state, and it’s being replicated all over the country,” says Edward Siedle, a former Securities and Exchange attorney and president of Benchmark Financial Services, an Ocean Ridge company that pension funds hire to investigate abuses by money managers. Says Siedle, “The bottom line is the public pension funds have benefits that are unsustainable.”

Critics fault the systems along three broad lines.

• First, politically powerful employee unions have extracted overly generous benefits in some locales, Calabro says. In some cities, firefighters with long service can theoretically retire on higher pay than they earned working. The number of deferred retirement option programs in Florida more than doubled since 2001 to 289. Says Siedle, “I wish someone would guarantee me 8.5% for life. Nobody’s made 8.5% in the market in 10 years. The 8.5% has come right out of the taxpayers’ pocket.”
• Second, management. Workers’ pensions are calculated based on the earnings in their final few years of employment. First-line managers, Siedle and Calabro say, engage in “spiking,” the loading of overtime and special duty work — such as the privately funded policing of football games and festivals — to drive up the salaries of workers near retirement and thus their retirement pay. Some cities attempt to limit the practice by capping the amount of overtime that can be counted.
  
  Pension plans also are poorly run, Siedle says. Overseen by boards of unpaid, unsophisticated part-timers drawn from city staffs and police and firefighter ranks, local pension boards depend heavily on investment consultants. Siedle has been warning for years that Florida pension boards are blind to complex broker-consultant conflicts of interest and pay-to-play schemes resulting in “horrendous” underperformance and consultant self-dealing with an estimated $1 billion in losses.
  
  “There’s a daisy chain of people that don’t want attention drawn to the fact these funds are being mismanaged,” says Siedle. Last year, Delray Beach’s police and fire pension, a client of Siedle, sued Citigroup for at least $9 million over its Smith Barney unit that was Delray’s investment consultant from 1995 to 2006. (Citigroup says the suit is “without merit” and that Smith Barney “acted in accordance with the instructions and directions” of the local pension board.)
  
  Cost is part of the management issue. Small plans, the argument goes, can’t operate as efficiently as large ones. The state division of retirement puts the Florida retirement system’s expenses at .17% of assets while one municipality’s operating cost was as high as 1.42% of assets.
• Third, state law. Kraig Conn, legislative counsel to the Florida League of Cities, traces some pension woes to the 1999 Legislature and then-Gov. Jeb Bush. The Legislature passed a law mandating that cities devote any growth in revenue from a state tax on insurance premiums, which had previously been set aside to pay pensions, to pay “extra benefits” the unions negotiated with cities. Thus, the only way for cities to tap extra state money was by offering more benefits. He estimates that $280 million that could have gone to shore up regular pensions instead has gone to extra benefits.
  
  Calabro says cities need to shift to defined contribution plans — as the private sector has with 401(k)s — to limit their risk. But anyone who’s opened a 401(k) or IRA statement lately understands why police, firefighters and other municipal workers with defined-benefit pensions aren’t inclined to give them up.
  
  There are other hurdles to change aside from the unions. State law requires that cities drawing state insurance premium tax money must offer a defined benefit plan, not defined contribution. Another option is closing the plans, at least for general employees, and switching to the lower-cost Florida Retirement System for state and county workers.
  
  But such options, or cutting benefits for new hires, can involve getting union approval, with a sizable upfront payment to assure the viability of the plan for legacy members and a long horizon — decades — to see a payoff.

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