“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.”

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.

The ‘unsustainable’ card

Worker reps and pension administrators say claims of pension troubles are overblown. Pension funds lawyer Steve Cypen in Miami, who represents about 40 pension funds, says anyone who wants to change the system always plays the “unsustainable” card. “Don’t take (Jacksonville) as the norm,” cautions Ray Edmondson Jr., CEO of the Florida Public Pension Trustees Association. Florida’s local pensions are the best in the nation, well-funded for the most part and well-managed, he says, by trustees certified after days of class work and testing by his organization.

The problem, says John Keane, executive director of Jacksonville’s police and fire pension, isn’t an overly generous plan. It’s with the city, which hasn’t funded the plan as it’s supposed to, he says. [Photo: Kelly LaDuke]

Edmondson suggests that the state has imposed regulations meant to drive up the costs of operating a pension fund locally — and to force the municipalities to invest their funds with the state. “The state of Florida wants all of the pension investment funds in the Florida Retirement System. That would be total control of all that money. They are making local pension systems, with local control and employee contribution, more expensive in an attempt to make FRS look better,” says Edmondson.

The executive director of Jacksonville’s police and fire pension, John Keane, says Jacksonville’s problems don’t stem from too-generous benefits. That perception comes from slanted reports, including Florida TaxWatch’s, he says. Rather, they come from years of the city not paying what it should. He’ll show anyone who will listen a chart contrasting the city’s annual contribution rates to the police and fire pension with its contributions to the general employee pension. Bottom line: The city all but stiffed the police and fire fund for eight years in the 1990s. Even counting recent years of higher contributions — and a three-year “holiday” in which the city zeroed out regular appropriations to the general employees fund — the cops and firefighters have still gotten less, percentage wise, since 1978, he says.

The city’s problem is its misguided and “unsustainable” cutting of its tax rate and the “extraordinary” weak market returns since 2000, he says. The fund is suing the state for the right to invest more aggressively. Florida law limits local government pensions from investing more than 10% of assets in international instruments, prohibits buying bonds rated below A and prohibits hedge and alternative investment plays.

In the meantime, Keane says, the city has 50 years to make up the gap. The S&P 500 jumps an average of 35.3% in the first year after market declines, he says. “Once this period of recovery emerges, the pain of the current episode will be removed with the associated favorable impacts upon the (unfunded gap) and the city contribution rates.”

There are signs that more cities are under stress. From two to eight public safety pension plans have been closed annually in Florida since 2000. Pensacola last year closed its pension for new hires other than police and fire and switched them to the state retirement system. It has talked with the police and fire unions about changing their plan. “The cost of the pension plans has dramatically increased over the last five years,” says Cheryl Jackson, Pensacola payroll and retirement manager.

Indeed, the city’s contribution to police and fire is up 481% in five years, but the fire plan still has unfunded liabilities to the tune of $15 million and $12.2 million for the police pension. (Police in Pensacola can retire at 100% of pay; firefighters at 75%. )

Asks the League of Cities’ Conn, “At what point do you call this a crisis? When you talk to the big cities, a lot of them are struggling. I can’t tell you what the breaking point is. I have a feeling there’s going to be a lot of cities going to the state Legislature saying provide us with the tools to address this.”

Next two pages: Charts showing how cities pensions were funded prior to the 2008 market disaster, and charts of the best funded, and worst funded local government pensions in Florida.

Before the Storm Pensions in Florida’s 10 largest cities were generally adequately funded based on their last valuation. But that was before the 2008 market disaster. Funded ratio is a measure of a pension fund’s fiscal health. It compares assets to pension obligations. A percentage over 100% means the fund has more money than it needs to meet its obligations.
City	Total Assets	Funded Ratio
Jacksonville
Police and fire	$761.8 million	49%
Miami
Police and fire	$1.2 billion	107%
General employees and sanitation	$664 million	86%
Tampa
General employees	$503 million	98%
Police and fire	$1.4 billion	109%
St. Petersburg
General employees	$234.4 million	98%
Police	$261.9 million	87%
Fire	$155 million	78%
Hialeah
All employees	$522.8 million	99%
Orlando
General employees*	$153 million	82%
Police	$323 million	92%
Fire	$209 million	92%
*closed plan, city switched to defined contribution for new hires
Tallahassee
General employees	N/A*	111%
Police	N/A*	104%
Fire	N/A*	101%
*Assets for all three funds total $1 billion
Fort Lauderdale
General	$239.7 million	76%
Police and fire	$420.6 million	82%
Cape Coral
Police	$67.9 million	80%
Fire	$77 million	77%
Port St. Lucie
Police	$27.9 million	70%
*No general employees defined benefit pension; city does not have a fire department.
Most funded ratios are from Sept. 30 or Oct. 1, 2007, their most current valuations. Asset figures generally are from Sept. 30, 2008.
Source: Respective municipalities

Best Funded Local government pensions with the 10 highest-funded ratios. A percentage over 100% means the fund has more money than it needs to meet its obligations.
Pension Fund	Funded Ratio
Bunnell fire	173%
Lauderdale-by-the-Sea fire	141
Tequesta general employee, police and fire	131
Okeechobee fire	127
Plantation volunteer fire	119
Martin County early retirement plan	119
Fort Meade fire	118
Lake Park fire	118
Fort Walton Beach general employee	117
Milton police	116
Sources: 2008 Annual Report Florida Local Government Retirement Systems, Florida Department of Management Services, Division of Retirement

Worst Funded Local government pensions with the 10 lowest-funded ratios. A 50% ratio means the fund has only half the assets it needs to meet its long-term obligations.
Pension	Funded Ratio
Palm Harbor fire control district	50%
Longboat Key fire	49
Ocean City-Wright fire	47
North Palm Beach general	42
Oviedo fire	41
Okaloosa Island fire	39
Parkland police	38
Pasco County early retirement plan	37
MacClenny police and fire	37
Monroe County early retirement plan	22
Marco Island police	22
Hillsborough County early retirement plan	19
Sources: 2008 Annual Report Florida Local Government Retirement Systems, Florida Department of Management Services, Division of Retirement