Pensions, historically, have been the lifeblood of many government retirees, but these days they are threatening to become the death knell for many cities.
Spiraling costs associated with checks sent from underfinanced pension funds to retirees are dragging down cities and taxpayers alike, while those in government workplaces today worry that nothing will be left by the time they reach retirement age.
Just this month, Detroit made the largest bankruptcy filing by any U.S. city in history, partially blaming its out-of-control pension system. In a Palm Beach County example, the town of Palm Beach, before reform last year, spent 24 cents of every dollar on pensions.
“It’s a system that became too generous and unsustainable financially,” Town Manager Peter Elwell said.
Taxpayers in several Palm Beach County cities have been stung by rising pension contributions since 2008, when the Wall Street meltdown shrunk the value of pension investments and property values plummeted, leaving cities with less tax revenue to make up the difference.
The Palm Beach town council moved to slash pension costs by adopting a system that combines features of a scaled-back, defined benefit plan commonly found in government pensions with a defined contribution savings plan similar to the 401(k) plans found in private companies.
First responders pinched
Cities and towns throughout the country have been making similar cost-cutting changes to pension plans during the past several years. In Palm Beach County, the changes have included increasing the minimum retirement age, capping maximum benefits and forgoing additional benefits that were supposed to have been paid by a tax on insurance premiums.
The impact is being felt by employees, many of them first responders who risk their lives in the line of duty.
“Since 2008, all of our firefighter/paramedics have been making sacrifices that will forever affect the retirements they were initially promised for putting their lives on the line and choosing these dangerous and physically demanding jobs,” said Tara Cardoso, communications director for Professional Firefighters/Paramedics of Palm Beach County Local 2928.
And with the changes come other challenges.
The shift required Palm Beach to withdraw from the revenue-sharing program through which Florida municipalities receive a portion of the excise tax on property and casualty insurance premiums. The decision costs the town $600,000 a year, but enables it to save by consolidating pensions under one board and investment pool.
More blow-back: The town lost its fire chief, William Amador, who had served in that post for 3 1/2 years. Town Manager Elwell fired him for involvement in a union-backed website that criticized the town’s pension reform plan. Amador challenged his firing in federal court, claiming a violation of his constitutional rights, but a judge dismissed the case last year.
After the pension changes took effect, town police officers voted out their union, the Fraternal Order of Police.
Elwell, though, said that with dramatic savings to taxpayers, the wealthy island town is becoming something of a model for municipal pension reform.
“Everybody recognizes the system is broken,” he said. “We’ve tried to face up to things and make some very difficult decisions one time and be done with it. I feel very strongly that we all need to do this for the sake of public employees and the taxpayers.”
A study released this year by two Tallahassee nonprofits — Florida TaxWatch, which focuses on taxation and government spending, and the nonpartisan Leroy Collins Institute, a public policy group based at Florida State University — found that one-third of Florida’s municipal pension plans are in “perilous financial positions.”
The study recommends several cost-cutting measures — including higher contributions by employees, eliminating or reducing cost-of-living adjustments, reworking formulas used to calculate retirement benefits and switching from defined benefit plans to defined contribution plans. In defined contribution plans, employees pay a set amount but the amount of their future benefits fluctuates, based mainly on how the invested funds fare in the stock and bond markets.
“A number of Florida cities are faced with significant, almost crippling liabilities in their municipal pensions that bring into question the long-term sustainability of these pension systems,” Florida TaxWatch President Dominic Calabro said. “While some have chosen to kick the can down the road, there are some cities stepping up and making the hard, yet necessary, choices on behalf of taxpayers.”
The firefighters’ union says its members are agreeing to reduced retirement benefits when necessary to make municipal pension plans sustainable.
Cardoso said the 1,750 firefighters/paramedics represented by the union understand that tough economic conditions sometimes require them to accept reduced pension benefits. But she said the union continues to support a higher level of benefits for firefighters/paramedics because of the health hazards and intensity of their jobs.
“We believe they and their families should feel secure in knowing that they will be taken care of should something happen to them in the line of duty,” she said.
About 10 percent of West Palm Beach’s general fund budget goes to finance police and fire pension plans, Finance Director Jeff Green said.
“We haven’t had much growth in revenue at all, but pension costs have skyrocketed,” Green said. “We are looking at everything we can to make these plans affordable.”
West Palm Beach has ordered an actuarial study of pension benefits to identify options for cutting costs, but pension plan changes won’t be debated until the next union bargaining session opens in the fall of 2014. Meanwhile, West Palm Beach commissioners have discussed increasing the city’s fire assessment to close a projected $8.4 million budget gap.
In Greenacres, council members have supported a Florida League of Cities push to reform a 1999 law, signed by former Gov. Jeb Bush, that requires cities to use much of the money they receive from the excise tax on property and casualty insurance premiums to pay for additional benefits for police officers and firefighters.
But the move to allow cities to use all of the insurance premium tax money to pay for existing police and firefighter pension obligations — instead of for additional benefits — went nowhere in Tallahassee during the past three legislative sessions.
‘Political ball of wax’
“It’s been one giant political ball of wax,” said Kraig Conn, legislative counsel for the Florida League of Cities. “Nothing happened in 2013 because of the continued political influence of police and fire unions. Are we going to try again in 2014? Absolutely.”
The firefighters union said they would support allowing cities to use all of the insurance premium tax money, but only to pay down unfunded liabilities that would make pension funds stronger.
“We are not in favor of changing the law to allow cities to use the monies to offset their daily costs or their normal retirement contributions as they suggested to the legislature in the 2013 session,” Cardoso said.
Florida cities collect about $130 million annually from premium taxes. Of that, about $70 million can be used to cover existing benefits, while $60 million must be used to pay for additional benefits, Conn said.
Since 1999, about $500 million in premium tax revenue has gone to pay for additional pension benefits for police officers and firefighters, Conn said.
Regardless, municipal pension costs are beginning to stabilize because of reforms at the local level, said Robert Klausner, a veteran pension attorney based in Plantation.
“In a large measure, governments have been able to save costs by changing the plans for new workers,” Klausner said.
Ernest George, executive director of the Palm Beach County Police Benevolent Association, said the return of healthy investment as the economy improves could solve the pension woes of many cities.
“If we would have some good years, this would all go away,” George said.
What some Palm Beach County cities are doing:
- West Palm Beach: Required contributions to police and firefighter pension plans jumped 55 percent in past two years — to $14.5 million this year. Unions allowed city to use revenue from the excise tax on property and casualty insurance, about $2.5 million this year, to help cover the obligations. That concession expires in September 2014.
- Palm Beach Gardens: Last year the city raised the minimum retirement age for police officers from 52 to 59 and reduced the maximum benefit from 99 percent to 75 percent of salary, to save the city $5.7 million over three years. Officers with 10 years of service when the contract was approved last year could still retire after 20 years of service. The maximum benefit for city firefighters was capped at 75 percent to save about $5.8 million over three years. Firefighters with 25 years of continuious service at the time of the new contract remained eligible to receive up to 99 percent of their salaries.
- Lake Worth: The city is negotiating with three unions. Annual firefighter pension costs have risen 64 percent the past five years, to $2.3 million this year. Police pension costs took a similar jump. Commissioners imposed a $60-per-dwelling annual fire assessment to cover firefighter pension costs two years ago. But the controversial tax was repealed following the November 2011 city election. Instead of a new fire levy, commissioners cut $1.6 million from the general fund to cover pension obligations.
- Jupiter: The town reduced its police pension costs through negotiations with the Police Benevolent Association. Police pension costs have dropped 22 percent since 2011, to $2.5 million this year.
- Greenacres: Contributions to pension plans are expected to drop slightly next year after more than doubling following the 2008 financial crisis. Most of the costs are for police and firefighter pensions. The city’s general employees moved to a defined-contribution retirement plan in the mid-1990s.