State pension issues have received much attention from lawmakers and the media, but many municipalities also face pension liabilities leading them toward bankruptcy. Robert Weissert, chief research officer for Florida TaxWatch, estimates Florida municipalities have accumulated nearly $11 billion in debt future taxpayers will have to pay off.
Florida’s cities face a unique problem borne of a bad deal with public employee unions. In 1999, the Florida’s state legislature passed a series of amendments to the state’s pension law requiring city governments to set minimum pension benefit levels they are required to pay. This new pension fund floor significantly increased costs for Florida municipalities. The 1999 reforms also require Florida municipalities to use a portion of their revenues from taxes on property and casualty insurance premiums on “extra benefits” for employees, even when a pension plan is underfunded.
Cities need flexibility to use the funding they have available to provide retirement benefits to their employees, fitting their unique budgetary situations. The mandate to provide extra pension benefits is not sustainable and is at the heart of Florida’s municipal pension crisis.
Scott Dudley, legislative director of the Florida League of Cities, argues the legislature must repeal the mandate if cities are to have any chance of paying their first responders and local employees the benefits they earned: “The legislature has imposed mandates on cities that have made municipal police and firefighter pensions unsustainable in the long run. Unless and until the legislature repeals the existing mandates that have cost Florida’s taxpayers over $550 million since 1999, cities will continue to struggle to make good on their promise to these first responders.”
The LeRoy Collins Institute at Florida State University recently released a report on the financial condition of Florida municipal pensions from 2005 to 2012. The report collects data on 320 pension plans from 151 cities and gives each plan a letter grade based on five measures of the financial condition of public pensions, including funding ratios, unfunded liabilities, the plan’s annual required contribution, its assumed return on investments, and employee contribution levels.
Only 30 percent of municipal pension funds received the analysts’ highest grade, a decrease of 20 percentage points from seven years ago. The proportion of failing grades increased from five percent in 2007 to 11 percent today.
Taxpayers cannot afford for state and local governments to continue overpromising and underfunding their pension plans. Short-term fixes should include changing pension formulas, curtailing automatic cost of living adjustments (COLAs), adjusting pension rate of return assumptions to more realistic levels, and requiring workers to make higher contributions. Florida legislators should consider reforms to protect both taxpayers and public workers by repealing the costly pension floor and following the private sector’s lead by switching workers from defined-benefit pension systems to defined-contribution-style pension plans like 401(k)s.
The following documents examine state pension reform and Florida’s pension problems.
Protecting Florida’s Cities Through Pension Reform
http://heartland.org/policy-documents/protecting-floridas-cities-through-pension-reform
The James Madison Institute analyzes the potential future pension liabilities of Florida’s local governments and makes recommendations on how cities can avoid serious pension problems in the future.
Report Card Update: Florida Municipal Pension Plans
http://heartland.org/policy-documents/report-card-update-florida-municipal-pension-plans
Beginning in February 2011, the LeRoy Collins Institute issued a series of reports highlighting funding and management issues in Florida municipal pension plans. In November 2011, the organization published a report card grading 208 defined-benefit pension plans in the state’s 100 largest cities. They found many well-funded plans – 14 percent received an “A” grade – but nearly a third of the plans received a “D” or “F.” This edition updates the report card with new information.
Modernizing the FRS: Switching to a Defined Contribution Plan
http://heartland.org/policy-documents/modernizing-frs-switching-defined-contribution-plan
The Florida TaxWatch Government Cost Saving Task Force makes recommendations for reforming the Florida Retirement System (FRS). “Florida TaxWatch recommends that the Legislature reform the FRS to improve equity between the private and public sector, provide predictable budgeting for the Legislature, reduce future UAL concerns for Florida taxpayers, and allow current FRS members to maintain their earned benefits and stay in the plan of their choice.”
Florida Retirement System Reform: Why Now?
http://heartland.org/policy-documents/florida-retirement-system-reform-why-now
The James Madison Institute argues the Florida Retirement System should move toward a defined-contribution system now to avoid a continued expansion of unfunded liabilities due to its current structure as a defined-benefit system.
The State Public Pension Crisis: A 50-State Report Card
http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/27578.pdf
The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some locations. The report ranks each state according to the operation and relative disposition of its pension plan and suggests ways states can solve their pension system problems.
Keeping the Promise: State Solutions for Government Pension Reform
http://heartland.org/policy-documents/keeping-promise-state-solutions-government-pension-reform
The American Legislative Exchange Council (ALEC) describes the variety of pension plans governments use today and the advantages and disadvantages of each. The report provides several tools legislators can use to ensure governments can affordably fund retirement benefits for their employees.
Years in the Making: Florida’s Underfunded Municipal Pension Plans
http://heartland.org/policy-documents/years-making-floridas-underfunded-municipal-pension-plans
The LeRoy Collins Institute uses data from the 2005 to 2011 Annual Reports of Florida Local Government Retirement Systems, published by the Florida Department of Management Services (DMS), to analyze several important trends in all 492 local government pension programs. This approach gauges whether Florida’s municipal pension plans are fundamentally healthy but need time to weather the current financial storm or if they have structural problems requiring significant repair.
Doing it Right: Recognizing Best Practices in Florida’s Municipal Pensions
http://heartland.org/policy-documents/doing-it-right-recognizing-best-practices-floridas-municipal-pensions
The LeRoy Collins Institute identifies Florida municipal pension plans in “good condition” and examines whether those plans tend to be better than others at following nationally recognized “best practices” in public pension management.
Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
http://heartland.org/policy-documents/defined-contribution-vs-defined-benefit-pensions
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans.
The Real Cost of Public Pensions
http://heartland.org/policy-documents/real-cost-public-pensions
Jason Richwine discusses how to calculate the cost of public defined-benefit pension benefits, compares the cost of these benefits to private sector retirement plans, and refutes two of the most common arguments against reform.
The Municipal Government Debt Crisis
http://heartland.org/policy-documents/municipal-government-debt-crisis
The Heartland Institute and Truth in Accounting (TIA) report on their comprehensive analysis of Cook County, Illinois’ taxing districts “reveals how officials in many districts have been misrepresenting their financial condition by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt,” the authors wrote. It finds several taxing districts in Cook County face an even worse financial burden than cities currently in the news, such as Stockton, California.
Research & Commentary: Public Pensions and the Assumed Rate of Return
http://heartland.org/policy-documents/research-commentary-public-pensions-and-assumed-rate-return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments.
Fixing the Public Sector Pension Problem: The (True) Path to Long-Term Reform
http://heartland.org/policy-documents/fixing-public-sector-pension-problem-true-path-long-term-reform
Richard Dreyfuss of the Manhattan Institute examines various states’ pension reform efforts and recommends they borrow a page from the private sector by shifting to defined-contribution plans: “Under such plans, to which employees as well as employers may contribute, investment risk is borne by plan members, not by taxpayers. A majority of Fortune 100 companies have already adopted such plans. Only 16 percent of large companies still offer their retirees medical coverage. By sharing a complex of risks with the beneficiaries, states and municipalities would be able to devote far more of their time and resources to the more immediate concerns of today’s voters and taxpayers.”
State Pension Funds Fall Off a Cliff
http://heartland.org/policy-documents/state-pension-funds-fall-cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies – the Public Employee Retirement Association of Colorado and the Kansas Public Employee Retirement System – are examined to identify fatal flaws that caused funding crises in these plans.
The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
http://heartland.org/policy-documents/gathering-pension-storm
The Reason Foundation tackles the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions and explaining why the current system is a disaster in the making.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
