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Retirement Reform. October 2012. Section 1: The Problem. Retirement Costs are Jacksonville’s Fiscal Cliff. An Everywhere Challenge.
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Retirement Reform October 2012
Section 1: The Problem Retirement Costs are Jacksonville’s Fiscal Cliff
An Everywhere Challenge • Municipalities throughout the nation and throughout the State of Florida are facing significant budget challenges brought on by compounding compensation and benefit obligations that are growing at alarming rates. • Municipalities that fail to take timely action to address the increasing costs associated with compensation and benefits find themselves with budget deficits, layoffs, and the elimination of needed services. • Worse case scenario: Stockton, CA or Central Falls, RI
City Revenue Going Down • Decline in revenues from FY 11/12 ($958 million) to FY 12/13 ($948 million) • Passage of Amendment Four could reduce revenue by $7 million in FY 13/14 and $13 million in FY 14/15
City Retirement Costs Going Up • Just four years ago, the City of Jacksonville spent less than 7% -- $65 million – of its budget on overall pension costs. • This coming year, the City is projected to spend nearly 16% of its budget – nearly $150 million – on overall pension costs. • That’s an increase from $65 million to $150 million in just four yearswith the same size budget.
Retirement Reform Priority • Mayor Brown has made retirement reform the top priority of his second year as mayor. • His promise: unveil a retirement reform plan by the end of 2012. • The goal was to have a plan that would respect and protect both hard-working city employees and taxpayers
Retirement Reform Process • For the Brown Administration, this process started back in June 2011 with the detailed work of then Mayor-elect Brown’s Pension Transition Committee. • Peyton Administration laid foundation with 2011-400
The Retirement Reform Process, continued • Those efforts, along with other community analyses, helped to frame up four key questions for our retirement reform initiative: • (1) What is the scope of the problem?
The Retirement Reform Process, continued • (2) How have other municipalities dealt with retirement cost challenges? • (3) What limitations does Florida law place on the reform of retirement benefits? • (4) What reform plan(s) address the city’s financial needs while meeting the state’s legal requirements?
Retirement Reform Experts • To help answer those questions, we turned to three experts: • Attorney Jim Linn of Lewis, Longman, and Walker in Tallahassee • Actuary Robert Dezube of the Milliman Group to evaluate the PFPF and assist in making reform recommendations (Milliman is the actuary for the FRS)
Retirement reform experts, continued • Jeff Williams of the Siegel Group to evaluate the General Employees Pension Plan (GEPP) and assist in making reform recommendations • Mayor’s Special Adviser on Pensions, Kevin Hyde.
COJ Pension Plans • Police and Fire Pension Fund (PFPF) • General Employees Pension Plan (GEPP) • Includes Corrections Employees
Specific PFPF Challenges 1. Annual Contributions Skyrocketing Fiscal Year 10/11: $76.1 million (8% of overall general fund) Fiscal Year 12/13: 121.3 million (Nearly 13% of overall general fund)
City PFPF Contributions (General Fund)FY 2002 - 2013 • FY 2001-02 $ 9.9 million • FY 2002-03 $ 9.7 million • FY 2003-04 $ 22.1 million • FY 2004-05 $ 25.8 million • FY 2005-06 $ 34.7 million • FY 2006-07 $ 42.9 million • FY 2007-08 $ 47.1 million • FY 2008-09 $ 49.2 million • FY 2009-10 $ 81.1 million • FY 2010-11 $ 75.0 million • FY 2011-12 $ 77.2 million • FY 2012-13 $121.3 million
2. PFPF Significantly Underfunded Unfunded Actuarial Liability (UAAL) Actuarial accrued liability (value of benefits) MinusNet assets available for benefits = Unfunded Actuarial Accrued Liability (bigger number means bigger problem)
Pension Report Card Grade for PFPF “F” Source: Tough Choices Facing Florida’s Government November 2011 – based on 2009 data Leroy Collins Institute Reason: Plan was less than 50% funded
The Cost of Inaction • If the COJ takes no action – PFPF benefits stay the same and we rely on the same assumptions as to rate of return on investments (7.75%) – we will continue to underfund the PFPF while steadily increasing general fund contributions.
Pension Cost Components • Normal Cost – annual cost of current benefits, without unfunded actuarial accrued liability (UAAL) payment • UAAL Amortization Payment [UAAL = assets minus liabilities = debt] • Actuarial losses • Plan improvements
Key Status Quo Data Points • Retirement benefits stay the same • Rate of return remains at 7.75% • Anticipated FY 2013 Contribution: $122m • Recommended COJ Contributions: • FY 2014: $144 million • FY 2015: $151 million • FY 2016: $158 million • FY 2017: $164 million • FY 2018: $169 million • FY 2019: $175 million
Bottom Line for Next Budget • If nothing changes – benefits stay the same, the assumed rate of return stays the same – the City will devote an additional $22 million in general fund revenue to the PFPF (yet still be under-funding).
The Rate Debate • Growing consensus that the assumed rate of return (7.75%) is too optimistic given recent market conditions. • The State of Florida has worked to utilize more realistic assumptions in the Florida Retirement System (FRS) and urged municipal governments to do the same.
More on the Rate Debate • In September, Florida State Board of Administration Exec. Dir. Ash Williams recommended that the state lower its rate of return from 7.75% to 7.25%. • PFPF Executive Director John Keane and actuary Jarmon Welch say they want to lower the PFPF rate “in stages”
Even More on the Rate Debate • In September, PFPF provided data from its investment advisers showing an expected actual return of 6.9% over the next 10 years. • Based on that data, our actuary recommended an assumed rate of return of 6.5% (6.9% minus .4% commission for PFPF investment advisers)
The Costs of Inaction with a Realistic Rate of Return • Adjusting the rate of return from 7.75% to a more realistic 6.9% is a fiscally conservative and prudent step that limits PFPF underfunding. • But it causes annual COJ contributions to the PFPF to grow substantially
Key Data Points for Same Benefits, New Rate of Return • Retirement benefits stay the same • Rate of return lowered to 6.9% • Anticipated FY 2013 Contribution: $122m • Recommended COJ Contributions: • FY 2014: $181 million • FY 2015: $186 million • FY 2016: $190 million • FY 2017: $194 million • FY 2018: $197 million • FY 2019: $200 million
COJ Reform Options • Fundamental Operating Principles • Utilization of “Freeze” Concept • The Reform Plan
Fundamental Operating Principles • Reform will not rely on an increase in the millage rate. • Any reform must use realistic assumptions on rate of return and payroll growth. • Current retirees will not be affected.
Fundamental Operating Principles, continued • All current employees will keep what they have already earned but will experience change once the reform plan is implemented. • Any reform must reduce the unfunded liability, not merely extend the time for payment. Debt will not pay for debt. • We will not propose Pension Obligation Bonds or Pension Liability Reduction Bonds
The “Plan Freeze” • The current plan will be “frozen” as of date certain (the “Frozen Plan”). • Employees’ vested benefits as of that date will be fixed at whatever level the employee was entitled to as of date certain • Example – employee who had worked 10 years had vested at 30% (10 x 3% yearly) in the plan. Upon retirement the employee is entitled to retirement benefit at 30% of pay. • Employee will not accrue any additional benefits under the frozen plan for subsequent years of service
After the “Plan Freeze” • A new plan will be implemented from a date certain going forward • Employees will begin accruing benefits under the new plan or all service after the Frozen Plan fixed date. • The new plan will have different benefits from what was available in the Frozen Plan • This approach is not unique – the most effective way to achieve meaningful savings on a short and long term basis
The Plan: Maintain Defined Benefit (DB) model but reform benefit package • Working with our experts, we crafted a reform package that we believe will credibly: • Fund COJ pension obligations • Control costs short and long term • Comply with law to retain Chapter funds • Reduce UAAL
Current System vs. DB Reforms Benefit-by-Benefit Comparison
