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Pensions Transition Policy Committee Report

Pensions Transition Policy Committee Report

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Published by Timothy Gibbons

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Published by: Timothy Gibbons on Aug 08, 2011
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Pension Transition Committee Report
Presented to Mayor Brown on August 8, 2011
It is with a strong sense of urgency that we report to the mayor our findings andrecommendations regarding the City of Jacksonville’s defined benefit pension system. Thecombination of pension fund deficits (unfunded actuarial accrued liabilities, or UAAL) for thetotal of all city plans was last reported to be over $1.6 billion. It is expected that Jacksonville'spension costs could skyrocket by more than 50% or more in the next 5 years if the currentpension structure remains in place.State law requires an actuarial study for each pension plan on a three year rolling basis. Thelast accepted actuarial studies were completed in September of 2008, prior to a large decline inthe stock markets. Since that time, our pension funds may have underperformed the 8.4% to8.5% expected rates of return, which could increase the pension deficit from the current $1.6billion estimation. It is expected that the new actuarial studies will require an increase inpension funding ranging from 10%-50% more (ie: $132 million to $180 million) for the 2012-2013 city budget, which is to be completed in 12 months.This large range of expected increase is based upon the results of the actuarial assumptionswhich, in the last 10 years, have been quite inaccurate. For example, this has resulted in the 22year performance of the PFPF (8.26% per year) has lagged the expected return (8.5% peryear). If we, responsibly, adjust the assumptions to more accurately represent the currenteconomic and investment environment, we risk increasing costs up to the 50% range for thenext budget. With all factors being considered, it is a reasonable expectation that currentpension cost projections are far less than the actual costs will be in the 2012-13 budget.A new state statute (SB 1128) requires that all municipal defined benefit pension plans provideadditional actuarial reports which use the Florida Retirement System (FRS) assumed rate ofreturn of 7.75%. If a defined benefit pension plans already uses the 7.75% assumed rate ofreturn, or lower, no additional report is necessary. Currently, our plans use the aggressiveassumption of an 8.4% expected average return for the General Employees Pension Plan(GEPP) and an 8.5% expected average return for the Police and Fire Pension Fund (PFPF).Using the rate established by FRS could increase the aforementioned pension costs by another10% or more.Jacksonville faces a short term and a long term crisis as the escalating costs of pensions areprojected to increase with significant volume and velocity over the next 20 years. The bearmarket has affected the FRS and local pension funds across the state. At present,Jacksonville's pension plans (primarily PFPF) are less funded than others across Florida. OurPFPF is 48.8% funded while comparable Police and Fire Pension Plans in the state of Floridaare 83% funded on average, according to data provided by our Police and Fire PensionPlan. The next least well funded Police and Fire Pension Plan is in Miami (62% Funded), whichis moving to a defined contribution plan.According to Jim Linn of Lewis, Longman & Walker, P.A., “Public pension plans in Florida are inbetter shape than those in many other states because Florida law requires that public pensionplans be funded on a ‘sound actuarial basis’….in 2009, average annual pension costs forFlorida cities accounted for 8.6% of total expenditures.” Unfortunately, in Jacksonville thesefacts do not hold true. Our pension plans are weaker than the national average and our costs
are, for the 2011-12 fiscal year, 12% of total expenditures and are projected to rise to over 18%of revenue for the 2015-16 fiscal year (under current assumptions and projections which mightbe more conservative than the November 2011 report), if left unchecked. This could mean ourpension costs would grow from $118 million this fiscal year to more than $180 million by 2016.Without a substantial increase in city revenues (greater than 35% in the next four years), whichis possible without significant change in the current economic environment, the City ofJacksonville could be forced to reduce all other city services by 10% to 25% to compensate forthe growing pension obligation problem.Inaccurate actuarial assumptions and the granting of retroactive benefits are among reasonsthat have contributed to Jacksonville's pension problem. A debate also exists as to whether thecity has taken "pension holidays". This committee does not attribute funding issues to any so-called pension holidays. For example, the PFPF enjoys an independent structure which makesit responsible for projecting its pension costs (actuarial assumptions), managing its investmentsand billing the city exactly what it believe will cover its costs. The city has paid this “bill” at100% or more for every year over the last 32 years. In fact, in the last 20 years the PFPF wasnear 100% funding. The “pension holiday” issue relates to the city not paying more than thePFPF requested, which is an illogical reason to be so far under-funded. The PFPF has aresponsibility to apply accurate assumptions to its plan in order to properly fund it.It is important to note that more than 1,000 city employees were excluded from the city's definedbenefit pension and enrolled into the Social Security system over a long period of time. Theemployees have since been enrolled into the City’s defined benefit pension plan, at a cost whichwill be added to the previous projections. The potential cost is estimated to be as high as$50,000,000.The options which can reduce the current crisis of cost include:
Reducing benefits for new and current employees
Increasing employee contributions
Terminating, freezing or closing current pension plans and setting up lower cost plansEven if the City alters benefits for new employees, that step may not provide all of the savingsrequired to fund this immediate and fast growing gap in costs without increasing taxessubstantially. The City may need to consider the proper level of employee contributions orbenefits for current employees.
 Executive Summary
This report serves to provide and outline of the City of Jacksonville’s pension planchallenges and a comprehensive list of options to address the pension deficits for MayorAlvin Brown and the incoming administration to consider.
The Milliman Pension Funding Index, which consists of the 100 largest corporatepension plans, rose to an overall funding ratio of 87% in June, 2011. The UBS GlobalAsset Management U.S. Pension Fund Fitness Tracker reports an 85% funding ratio forcorporate plans at the end of the second quarter of 2011. It is expected that the PFPFwill fall into the 35% to 45% range of funding after the actuarial study in November of2011, and the GEPP will fall into the 65% to 75% range.
According to a 2010 analysis of comparable PFPFs in the state of Florida, Jacksonville’sPFPF is currently funded at a ratio of roughly 48.8% as compared to an average fundedrate of 83% for other comparable cities in Florida. A study of best practices among otherpension plans in the state is recommended.
The vast majority of city’s employees are not enrolled in Social Security through the city.
A review of the governance policies of the pension plans could serve to improvestrategic decision making, cost structure and reduce conflicts of interest which jeopardize the quality of fiduciary oversight.
The city has benefited from using inaccurate actuarial assumptions in the GEPPbecause it can lower immediate and “projected” pension costs at the risk of future citybudgets footing the bill. In the case of the PFPF, inaccurate assumptions can fail tocapture the true cost of additional benefits.
Maintaining the current review and advisory capacity of the Pension TransitionCommittee or a similar group of advisors is recommended. The committee would help toprovide checks and balances, facilitate taxpayer and participant outreach, encouragetransparent and conservative practices, and solicit input from objective resources.
A review of potential options to fund or reduce the pension deficits can be categorizedinto two sub-sets. The first sub-set of options include strategies that reduce the costburden to tax-payers and the city, while the second sub-set includes options thatincrease the cost burden to tax-payers and the city.
A Defined Contribution system could serve to reduce costs to tax-payers andemployees, align employee interests and benefits with the private sector, avoid budgetcrises as a result of the correlation between city revenues and pension deficits, andcould reduce the potential for political influence to create massive budgetary issuesrelated to employee benefits.
Multiple national resources estimate that between 80% and 90% of private sectoremployers offer only defined contribution plans. The United States Bureau of LaborStatistics reports the average wage for private sector workers in the Southeast is $20.76in comparison to an average wage for public sector workers of $32.14. This differentialshould be considered as defined benefit pensions have proven, in Jacksonville, to cost(on average since 1979) over 50% more than a defined contribution plan.
People are working longer and living longer, so city benefits should reflect this in order toalign public sector employee pensions with tax-payer benefits.

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