Stories of public pension crises are surfacing around the country. Every day seems to bring a new report about a public employee pension plan with annual costs that are no longer sustainable and unfunded liabilities that could take nearly a generation to pay off.
The bad news is that the recent economic performance of investments assures further declines in these plans in the short term, with future uncertainty in the markets leaving many wondering whether the bottom is even in sight.
Understanding the inner workings of traditional pension plans is necessary for solving the situation. Historically, employees were guaranteed that upon retirement they would receive each year a certain percentage of pay for each year of service. Termed a "defined benefit," this type of plan was based primarily on a formula (police and fire employees generally receive 75 to 85 percent of annual compensation after 25 years of service). The future funding liability fell completely on the employer — in the case of public pensions, the taxpayer.
Over the past 20-plus years, the private sector recognized the increasing cost and potentially unlimited financial liability of this type of plan and began moving toward what is termed a "defined contribution" plan, which identifies a specific contribution — usually a percentage of pay —- contributed by the employer. Once provided to employees, the funds become their responsibility to manage as a future retirement benefit. The ultimate cost to the employer is lower, but more important, the risk of investment of these pension monies is shifted to the employee.
Public pension plans have been much slower to switch to a "defined contribution" system, particularly for police and fire employees. In fact, police and fire unions in Florida have bypassed local governments and gone directly to the Legislature for support that virtually ensures the continuance of a "defined benefit" pension program. This has resulted in taxes on homeowners and automobile insurance premiums to partially fund police and fire pension plans.
With the rising cost of the plans, these funds are paying a smaller portion of the costs each year. In addition, any local government trying to rein in costs by changing to existing "defined benefit" plans or switching to a "defined contribution" plan faces the threat of losing the tax revenues paid by their own residents because the state does not approve of their local pension plan.
Pension plans are no longer an "out of sight, out of mind" issue that can be ignored. The voters' recent record on reducing the cost of government, combined with the impact that market volatility has on cost, requires every government agency to take an in-depth look at pension plans. The process will be very painful; however, all of those involved in creating the crisis must work together within the current political and legal framework to develop a sustainable solution:
Public employees and unions: Pension expectations have been created over the years without a full understanding of the cost. As the real costs surface, pressure for cost containment is inevitable. Employees and unions unwilling to support changes to control costs run a risk of further alienating a public that is growing more cynical of government costs, particularly employee benefits.
Public pension boards: They were established by law to manage the funds in the best interest of the members, primarily to provide autonomy in their oversight and management. Many boards have become employee-dominated and often act as advocates, protecting the interests of current members with little consideration of long-term liabilities for taxpayers. These boards manage billions of dollars as well as the unfunded liability assumed by these plans. Their role needs to be redefined to ensure greater control over decisionmaking for the taxpayers who are assuming the greatest liability.
Elected officials: The Florida Legislature is under tremendous political pressure by employee unions to protect and even expand pension benefits, often bypassing the local collective bargaining process. Previous decisions have created financial liabilities for local governments that far exceed the funding provided by the state. These costs then must be covered by local revenue, primarily the property tax. The Legislature should consider removing itself from the local government pension process or provide adequate funding to cover the costs of its decisions. Local elected officials are under similar political pressures. It is critical that they fully understand how the pension plan operates in order to explain the issue while gauging the voters' willingness to fund these benefits.
City administration: These individuals often feel the same pressure that employees and unions apply to elected officials. Administrators work in highly political environments and are often faced with balancing pension costs while maintaining a functional work environment. It is critical for city administrators and department directors to articulate these issues in a manner that elected officials and local citizens understand the costs associated with pension decisions and the impact potential changes have on the work force.
The long-term sustainability of public employee pensions is an issue that can no longer be "kicked down the road." Those of us in the public sector today may not have created the problem, but it is ours to fix. The sooner we can come to grips with the reality of our current financial condition, the quicker we can develop a solution that is in everyone's best interest. Based upon recent voter attitudes revealed at the polls, we may be surprised to find out what will be left of these pension funds and other employee benefits if we don't work now on a solution.
Michael P. Bonfield is city manager of St. Pete Beach.