Mayor Alvin Brown recently announced a deal on pensions with the public safety unions. The deal appears to be geared toward the unions and not the taxpayers. It is preferable that the Jacksonville City Council directs the mayor and the unions to modify this deal or send it back to the judge for ruling using its own ideas.
The first problem with the pension deal is that the city will guarantee a return of 7.75 percent on the pension fund. This may be acceptable during certain years when the market does well; however, during other years, it can be a disaster.
Consider how such a guarantee might play out in the current 2012-'13 fiscal year:
The market has increased by 17.1 percent since the new fiscal year started Nov. 1, 2012. If a normal correction, a market decline of 10 percent or less in a short period of time, occurs, the fund is still in good enough shape that the city doesn't have to pay this year. If a major correction occurs, the city could end up paying in $90 to $100 million above its normal contributions.
Admittedly, a market gain of 73 percent over the last 10 years would almost meet the guarantee. However, there were years when the market fell by several thousand points. During similar time periods in the future, the city will be required to pay in millions of dollars.
A better solution for the city would be to guarantee a return of 4 percent (the return rate on most corporate bonds); as long as the ending balance is 4 percent above where it was at last year's ending balance, the city doesn't pay into the fund beyond 7 percent of the employees' salaries. This would be in-line with where growth in Gross National Product (GNP) was before the Obama presidency. The growth of the stock market beyond the growth of the GNP is not sustainable. This decrease in the promised rate of return would lower the city's liability and would still guarantee a reasonable return. The city's current and future pensioners should not expect a rate of return greater than the economy. Instead, they, like those of us with 401(k)s, should expect only market returns. In the case of substantial market losses, maybe the payout needs to decrease temporarily until the market comes back.
The second area where the pension deal is lacking is in the amount contributed by city employees. The deal increases the amount to 12 percent. This is an improvement; however, it isn't ideal. Those of us in the private sector pay a Social Security tax of 6.2 percent (12.4 percent for the self-employed). Beyond the Social Security tax is the contribution to the 401(k), which is 8 percent for most prudent employees. The majority of those employees don't have a pension.
Under the circumstances and considering that city employees do not pay Social Security, a 14 percent contribution is not unreasonable. The city's share is currently 14 percent, and this should be changed to match the majority of employers in the 7 percent range. This means an annual contribution of 21 percent will go into the pension fund, creating plenty of funds for future retirement. For a city employee earning $40,000 per year, this would be $8,400 spread over a 20- to 30-year period along with increases as wages go up and gains on investments.
The third area is the suggestion that would save the most money. This came from Lucy Miles in a letter to Folio Weekly last fall. With a few modifications, the thoughts in the next few paragraphs are based on her suggestion.
The mayor proposes changing the retirement from 20 years to 30 years. And the maximum percent of salary received at 30 years would decrease from the current 80 percent to 75 percent. This will save money on those who are deferred for the additional 10 years; however, the pension will start being paid at retirement.
What Miles had suggested and what the mayor has apparently backed down from was that all employees who were not disabled would have retirement deferred to age 62. The way it is being done versus how it should be done would work like this:
A police officer retires at age 52 after 30 years at a salary of $71,000. Under the mayor's plan with the deferral not being used and adjusting for inflation, the officer would receive more than $600,000 in the 10 years prior to reaching age 62.
If 250 city employees retire each year, and the average earning is 70 percent of our hypothetical Sheriff's Office employee, the cost to taxpayers the first year is $9.318 million. The cumulative cost over 10 years for just the first year‘s group of retirees is $105.480 million. By year 20, the cost of the first 10 years of retirees would be well over $1 billion. By going back on his word regarding no payments until age 62, the mayor is literally costing us several billion dollars over the next 30 years.
With dozens of financial operation centers around town, there is no reason that the hypothetical officer in our example cannot work in a risk management department (fraud prevention area) for the 10 years from age 52 to age 62. There is no reason why other employees cannot do private sector work that is similar to civil service jobs if they retire before age 62. Only disabled retirees should be able to receive their pensions earlier. This policy should take effect with all retirees who leave on or after the effective date of Oct. 1, 2013.
The final area in which the mayor did not change the current system — and which may be the most important — would be moving the city of Jacksonville from a defined benefit plan to a defined contribution plan. By making this change, the city would prevent future taxpayers from having to deal with pension shortfalls. The city should require that all employees hired on or after Oct. 1, 2013, not receive a pension and be offered a 503(b) plan, a 401(k) plan for government employees. Since this money isn't being guaranteed in the future, employees can be fully vested in five years, just like in the private sector.
The move to a 503(b) would mean that the city's taxpayers in the year 2053 wouldn't have to worry about a pension crisis and losing government services to pay for a pension plan that operates on principals determined to be fiscally unacceptable by the private sector in 1990s. The City Council, the mayor and all the taxpayers should be brave and stand up to the unions.
Do we want to stand up to this multi-generational robbery or do we want to spend billions of dollars the city of Jacksonville doesn't have, when we can negotiate a deal that's fair to all parties? So that the parties will remember, the four items needed in a fair deal are:
1. Do not guarantee a rate of return on the pension or a guarantee in the 4 percent range. If the market loses money, payments may need to be temporarily reduced.
2. City employees should pay the equivalent of the private sector's 8 percent into a 401(k) and 6.2 percent into Social Security; this means a 14 percent employee contribution.
3. No able-bodied retiree should receive a pension payment before age 62.
4. Anyone hired on or after Oct. 1, 2013, should be placed into a 503(b) defined contribution program instead of a pension.
If the mayor would address these four concerns, we might have a pension plan that may actually remain solvent.
Fouraker was a paralegal at a law firm
specializing in municipal finance. He has worked in banking for the past 20 years.