What About the Taxpayers?
Don't solve Jacksonville's pension crisis on the backs of its citizens
While Bill Scheu is to be commended for taking on a difficult task as outlined in last week's Folio Weekly [Cover Story, "Jacksonville's Pension Crisis: An Explainer," Ron Word, Feb. 12], it must be remembered that the task force, the mayor and the unions have forgotten the taxpayer. According to the Census, the private sector has been hit by salaries that have decreased during four of the last six years. The taxpayers are willing to pay for services, but there must be shared pain when it comes to pensions.
The pension plans that cover 7,030 city employees are owed $2.74 billion, and if we have a 7 percent guarantee during a repayment period lasting through 2036, we need to add another $2.78 billion, for a total repayment of $5.52 billion. That means the the annual payback would be around $240 million.
The discussion appears geared toward another millage increase to pay for the unfunded liability. This would be acceptable if the liability was not met last year by a tax increase from the city of Jacksonville. The average house valued at $125,000 after the homestead exemption had an increased annual payment of $176.The average $100,000 rental unit, which has no homestead exemption, meanwhile, had an increase of $141 in annual expenses, requiring almost $12 per month in rent to cover these hidden taxes.
The idea of further increasing taxes to cover the retirement is wrong. Already 70 police officers have left the Jacksonville Sheriff's Office for jobs with better benefits. When these other communities address their pension issues, the grass may no longer be greener on the other side of the fence.
Tad Delegal points out in The Florida Times-Union that it costs about $100,000 to train a public safety officer. This cost is $7 million for the 70 officers lost, as opposed to the $5.52 billion that we have to pay toward the pension. While we do not want lose good officers, we may have to let some leave for those better pastures. The question now becomes, what do we provide our 7,030 COJ employees listed in the 2014 budget?
The 2014 COJ budget sheet shows $681.75 million for salaries and benefits. Of that amount, 21 percent, or $143.166 million, should be set aside for current pension expenses. And there's the $150 million in unfunded liabilities that needs to be paid back. This leaves $55,274 per employee for salaries and other benefits. After benefits, the average salary would be about $41,000. This is in line with the average salary in Jacksonville's private sector. The total average compensation of $75,369 greatly exceeds the average in the private sector.
In the private sector, there are two ways that employees save for retirement out of their salaries. One is socking away up to 8 percent through a 401(k) plan (and/or IRA), and the second is saving 6.2 percent through Social Security. The other 6.2 percent of the Social Security contribution is paid by the employer. If the employer has a good year — which many small businesses have not had for the past six years — it might match the 401(k) contribution, generally using a limit of 3 percent.
In the public sector, COJ pays 14 percent of the pension contribution and the employee pays 7 percent. The city is going through tough times and these contributions should be flipped, with employees permanently paying 14 percent, like workers in the private sector do, and COJ paying a minimum amount, set at 7 percent. When COJ revenues increase, the City Council can re-evaluate and approve an additional bonus contribution on a year-by-year basis. Flipping the contribution amounts will save the city about $25 million a year and will lower the employee's salary after benefits to $38,130, temporarily.
There currently are a lot of COJ employees who retire with pensions from about their early 40s to early 50s, an age range that doesn't need to change. However, in the private sector, funds cannot be withdrawn from a 401(k) until the employee is 59-1/2 years old. To receive Social Security, one must retire at age 62 for minimum benefits, age 66 for regular benefits and age 70 for the maximum benefits. Generally, private sector pensions don't pay out until age 65.
The new public sector rule should be that employees who retire early should have their pension deferred to age 62, unless they're disabled. If 90 percent of pensions are deferred, it would save the city almost $8 million in year one and about $80 million per year in years 10 through 30. Most city retirees would qualify for employment outside of government. We should have as many as possible stay gainfully employed as long as possible. As an example, retired police officers can work as highly paid fraud investigators (a desk job) for the many local financial companies.
The guarantee for the pension that the COJ wants to accept is 7 percent. In the private sector, most 401(k) plans have no guarantee of return. The only real guaranteed payout these days is Social Security, which might be around 40 percent of an employee's retirement compensation. Let's change the guarantee in the public sector to match that of the private sector.
Instead of an annual return that is now being negotiated at 7 percent, a guarantee of a 10-year annualized averaged return of 4 percent is more reasonable. If the funds made a 39 percent gain over the last 10-year period, the city would contribute 1 percent to bring the fund to 40 percent (4 percent per year average). Even during the Great Recession, the annualized 10-year average never would have been below 4 percent.
The payback using the 10-year annualized guarantee decreases to $182.4 million per year. While this is a substantial savings over the 7 percent guarantee, even this payment seems excessively high. However, by flipping the contributions the first-year pension liability overall is lowered by $25 million, and another $7.75 million is saved from the deferred pensions in year one, bringing us a $149.65 million liabilities payment (by year 10 this is lowered to $79.9 million).
The public employees will balk at these changes. For the 97.99 percent of us who are not city employees or their immediate families, this will keep our taxes or electric bills from increasing by $40 million. The 2.01 percent of the population directly affected by these changes will now be going through the same changes that we've experienced for the past 20 years (and to an extreme extent, for the last six years).
A very small number of city employees die in the line of duty, and a larger number are disabled. The city could set aside a fund to pay benefits to these individuals or their families at 75 percent of salary and full benefits up to age 66, income-tax free. If 2 percent of former city employees actually fall in these categories in any one year, the fund would have to carry $13.635 million. This is a reasonable amount to ensure the families are taken care of.
In conclusion, we're looking at perhaps 30 mils of new taxes to pay for improving our library services and another 30 mils to bond our local share of dredging the port (this is just one possible solution, since other funding sources may be found for those). With many critical needs, we need to explore all other options before raising taxes again to support pensions that are out of line with the needs of the taxpayers.