Government Watch Action Team: Initial remarks on the Mayor and Police and Fire Pension Board 2014 “reform,” proposed ordinance 2014-386:

Before anyone assumes that the City Council has been presented with a reasonable compromise on public safety pensions and tries to look for funding sources, we need to examine the fundamental economic flaws of the proposal which, unless they are addressed now, mean that the plan has to rely on uncertain financial assumptions regarding future inflation rates and market performance to avoid municipal insolvency.  

In particular, unless the 3% automatic annual pension escalator is reduced and tied to actual inflation rates, neither City Council nor the taxpayers have any incentive to agree to an additional $40 million annual taxpayer contribution, for an indefinite period, above and beyond the present required contributions.  

I enclose two excel spreadsheet files derived from the Mayor’s latest proposed “reform” ordinance which present a side-by-side comparison of the pension benefits of current employees vs. new hires under the "new new deal."  They are interactive and one can plug in any preretirement final compensation assumption and see each year's pension benefit, the total received year to date and the benefit and totals for a presumptive surviving spouse.   

I also attach pdf files for the spreadsheet challenged showing figures for a final 2040 or 2045 retirement date compensation average of $80,000.   The ratios between 3% increases and 1.5% COLAs all hold true at every compensation level.   

While current hires and new hires initially receive very similar pensions, note that by the time they reach their 60s the gap in favor of current employees has increased from less than 7% to over 45%, if inflation has been at least 1.5% each year.  If there has been no inflation at all, a 60 year old current hire retiree will be receiving over 85% more each year than an identical new hire, and by 70, two and a half times what the new hire receives.  The disparity only grows thereafter, including in the amount of pension paid to a surviving spouse.   

What is it about a policeman or firefighter who is hired by September 30, 2014 that makes him or her so much more valuable to the city’s taxpayers than the public safety employee who starts on October 1?  Do we value the fire and police of today so highly that their lavish retirement (and that of their widows and widowers) must come at the expense of the distant future comfort of the next generations of public safety personnel?  Or, since no one pretends that the new hires’ pensions are inadequate, it becomes clear that the current employees, and their surviving spouses, while they may start with merely generous pensions, are being given an enormous windfall over the coming decades at public expense.   

The difference between a 3% and a 1.5% annual increase in the pension, as seen in the charts, is ruinous to city finances and is unsustainable.  The only scenario under which a city which accepts this proposal as “pension reform” can avoid insolvency is if we assume that the future will bring long periods of hyperinflation.  Yet I cannot honestly believe, were the consumer price index to quadruple over 14 years (which is what annual 10% inflation brings about), that our future selves and future political leaders would hold either current or new hires to the letter of the present proposal and leave the retirees with ever shrinking buying power.  Nor do present police and fire union leaders or their negotiators believe that they would ultimately have to suffer the potential downside of this “bargain.”  Acceptance of the continuation of the 30 year contract of 2000 as to the 3% pension increases for present employees truly means current police and fire personnel can have their cake and eat it too.  There is neither “shared sacrifice” nor downside risk on the part of public safety unions, who once again lock in unrealistic guaranteed increases for a decade or more, utterly contrary to state law requiring negotiations on these issues at least every three years.  Pension benefits to those who were already collecting at the beginning of the 30 year agreement are already one and a half times what they were in 2000, outpacing both the cost of living index (CPI) and social security benefit increases.   

One rationalization which John Keane has presented on behalf of the employees for retaining the 3% annual raise is that the City has not granted across-the-board salary increases in years.  But police and fire, like other career public employees, start at an entry level pay rate which in the ordinary course is increased several times by promotion (15% in the case of fire, per promotion), incentive raises, step increases and other longevity raises.  Hundreds of public safety employees make more than $80,000 a year in base pay, and no one of retirement age still makes the rookie firefighter’s $33,384 a year.   

Adroit use by a firefighter of her personal leave and holiday allowances could give any a rookie four separate two-week vacations every year.  Private sector entry level employees are lucky to have any paid vacation at all.   

Current police and fire can easily permanently boost their pensions by working extra shifts in the last few years before they retire.  New hires lose this perk, and are therefore limited at 30 years retirement to 75% of their final four years average base pay for their first year’s pension.  Current employees will still be able to retire with initial pensions which are more than their final base pay, making the long term compensation disparity between otherwise equally talented and experienced employees even more dramatic (see spreadsheets).    

Unwarranted assumptions were made about future economic conditions fourteen years ago, when past city officials entered into what was called a thirty year agreement.  Some City Council members, particularly a few among those who do not face reelection, insanely continue to insist that we can now ignore the recent past and count on economic growth in the next decade to cover these guaranteed pension benefit increases.   

Those assumptions, even if now modified to only apply to police and fire hired by September 30, 2014, have an impact that extends to the day that the last of them, or their surviving spouse, goes to their eternal reward.  That date can easily, given a few May-September marriages, be over a century from now.  Under the proposed “reform,” in 2114 a hypothetical 88 year old widow, thirty years younger than the predeceased employee who started collecting a $56,000 pension in 2040, would collect $374,286.29 for that year alone.  [The same widow of a “new hire” would receive somewhere between a low of $37,500 and a maximum, inflation adjusted, of $111,186.57 in the same year.]   

In the days which follow I intend to supplement these remarks with concerns regarding other aspects of the Mayoral/PFPF agreement, such as the core illegality of the initial 30 year agreement which the new deal purports to modify and their attempt, not spelled out in the proposed ordinance, to divest the Florida state courts of any jurisdiction to interpret any aspect of those agreements.   

Einstein may or may not have said the most powerful force in the universe is that of compound interest.  The future widow of a new hire who is receiving one tenth the pension of another, both of whose spouses retired with the same salary and service, would agree that compound interest is impressive. It is certainly powerful enough to destroy our city, if we not take steps today to prevent what is otherwise mathematical inevitable.

 

John Winkler

President, Concerned Taxpayers of Duval County

Submitted By Government Watch Team Member D. Davis

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Comment by FCTP on June 18, 2014 at 11:55am

Spreadsheets won't load or copy and paste in a format that would make any visual sense. Please email me (Babs) at admin@firstcoastteaparty.org if you would like me to forward all documents involved. Happy to do it.

Comment by FCTP on June 18, 2014 at 11:33am

Will try to copy and paste the documents mentioned in the article:

2014-386 LEAVES BIG MONEY ON THE TABLE:

❶    Actuaries say $113 million next year must be paid to reduce the unfunded pension liability, but this number is based on “actuarial assumptions”

❷    The unfunded liability of $1.7  billion calculated by the actuaries assumes investment returns are only 4.5% better than inflation, when historically long term returns are over 7% better than inflation

❸    The actuaries assume City Council will give annual salary increases across the board to police and fire of 4% every year for the next 22 years, when the last four years average less than one-tenth of that, and the last 10 years average only 1.79% per year

❹    The actuaries assume the average police and fire wage increases from $61,082 this year to $150,549 in 2036.  Eliminating this 4% compounded increase for 22 years saves a cumulative total of $1,975,401,451 in payroll based on 2013 employee counts

❺    Last year the PFPF made 16.81% return on investment, increasing the value of the fund by $160 million instead of the assumed 7% or $62 million, yet the required payment from the City to the PFPF was only reduced $6 ¼ million

❻    Eliminating the 3% automatic annual pension increase today would save the City over $900 million through 2036, just based on 2014 retirees

❼    Restricting the PFPF’s investments to just the S & P 500 would have brought a 32% return for 2013 alone and cost less than $100,000 in investment expenses instead of the over $9 million in expenses incurred last year by the PFPF.  Over a 22 year span this potentially saves over $175 million

❽    Accordingly, just changing two assumptions and a “governance” provision, which is within the administration and City Council’s power to do, saves over $3 billion between now and 2036 than 2014-386 fails to do

Comment by Patricia M. McBride on June 17, 2014 at 8:48pm

All that he says is true which is what makes their violation of the law in agreeing to a 30 year contract so outrageous.............and is one of the reasons we are in the mess we are in.  And now, they want to make another agreement that goes well beyond the 3 year limit as well, and does nothing really for the taxpayers except make it manditory for them to make a huge payment to the fund each year (and none of the real problems are fixed)!

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