This one is going to be a two-parter.
This first part is simply going to cover news stories about the Jacksonville, Florida Police and Fire Pension, as well as a little back story.
The second part is going to explain how an assumption many people have been ignoring has been eroding pension fundedness.
I will give the game away: the assumption is that of payroll growth. Most of the attention has been paid to discount rates, then mortality (especially increasing longevity). But the big thing is that these valuations assume the payroll grows at a certain rate…. and it hasn’t.
It’s part of the reason the Detroit pension wasn’t as funded as people thought it was, and definitely wasn’t really supportable going forward after bankruptcy. It’s also a huge reason why people say public pensions get so much more expensive when you close the defined benefit part and put new hires into defined contribution plans. But that’s for part two on another day.
But my point is: watch out in the stories below for the details about the payroll growth assumption.
SURPRISE! PAY $44 MILLION MORE
A new financial analysis shows Jacksonville’s pension costs for public safety employees could jump $44 million next year, a startling revelation that set off a swirl of controversy and acrimony Wednesday between City Hall and pension fund officials.
Pension costs for police and firefighters, already an outsized burden on the city’s budget, are set to rise to $202.6 million.
The increase came as a surprise to city officials, who are laying blame for the unforeseen spike at the feet of the pension fund’s longtime consultant, Jarmon Welch. They say Welch, whose contract with the pension fund ends this year, appears to have improperly understated the city’s true pension costs for years, until deciding to correct his math this time as he’s heading out the door.
“We are an injured party here,” said Mayor Lenny Curry, who has asked the city’s top attorney to investigate the issue. He says it’s clear Welch has not performed his work “in accordance with state law.”
Welch, who is based in Atlanta, dismissed any implication of wrongdoing, saying his reports have always been above board and accepted by state retirement-fund regulators. And he turned blame back onto Curry for the increase. Some officials with the Police and Fire Pension Fund are also frustrated with Curry for litigating the issue through the media before trying to first discuss it with the pension fund or understand the nuances.
Welch’s latest report shows the cost for police and fire pensions will jump to $202.6 million, compared to the $158.7 million payment the city made this year — an already high amount that stretches the city’s general fund and its ability to provide robust services like parks, full library hours and police protection.
The spike is reminiscent of rougher budget cycles in past years when the accelerating annual retirement costs for police and firefighters were crippling city budgets. A series of reforms finalized in 2015 were thought to have arrested the dramatic jump in costs year after year, making the latest increase particularly disheartening.
A series of changes Welch made in this year’s analysis to calculate the city’s pension costs — including the lifespans of retirees and salaries for employees — caused the sharp $44 million increase. About $25 million of that increase is at the center of dispute between Curry’s office and Welch.
“It puts us in a place where at best we’re on a plateau and at worst we’re at a place where we’re going to have to crawl back out again. I sure don’t want to be there,” said City Council President Lori Boyer.
Under normal circumstances, the city’s sluggish growth in payroll would lead to higher annual payments on the city’s pensions (slow growth means less employee money into the system, which means the city has to contribute more). But Welch says the state had previously granted the city a waiver to make lower payments as if payroll growth was higher. The city’s treasurer was aware of the arrangement but assumed information about the waiver was correct, according to City Hall officials.
But the waiver, Welch said, was revoked after voters passed a referendum allowing the city to dedicate a sales tax to paying off pension debt and to spread those debt payments out over 30 years.
“That upset the arrangement we had with the state,” Welch said.
Curry now questions whether there was ever a waiver at all. And he says he was particularly frustrated to learn that the city may not have been paying the appropriate amount on its pension debt for years.
Welch said the arrangement was a verbal agreement with a state actuary. Curry’s office calls that a major red flag and wants concrete documentation about the waiver.
An almost $44 million increase to an already $160-ish million payment is a 28% increase in costs.
But notice: many people knew that the payroll growth wasn’t there, but pretended it was. They got official permission for many years, but then realized that wouldn’t do to keep that fiction going along. It’s similar to plans using mortality assumptions pretending that mortality experience was like it was decades ago. Th
A few more news stories on this:
The state is denying it changed the rules on Jacksonville’s pension liability — a change the city estimates could cost as much as $45 million a year more than anticipated.
Multiple documents obtained by Action News Jax on Thursday make it clear that this $45 million in possible fallout was no mistake; this was intentional.
The Florida Department of Management Services allowed the city’s Police and Fire Pension Fund Board’s actuary, Jarmon Welch of Pension Board Consultants, Inc., to exaggerate the city’s payroll growth for years.
Statute requires that the actuary use a 10-year average of annual payroll growth as part of its plan.
For years, the city used an inflated payroll increase assumption of 3.25 percent, even though Jacksonville sheriff’s officers haven’t gotten a raise in eight years.
A spokesperson for the Florida Department of Management Services said the agency does not grant “waivers,” but accepted Welch’s pension plan because statute also says the payroll rate should be consistent with future expectations of payroll growth.
Welch had told the state he expected new hires would cause payroll to increase.
“So if you do it with any item in it that deviates from state law, they won’t accept your report unless you have balancing items in it that are OK,” Welch told Action News Jax on Thursday.
Now Welch claims the state won’t accept that inflated payroll growth rate anymore and it’s going to cost taxpayers tens of millions.
City treasurer aware of issue, explored it himself
The City Hall treasurer and a consultant with the Jacksonville Police and Fire Pension Fund discussed the possibility of a dramatic increase in retirement costs for public-safety employees nearly a year ago, according to a meeting transcript, even as Mayor Lenny Curry said this week he was shocked by the sharp increase and frustrated with pension fund officials.
Curry and his administration said this week they believe Welch’s claims about a state waiver are dubious and that he is merely trying to correct his math on his way out the door after using improper calculations for years. Curry has also lambasted the pension fund as an organization shrouded in secrecy and that is rarely held accountable for its actions.
But in January, Welch and Joey Grieve, the city treasurer, discussed in some detail the potential for a cost increase of the kind that could hit next year, according to a transcript of a pension board meeting that month. The discussion at the meeting revolved around the analysis Welch completed to come up with this year’s cost figure. That report calculated the city’s cost with the lower payment Welch says the city had permission to write up.
Grieve said in January he was “a little worried” the state would not allow the city another waiver for this year’s costs, and he had explored the issue himself.
He indicated the city’s own pension analyst backed up Welch’s version of events — that the state was willing under certain circumstances to give the city a pass and allow it to make lower payments. Grieve also said he was “glad” Welch had sought and obtained the waiver in the previous year.
Welch said at the time he was unsure whether the state would grant the waiver again.
“So you feel pretty confident that you’re going to get that waiver again?” Grieve asked.
“No, I’m not saying that. I think I will …,” Welch said.
Welch said the difference could have been as much as $42 million more in costs.
Revelations over the transcript have gotten the attention of the employee unions, which are in the middle of high-stakes negotiations with Curry. The mayor wants to shift new employees into 401(k)-style investment accounts and end the city’s involvement in pensions — and he’s pointed to the potential spike in retirement costs as an illustration of the risks inherent for taxpayers in providing pensions.
And the unions will point to the definitely shrinking covered payroll under a shift to defined contribution plan making the defined pension plan even more expensive (because they can’t amortize costs over the younger people).
THEY SHOULD HAVE KNOWN
A quick note about the “You guys already knew this” comment: I’m sure it’s part of the discussions… just like all the other assumptions. It’s every little “clever trick” or leniency in “just this place”, “just this year”, etc.
that adds up. Hey, it’s just a waiver. We’ll make it up next year.
For ten years.
When the accumulated cost of underfunding the pensions keep building up to the point where they couldn’t really afford it any more.
The police unions will say that the only reason they’re having pension contribution spikes is because the city had never paid enough in previous years. It’s not the pensioners’ and employees’ fault.
They wouldn’t have these huge contribution spikes if they had had honest assumption sets all these years and didn’t try to back-end costs, assuming that some time in the nebulous future it would all get easier.
Thing is, if those honest costs had been recognized at the time, the pension contributions would have been so much higher all those years. The expensive nature of these kinds of promises would have been recognized years ago.
And then they perhaps would not have such cushy promises made in years past.
Here’s the deal: everybody “knew”. They knew they were doing things to make the pensions look cheaper. Everybody kept telling each other — that is, everybody who was directly involved in negotiating pensions and pay, everybody involved in overseeing the pensions — it would be all right. It’s okay to pretend things will be so much better later, of course it will be better!
Who could have foreseen that the great governmental growth would be checked?
(Other than it’s happened many times before, and was happening all around them)
SALES TAXES TO SUPPORT PENSIONS
I’m going to go in reverse chronological order. There had been a ballot measures for this plan in August to support a new tax to pay for pension contributions.
The historic campaign for a half-cent sales tax to tackle Jacksonville’s crushing pension debt started four months ago with the biggest share of voters in the undecided camp, but it ended Tuesday with a resounding victory for Mayor Lenny Curry and the powerhouse Yes for Jacksonville committee.
The tax was championed by Curry and the well-oiled Yes for Jacksonville political committee, which marshalled a $2.1 million campaign operation featuring consultants from Curry’s winning 2015 mayoral campaign, pollsters, and wave after wave of ads on television, social media and in the mail.
Curry hit the campaign trail as well, making dozens of appearances at town halls to field questions about how the plan would work. The measure passed with 65 percent support.
The half-cent sales tax would not start until after the existing half-cent for the Better Jacksonville Plan expires at the end of 2030, a feature that Curry touted as a benefit by saying it wouldn’t be a tax increase — the overall sales tax rate is 7 cents now and it would still be 7 cents for future taxpayers.
Let’s check that last one:
JACKSONVILLE, Fla.- By a wide margin, Duval County voters have decided to extend a half-cent sales tax scheduled to expire in 2030 to help cover the city’s $2.8 billion pension tax liability.
Nearly 65% of Duval County voters said ‘yes” to the pension tax.
Mayor Lenny Curry and a multi-million dollar campaign pushed extending the “Better Jacksonville Plan” tax until as long as 2060 to raise revenue to close gaps in the city’s police and fire pensions.
Despite passing muster with voters Tuesday, the plan still faces obstacles.
A group opposing the tax filed a lawsuit saying the language on the ballot was confusing. A court hearing on that lawsuit is expected in the fall and could overturn the election if successful.
Also, the city must now agree to new contracts with the police and fire unions that would increase employee contributions to the pension plan and create plans for new hires that are less expensive to the city.
Curry has said that passing the pension tax could free up other dollars for city services and development.
The main story this year had been this new tax (and to find out it really is going to be insufficient… yeah, that’s not happy.)
Some various shenanigans this past year, and I will just put the headlines down:
City officials happy Pam Bondi stays out of Keane pension debate – Pam Bondi is the Florida Attorney General, and John Keane had been the executive director of the pension fund… who had a very special pension arrangement. Follow this link (and others) for that particular shady story.
New pension fund head brings outsider’s perspective to post-Keane era – the new person is coming from a different public pension plan, signed up for the city’s defined contribution plan, and the notable item is that he’s considering using a new actuarial firm. The firm that calculated the $44 million increase is the one that is expected to be replaced.
Florida Supreme Court orders pension board to pay legal fees
Police, Fire Pension Board must pay $75,000 to Curtis Lee’s lawyer – check out this google search to see what Curtis Lee is about.… but mainly, he found the very questionable Keane pension benefit
That Keane business is very interesting, but it’s not the reason the pension fund is in a pickle.
Let’s go to the numbers.
THE VERY UNDERFUNDED JACKSONVILLE PLAN
I see that the Jacksonville General Employee Pension Plan is in the Public Plans Database, but the police and fire fund is not.
But given the situation, let’s take a look at what the general plan looks like.
Here’s the contribution history:
Here’s the funded ratio:
Ah yes, a rapidly increasing contribution rate and a decaying funded ratio. To well below 100% (to about 66%, in fact). That is a pattern I’ve seen in many grossly underfunded plans.
But that’s the general plan. What about the police and fire plan?
Well, I found the page with the financial reports, and here’s the last actuarial report posted — from October 2015. Alas, there are no useful graphs to be had (I don’t like the graph of projected future payments to amortize the unfunded liability, appearing on numbered page 2.
The report is a pdf of a scanned paper document, and I can’t copy over the numbers easily for a graph, so I’m going to post pictures of a few tables.
Here’s the contribution history for the police and fire fund:
Here is the payroll growth assumption:
Here is the actual payroll growth:
3.25% assumed annual.
That makes for a very large difference.
The above were news items, but I want to point out two commentary pieces I picked up on Jacksonville in the past year.
First, the evil Koch Brothers make their appearance.
Mayor Lenny Curry threw down the gauntlet earlier this month by proposing to eliminate pensions for all future city employees, upending what is widely viewed as a bedrock of government service, particularly for higher-risk employees like cops and firefighters.
The idea is potentially precedent setting. No other major city has eliminated pensions for all its employees in favor of the 401(k)-style investment accounts Curry wants to provide instead, and his success could provide a blueprint for politicians elsewhere who want to get rid of employee pensions. His idea is virtually certain to meet strong pushback from employees.
The new front Curry has opened on pensions has already attracted outside interest. The Florida branch of Americans for Prosperity — which has ties to the Koch brothers, billionaire conservative political donors — said last week it is making phone calls and knocking on doors to “educate citizens about the looming pension crisis.”
Negotiations with the nine local unions that represent employees across Jacksonville’s vast consolidated government are high stakes, especially with the police and firefighter unions. The outcome not only determines the future of city retirement plans but also Curry’s efforts to pay down Jacksonville’s massive $2.85 billion pension debt.
As a result, it also carries enormous political weight for Curry.
“I wonder why billionaires now are trying to weigh in on a problem that we’ve been trying to fix for eight years,” said Randy Wyse, local president for the International Association of Fire Fighters. “Seems like they’re a little late to the party.”
Curry’s rhetoric so far suggests he sees little room to negotiate on the core issue. He has called pensions “dinosaurs,” relics of a bygone era of government employment that are no longer sustainable.
Experts who study retirement issues see things a bit differently.
“Our perspective is that there is certainly no one size fits all,” said David Draine, a Pew Charitable Trusts researcher who studies pension plans nationwide. Draine was an adviser for a Jacksonville pension-reform task force that made several recommendations in 2014 to address the city’s pension problems.
Draine noted that there are examples of well-run, model pension plans around the country, including the plan administered by the state of Florida.
“The expensiveness of the plan has to do with the design, not the type,” he said.
Tad Delegal, a labor and employment attorney who served on the city’s pension reform task force and supported Curry’s pension-tax referendum, said moving forward with only 401(k) plans would be a “disaster.”
“It doesn’t make logical sense, but it makes political sense — short-term political sense,” he said.
Zona and Wyse will present their unions’ responses to Curry this week. Both have aired strong reservations about 401(k) plans. Wyse called them “unheard of” for public-safety workers and said they could create a “serious recruitment and retention issue.”
Individual investment accounts like 401(k)s (also called defined-contribution plans) are relatively rare in the public sector.
Since the financial crisis, a few cities have introduced plans that are a hybrid of pensions and defined-contribution plans. The jury is still out on those plans.
“Most of them have only been introduced in the last five years, so it’s been hard to assess how they’ve worked out,” said Caroline Crawford, a research associate at the Center for Retirement Research at Boston College.
There appears to be little precedent for a major city that offers only defined-contribution plans to all employees, including public-safety workers. Such plans are attractive for cities because they remove the risk of market downturns from taxpayers. If investments made by pension funds perform poorly, the difference has to be made up by taxpayers. That can become a big cost in big market downturns.
Somebody has to be first.
And next, a comparison to Detroit is made.
Mayor Curry says the sky is falling, but many trend lines point in the opposite direction
Mayor Lenny Curry has used nothing short of End-of-Days prophesying in his push for Jacksonville voters to support a first-of-its kind sales tax to help pay down the city’s $2.8 billion pension debt — even invoking the specter of large-scale municipal failure akin to Detroit’s 2013 bankruptcy.
“We are dealing with a crisis situation in our city right now,” Curry said the day he announced his plan in January. “Look, the sky really is falling.”
But economic data, city budget numbers and outside analysis of the city’s financial condition muddy the fateful choice Curry created for voters on the Aug. 30 ballot.
He says his plan — a half-cent sales tax that would begin in 2030 and would pay off the city’s pension debt over time — will alleviate a burden that has left the city “on the cusp of falling off a financial cliff.”
There is little empirical evidence to suggest the city is on the brink of financial disaster or that the local economy suffers from wide-spread systemic problems that could lead to a Detroit-like meltdown, no matter what voters decide this summer.
Years of falling property values and the prolonged hangover from the national recession, coupled with changes in the way pension investment returns and employee retirements were calculated, created a spike in what the city paid every year for pensions. One year, Brown had to grapple with a 50 percent increase in the cost of pensions with a smaller budget. Yearly costs for public-safety pensions more than doubled during Brown’s term.
Now, however, some of those conditions have slowed or reversed completely:
Budgets have gone from shrinking every year to growing once again because of rising home values and more favorable economic conditions. A series of pension reform measures enacted last year, in Brown’s final days in office, are projected to stabilize the rising cost of future benefits for public-safety pensions, which make up the majority of Jacksonville’s retirement debt.
In short, trend lines are already moving in the right direction.
■ Jacksonville is a low-tax city: The 11.44 millage rate is well below the state-allowed 20 mills and lower than many of its peer cities.
The tax rate is “competitive compared to the combined city/county tax rates of other large metro areas in the state,” says a December 2015 analysis by Fitch Ratings, one of the nation’s three major credit-rating agencies. “The city’s legal tax raising capacity provides a significant source of protection against unanticipated budgetary challenges or emergencies.”
By the time of its 2013 bankruptcy filing, Detroit had reached its legal taxing limit, and it had exhausted its capacity to borrow money.
“Detroiters already have a higher tax rate than anywhere in Michigan, and even with that revenue the city has not been able to keep up with its basic obligations, both to its citizens and creditors,” Michigan Gov. Richard Snyder wrote in an attachment to Detroit’s bankruptcy filing.
Curry has used a headline-grabbing figure to illustrate the increased burden pension costs put on the budget. The cost jumps to $280 million next year.
That represents the total annual costs of the city’s three retirement plans: General employees, corrections officers and police and firefighters.
The $280 million is a top line figure, however, that does not illustrate the actual cost borne by the general fund, which generally sits around $1 billion and is what pays for quality-of-life services financed by property taxes.
The burden on the general fund will be closer to about $208 million.
JEA covers about half the cost of the general employees’ plan, and the about half of what the city is responsible for is paid for by separate funds that generate revenue through fees, not property taxes.
Curry’s administration has pointed out that growing annual pension payments will squeeze city coffers more and more, but projections vary widely on how much that burden will go up over the next 30 years.
The city has hired an actuarial firm that is expected to report back this month on what costs would be through 2045 for the city’s three pension plans.
The numbers can be a moving target depending on the pension funds’ performance on the stock market, so it’s ultimately hard to know exactly what kind of burden the city faces in the decades ahead.
That author may come to regret making the Detroit comparison.
Look for part two in my next post.
Calpers Myths vs. Facts: Page is Gone But The Internet is Forever
Kentucky Pension Liabilities: Trends in ERS, County, and Teachers Plans
Kentucky Update: Republicans Take Legislature, Pensions Still Suck, Hedge Funds to Exit