Mark Schumann

Vero Beach’s new pension plan fair to employees and taxpayers

COMMENTARY

“Because of changing circumstances, it is sometimes necessary to renegotiate our commitments. In fairness to the city’s employees and to current and future taxpayers, the Vero Beach City Council, by adopting a generous defined contribution pension plan, has done just that.”

MARK SCHUMANN

As is true with many defined benefit public employee pension plans across the country, Vero Beach’s general employee pension fund has nowhere near enough assets to meet its obligations.

Though the picture is now slightly improved, in 2012 Vero Beach’s general employee pension plan was only 59 percent funded. To close the gap, taxpayers are covering the cost of annual installment payments of some $4 million. These “catch-up payments,” which equal the city’s annual property tax revenue, will continue for another ten years, and are in addition to yearly payments of nearly $700,000 to cover current obligation.

Common in the public sector, but now nearly non-existent in private business, defined benefit pension plans such as Vero Beach’s place the investment risk on the pension provider, in this case the taxpayers of Vero Beach.

Each year, following the advice of actuarial experts, the city has set aside money to fund its pension obligations. But because the invested assets are at risk in equity markets, and because the assumed rate of return has proven to be unrealistically high, the city’s defined benefit pension fund has put current and future taxpayers on the hook for obligations incurred many years ago. This year, for example, the city will pay some $4 million to partially make up for investment losses suffered in 2008-2010.

Some critics of defined benefit pension plans say that, because of their inherent investment risk, they amount to little more than a license to steal from future taxpayers to cover the cost of obligations previously incurred. The new euphemism for these unfunded and ultimately unknown liabilities is “legacy cost.”

Recognizing this looming threat to the city’s financial viability, the city council recently moved to shift future pension fund investment risk from the city’s taxpayers to its employees.

As of July 1, the current defined benefit pension plan will be frozen and replaced with a defined contribution plan. The annual cost of the new plan may not be any less, but at least the city and its future taxpayers will not have to step in to cover investment losses.

The city will still need to bring the “frozen” defined benefit plan up to full funding over the next ten years. But, proponents of the switch say, at least the city’s pension liability will be a known quantity and will not continue to grow.

With the new defined benefit plan to go into effect July 1, rather than committing to pay future pension benefits, the city will make a contribution to each eligible employee’s retirement account, known as a 401A plan. Unlike many 401K plans, participants will not be free to “borrow” from and thus to deplete their retirement accounts.

For all current employees, the city will contribute 9 percent of their annual salary to their 401A retirement fund, with each employee paying 3 percent. For future hires, the city will contribute 7 percent and the employee 5 percent.

According to city staff, these contribution amounts are based on the assumption that annual investments of 12 percent of an employee’s salary will be needed to fund future retirement benefits comparable to the city’s previous plan. Employees will be free to select from a menu of investment options, so some account will, over time, do better than others.

At 9 percent for current employees and 7 percent for future hires, the city’s new defined contribution retirement plan seems more than fair. As Councilwoman Pilar Turner pointed out, 6 percent is far more common in the private sector.

In calling for a contribution of 9 percent for current employees, Mayor Richard Winger said he was concerned to make every effort to give the city’s existing employees a plan that at least has the potential of paying benefits comparable to the now frozen plan, but in a way that shifts the investment risk off backs of future taxpayers.

Not everyone agrees with the council’s move. Expressing concern that the city not renege on its commitment to current employees, Vice Mayor Jay Kramer wanted to keep the defined benefit plan in place for existing employees. Kramer has a point, but it seems equally true that it is unfair and even irresponsible to continue passing on to future taxpayers incalculable liabilities.

Because of changing circumstances, it is sometimes necessary to renegotiate our commitments. In fairness to the city’s employees and to current and future taxpayers, the Vero Beach City Council, by adopting a generous defined contribution pension plan, has done just that.

12 comments

  2. Joe, Just as I regularly remind readers of Glen Heran’s ties to and collaboration with FPL, it seems fair to point on that the study to which you refer is proffered by a trade association for public sector pension funds. Advocates for public sector defined benefit pension plans have a right to their say, and to their trade associations and lobbying efforts, but the fact remains that unfunded pension liabilities threaten to bankrupt cities large and small across America. The level of benefits previously promised, and the means of funding them, is simply unsustainable. I agree with those who see the current system, with its unrealistically high investment return assumptions, as a license to steal from future generations of taxpayers.

  4. Mark,
    I’m sure you would have a different opinion if you were hired in and promised these benefits 25 years ago, abd trust me this is not a golden egg retirement fund that everyone in the public thinks it is!!! Insurance family plans are very high, no “working class” city employee will retire on this “frozen pension” and survive on just it alone. City employees get a bad rap for …oh you have it made you work for the city…trust me..WE don’t !!! Why don’t you sit down and talk to a Parks employee or a W/S employee or a storm sewer employee or a warehouse employee or a electric lineman employee and ask them exactly what they pay for insurance, what there pension will be after 30 or 40 years and then tell them this is a good deal…oh yeah…you think this is good for the tex payers…employees paid for part of the unfunded pension…not now…it’s ALL on the tax payers backs.

  5. Bob, You certainly haven’t heard me claim the employees of the City of Vero Beach have it easy. In fact, if you are a regular reader of Inside Vero then you know we have made every effort to support city employees. At the same time, despite what the NCPERS might claim, the fact remains that continuing top assume the investment risk for defined benefit pension plans is simply unsustainable for Vero Beach and for many, if not most cities across the country. By funding the new defined contribution plan at 9 percent, the city council went a long way to offering a comparable plan, at least in terms of the future benefits that can be afforded. Ultimately, though, each person’s level of retirement benefits will depend on the long-term rate of return for their personal retirement accounts. The issue here, it seems, is not how much the city should set aside each year, but who should assume the investment risk.

  6. Joe, to assert that those who disagree with you are necessarily uninformed and mistaken, and to say nothing more, is not exactly a strong argument.

  7. Mark,

    I understand why you are saying that the pension change needed to be done, however there are a few issues that no one is talking about. The first being that city employees are in the lower tiers of pay in comparison to other cities that surround the COVB. If you remember correctly I provided you with these numbers about a year ago in reference to police officer starting pay. Nothing has been done to help city employees with cost of living and the city is no longer competitive in attracting new employees nor are they be competitive in employee retention.

    I would also like to point out that 401K’s (or A’s) were never meant to be retirement plans. They were used as tax shelters for the wealthy. Let me pose this question to you, how does a city employee lets say that works in water/sewer making 35K a year afford to pay for his/her retirement. Also another issue that no one is talking about is with the recent change, employees are going to have to work longer. This will make the insurance claims sky rocket and cost taxpayers more due to having a older workforce.

    I would also like to point out that as far as I know no city or county has switched to this system in the surrounding three county area. So now the competitive edge to hire employees is even further than it was. I find it odd that the COVB actually cost the tax payers more money to eliminate the plan right away rather than just doing it for new employees as it was proposed by Jay Kramer. I believe the cost was an extra $400K. Another point is over the years all of the city employees have sacrificed to make the city better and take pay cuts during the tough times. Well the economy has recovered and many surrounding cities are thriving again while the COVB continues to balance the books on the backs of the employees. I know the question will be posed that if employees hate working for the COVB so much then they should just leave. What many people fail to realize is a majority of employees are born and raised in this area much like Amelia Graves. There is a great sense of service to the community from all of the COVB workers. We all take great pride in serving this community, along with raising our families in the same community that we grew up in. With everything that has happened to the employees over the years we have always been professional and completed our jobs to the best of our abilities regardless of having less resources to complete the tasks.

    Everyone forgets about the type of quality services the city workers provide and unfortunately I think it is the classic case of you don’t know what you have till it’s gone. In closing I pose this question to all the readers and that is this:

    After the last 5 years of spending millions of dollars on items that the city’s hands are tied on and everyone knew nothing could be done, why doesn’t the city invest in what makes the city special and that is the employees of the COVB? We aren’t saying we want to be the highest paid or the best benefit package, we just want to be treated fairly and not like someone that can be easily replaced.

    I would like to thank you Mark for many years of giving everyone an opportunity to debate the issues at hand.

    Brad Kmetz

  8. Mark, I have provided links to data based reports, not opinion pieces. These reports give good reasons for public sector administrations to continue to support DB plans, rather than freeze them. Is it necessary for me to reiterate here what can be better learned from the source I provided? You may be skeptical of a trade association that supports DB plans, but that doesn’t mean DB plans are, in fact, “unsustainable.” Of course, when the argument about the continued funding of a DB plan is based solely upon “investment return assumptions,” a range of other options are, perhaps, left unexplored and undiscussed. That said, I have yet to read a convincing, data based argument that replacing DB with DC plans is a move that will work. When you provide one, I may reconsider my position.

  9. Brad,

    I understand your concerns and agree with a number of the points you have made. If Vero Beach is unable to attract qualified employees at its current compensation levels, then city leaders will need to be prepared to pay more competitive wages. Whether current compensation levels are fair and competitive is a separate issue from the question of what means of funding retirement benefits is fair to both employees and taxpayers. And what means of funding those benefits would be best for all is also a separate issue from what level of pension funding is both fair and competitive. Even if current taxpayers paid for the city to contribute the full 12 percent a year to each employee’s retirement fund, that would be far less of a burden than for them to have to come up with an additional $4 million a year over the next 10 years to make up for unfunded liabilities carried forward from previous years.

  10. New York Times – The Next Crisis: Public Pension Funds: http://www.nytimes.com/2010/06/27/magazine/27fob-wwln-t.html?_r=0

    CNBC – Pension funding up, but still way short: http://www.cnbc.com/id/102480368

    CNBC – Funding shortfalls put pension in peril: http://www.cnbc.com/id/102520322

    http://www.wsj.com/articles/the-public-pension-funding-trap-1433109363

    Click to access slp_39.pdf

    http://www.forbes.com/sites/jeffreydorfman/2014/09/11/public-pensions-are-still-marching-to-their-death/

    http://www.forbes.com/sites/taxanalysts/2014/11/20/bad-news-for-state-public-pension-plans/

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