By now, most Longboat Key taxpayers know the town’s unfunded pension liability is alarmingly large and steadily growing. Since 1999, it has grown by 1,869% — from $ 1.3 million to $25.6 million. From 2004 through fiscal 2008, it has more than doubled.
As the absolute size of the unfunded liability has grown, the relative funding percentage of the liability has declined — from 91.5% a decade ago to 50.8% in fiscal 2008. The projected annual payment for next year to address this obligation will be $2.1 million, and that amount is a disturbing 15.9% of the town’s 2010 operating budget.
Town officials, like many other public officials across the state, once thought our employee benefit plans were affordable. However, we are now experiencing layoffs, furloughs, salary freezes and potential reductions in the level of service to support the existing plan. This is all a result of the prevailing weak economy and the negative impact of the recent bear market on the projected 8% growth factor on our pension investment fund.
Pension experts Girard Miller and Jim Link, of the PFM Group, writing in the August 2009 Government Finance Review, offer a list of tell-tale symptoms of unsustainable pension plans. They include:
• The plan has a pension multiplier of more than 2.5% coupled with an employee contribution rate of less than 7.5%.
• The asset-liability ratio of the pension fund is lower than 75%, using today’s market value.
• Employer pension-contribution rates are in double digits and keep rising.
• There are high percentages of early retirements and pension spiking, such as saving up vacation time and sick days to expand the base pay.
• Early-retirement incentives are charged to the pension plan rather than expensed.
Longboat Key does not stand well on these criteria.
With our fire and police having a pension multiplier of 3.5 and the general staff at 2.75, we are well over the recommended 2.5 threshold. The 2008 asset-to-liability ratio is only 50.8%. Our projected 2010 employer pension-contribution rates are well into double digits at 35% for firemen, 48.5% for police and 21.6% for general staff.
Even though the town has deliberately induced some early retirements as a cost-saving measure and the incentives have been relatively small, the town still has experienced some pension spiking, and the early incentives have been charged to the pension plan. They have not been expensed as recommended by pension consultants.
Given the foregoing, our present pension program is not sustainable. And the changes need to be made now.
What should be done?
Although there is no silver bullet and any approach that reduces pension costs will take some give and take on all fronts, there are two basic options available:
• Keep the current town plans, but reduce the benefits and/or increase employee contributions.
• Terminate, freeze or close the current pension plans and set up new lower-cost plans.
Either route would, by law, require the labor negotiation process. It cannot be done unilaterally or by edict.
In addition, the process can be further complicated if we elect to close the plan and adopt a new one. In that case, the town would be required to pay out the full amount of the unfunded liability before the new plan could be implemented. Again, for Longboat taxpayers, that’s $25.6 million.
To be successful, the Town Commission should act now to find a recognized pension-plan expert who can guide the town to the best solution.
Why do we need yet another consultant? Because, while all of the town’s current pension advisers serve the town well, they also have their own agendas. It would be unlikely, for instance, for our present actuaries and lawyers to recommend a move to the state pension plan that would, in effect, remove them from managing our account.
Unfortunately, past Town Commissions have not had much stomach for dealing with pension issues. But now it is unavoidable.
The pension issue — via an update from Foster & Foster, the town’s actuarial consultant — is now on the agenda for the 2 p.m. Oct. 15 Town Commission workshop, at Town Hall. Make every effort to attend the meeting and encourage the Town Commission to develop a strategy to address our pension problem.
There is too much at stake to wait any longer.
Sandy Gilbert is a former chairman of the Longboat Key Planning and Zoning Board.