At $25.6 million, the current unfunded liability for the three Longboat Key employee pension funds (fire, police and general) will be an important topic at the 2 p.m. Sept. 24 Town Commission workshop.
The unfunded liability is a debt and non-negotiable. It is a contracted amount that the town — or more specifically, you the taxpayer — is obligated to pay. Don’t confuse this with the ongoing negotiations between the town and the fire and police unions and the general employees. Those discussions are labor negotiations about future pay scales and benefits.
As the accompanying table shows, the unfunded liability has grown shockingly over the past decade — 1,869%.
In addition, as the absolute size of the unfunded liability has increased, the percentage of the total liability that has been funded has correspondingly declined, from nearly fully funded 91.5% in 1999 all the way down to around half in 2008. That means, if the entire liability had to be paid tomorrow, taxpayers would have to come up with $12.6 million.
How we got here
Four key factors explain why taxpayers are in this position with the town’s pension funds:
1. Performance of the pension investment portfolio
2. Methodology changes
3. Salary and benefit increases
4. Rising administrative costs
Looking at the formula that the town uses to calculate the employee retirement benefit, you’ll see that it works off a base salary (highest of five consecutive 12-month periods) times the number of years of service, times a multiplier (3.5 for fire and police and 2.75 for general employees). In addition, the pension investment fund is projected to have an 8% annual return. If the fund delivers less than 8% when averaged over four years, the shortfall becomes part of the unfunded liability, and the town (taxpayers) must make up the difference.
Not surprisingly, the greatest impact on the growing size of the unfunded liability is the performance of the stock market. According to the 2008 Actuarial Experience Study, the town’s pension investment portfolio generated an average return of 7.5% over the past 15 years. Although this is fairly close on average to the 8% guarantee, the portfolio took a major hit with a 15.6% decline in 2001 and another 12.5% decline in 2002. The difference between a projected compounded 17% gain over those two years and a total combined loss of 26.1% left a major hole to make up.
This disparity led Foster & Foster, the town’s actuarial consultant, to recommend the change to a longer 30-year amortization plan to smooth out investment returns.
Former independent actuarial consultant, David Hess, of Bobbitt Pittinger & Co., and a few other pension board members spoke out against spreading losses so far out into the future. However, over ensuing meetings, the appeal of minimizing the prevailing problem by pushing it out into the future won the day, and all three pension boards ultimately adopted the Foster & Foster recommendation.
This approach eventually caught the eye of state actuary Charles Slavin, which led to his infamous letter directing the town to replace the 30-year amortization approach with a seven-year payout period.
After much debate, Foster & Foster negotiated an agreement with the state that increased the amortization period to 20 years for losses prior to 2008. For any losses from 2009 and beyond, the payback period is 10 years.
This change in methodology will save the town about $1 million a year over the seven-year directive, but it will also add $100,000 a year to the town’s overall contribution to the pension plan.
The next 19 annual installments are projected to be about $2.1 million a year depending on the performance of the stock market and other variables.
One of the other variables is salary and benefit increases. According to the latest actuarial report in 2008, the town consistently has assumed salary increases of 6% for all employees. However, the actuarial report shows the town actually averaged an 8.2% gain in salaries over the past 11 years. This means we have under funded the salary portion of the pension formula by the difference between 8.2% and 6% or a gap of 37%, which is then further augmented by either the 3.5 or the 2.75 multiplier.
Although this margin has been reduced with lower or no salary increases for 2009 and 2010, you can see how salary increases have affected our pension liabilities.
And, finally, the move by the state nearly a decade ago to allow fire and police departments to set up their own pension programs significantly increased the administrative costs over one all-inclusive pension program. Since then, we have assumed the cost of three pension attorneys, three fund managers and three investment counselors to handle the three fire, police and general employee funds.
With the current $25.6 million unfunded liability and the knowledge it will continue to grow in the future, the Town Commission must reassess the town’s position. A step in that direction will be the discussion at the Sept. 24 commission workshop.
Will the commission decide to stand as we are and wait for the market to recover before considering any changes? Will it opt for a new approach, such as joining the state pension program, which would consolidate administrative fees? Or will it try freezing the current benefit package for existing employees and offering a less-expensive package to new employees?
An important factor in answering these questions is that state law requires, if any dramatic changes are made, the current unfunded liability of $25.6 million must be paid off first.
You should attend Thursday’s workshop on the town’s pensions. Listen to the options. Let the commission know your opinion. And count on this: Whatever course of action is taken, the funding will come out of your pocket.
Sandy Gilbert is the former chairman of the Longboat Key Planning and Zoning Board.