The Longboat Key Town Commission stopped the bleeding when it froze its three pension plans, but now it is dealing with the budget nightmare of paying off more than $27 million in unfunded liabilities.
At its Feb. 18 workshop, Town Manager Dave Bullock explained the town’s three pension boards are working to reduce the estimated rate of return for the frozen plans to a more reasonable 7% rate of return at the request of Tallahassee pension officials.
“We all understand and believe that the rate of return for the frozen plans needs to be lower than it was for the active plans,” Bullock said. “But the lower you make your rate of return, the higher the amount we have to pay back.
The General Employees Retirement System Board of Trustees has already reduced that plan’s rate of return from 7.75% to 7%. The boards of trustees for police and fire plans will meet later this week to discuss and finalize new rates of return.
But lowering those rates has big budget and taxpayer implications.
Currently, the town is estimating an annual required contribution for those pension plans of $2,760,020.
But if all three frozen plans reduce their rates of return to 7%, the result will be a $500,563 pension cost increase for the upcoming fiscal year. That increases total annual pension costs for taxpayers to $3.26 million. Making matters worse, the commissioners are already looking at a $1,625,559 budget deficit the town is facing this summer because of inaccurate revenue estimates.
Bullock told commissioners the town is looking at higher pension costs “for the next three critical years” before the pension liabilities are paid down and the pension budget line begins to reduce.
Commissioners expressed both frustration and resolve when they heard the news.
“We stepped up and did what we had to do,” said Commissioner Jack Duncan. “And now it’s time to pay the piper.”
Duncan said town staff must work to prepare a report that taxpayers can review for the next three years that shows why pension costs are rising.
“We need to put in place an explanation for this over a period of time,” Duncan said. “Taxpayers need to be prepared to know what’s going on.”
Commissioner Phill Younger noted the town “should be nibbling off the big chunk of this debt every year.”
“This is good stuff and it’s preparing us for reality,” Younger said. “The goal is figuring out how long we want to take to pay it down so the amount doesn’t keep increasing.”
Bullock said he is working with the pension boards to address the town’s concerns. He said he brought the issue forward to the commission as an update and to start a discussion to come up with a multi-year strategy moving forward to pay off the debt.
Although the pension boards are supposed to set annual rates of return without worrying about cost implications for the town, Bullock said the boards are aware of the issue the town is facing.
“The pension boards don’t have a fiduciary duty to be concerned about the town’s overall budget, but there’s a reason why we put 15 taxpayers on these new frozen pension boards,” Bullock said. “They know their actions affect your budget.”
Impact of budgetary change in annual required contributions (ARCs) for Pension Plans with Assumption Rates at 7%
Pension Plan Current ARC Increase Future ARC
Police $633,590 $31,322 $664,912
Fire $1,526,725 $364,431 $1,891,156
General $599,705 $104,810 $704,515
TOTAL $2,760,020 $500,563 $3,260,583
* Increase creates a potential 0.11 millage increase and a 5.3% tax increase impact. (Source: Town of Longboat Key)
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