Step two has now begun: Sell the plan to the employees.
This is the long-awaited public unveiling of how the Longboat Key Town Commission wants to address that frustrating, ever-festering problem of the town’s $28 million unfunded employee-pension liabilities.
Late last week and Monday, Interim Town Manager David Bullock released to the public two Powerpoint presentations that contain the details — the depth of the problem, how it came about and proposals to the town’s fire union and general employees to help keep the town from digging a deeper hole. As we have invoked on many occasions on this subject, the first rule to solve this problem is that funny cliche: When in a hole, quit digging.
So for about the past four months, Longboat Key commissioners immersed themselves in executive sessions with Bullock to strategize how finally to get out of this abyss.
It starts with Bullock depicting in vivid easy-to-understand detail the nature of the issue for all to see. The three graphs on this page, three of many, essentially tell the story — a story that has been told for nearly a decade (the full Powerpoints can be found at YourObserver.com, see pension story).
Bullock didn’t say it explicitly in his Powerpoints, but he told us Tuesday: Two definitive conclusions are these — the pension plans are unsustainable, and “to get out of this hole, there is no alternative but new money.” Additional, new taxes.
Before that, the pension plans need to change — in fact, you would think they must change dramatically. But the town’s proposals appear far from dramatic, and for good reason. The more dramatic the change, the higher the short-term tax pain for residents. Key features of the proposed plans include:
For current and retired employees:
• All employees — current or retired — would keep all vested benefits.
• No new benefits would accrue beyond the date the plan is frozen.
• Employees hired after the date the plan is frozen would be able to participate only in a new defined-contribution retirement account, similar to a 401(k) plan. That plan would be established for every employee, current and new.
The New Plan
• The town would contribute 10% of the employee’s base salary.
• There would be a mandatory employee contribution of 3% to the 401(a) plan.
• The town would match the next 3% of employee contribution dollar for dollar.
• The maximum town contribution would be 13%.
For town employees, vis-a-vis what is offered in the private sector, this still would be a sweet deal. Rare these days are the businesses the size of the town ($15 million in annual revenues) that can match a 13% annual contribution to an employee’s 401(k). Indeed, it seems that feature should be suspended until the unfunded liability is wiped out or at least dramatically reduced.
Despite that, one of the positive features of the town’s proposal is that it should keep the town from digging a deeper pension hole. If employees accept the defined contribution plan, the town is not locked into hitting the 8% annual return that is required now. The investment returns will be governed by the market — as they are in private-sector defined contribution pension plans.
Going forward, then, with all new and existing employees, the town will avoid adding new unfunded obligations.
Which brings us to that $28 million and how to pay it down.
Bullock says the commission considered shutting down the existing pension plans altogether, but that would have triggered a requirement to produce $28 million immediately — a big shock and hit to taxpayers.
In contrast, freezing the existing pension plans gives the town flexibility. It allows the town to make variable payments over time. It allows the town to adjust its annual contributions in concert with how the pension plans’ investment portfolios perform. If the returns hit the 8% mark or above, the amount owed will fall.
But no matter what happens, there is no way around it: Longboat Key taxpayers’ property taxes are going to go up.
Indeed, how much higher and for how long likely will be Step Three in the Town Commission’s strategy to address this longstanding issue. That is yet to come.
To be sure, if you look at Bullock’s Powerpoint presentations, he shows that even if the pension funds’ investment returns averaged 7% growth for each of the next 16 years, Longboat taxpayers’ contribution to pay down the unfunded liabilities would average about $2.5 million a year until 2029. From then until 2041, those payments would total a little more than $1 million a year. As we all know, however, 7% returns are optimistic.
The days of reckoning — no, the years of reckoning — are here. Longboaters have known for a long time this was coming. At the moment, the announced course of action appears reasonable, however painful it’s going to be. Even so, more can be done to pare the employees’ pensions — an equal share in the pain.
Click here to view the pension story in graph form.