By Matt Kelly

On January 27th, the managers of 19 Florida pension funds received a “call to action” letter from the Florida Department of Management Services informing them that reforms are needed to address their unfunded liabilities. A previous blog pointed out that while Florida’s state’s employee pension fund is 86% funded (better provisioned than 41 other U.S. states), some municipal pensions are less than 50% funded, posing a budgetary risk. Reforms are certainly needed, but what exact shape reforms should take might best be decided locally.

The Florida Retirement System (FRS) administers benefits for the state, counties, and 302 cities, among other entities. In 2013, the Florida Legislature appropriated an extra $500 million to bolster the FRS and cover liabilities of some underfunded cities, and will need to appropriate that much for about 20 years in order to cover unfunded liabilities.

The state itself shares blame for shortfalls. A 1999 law mandates cities pay a minimum annual level of benefits to pensioners and devote any additional property taxes collected to additional benefits rather than servicing liabilities. This requirement makes it difficult for cities to cover existing liabilities, and thus makes underfunding more likely. Correcting this system’s flaws would help Florida avoid budgetary crises as pension liabilities increasingly outpace revenues.

Transitioning from defined benefit plans to defined contribution plans is the most effective solution. However, unfunded liabilities vary from city to city. Removing the state’s 1999 law’s requirements could allow cities needed flexibility. Local governments could then make the changes in retirement age, eligibility for vesting, and contribution requirements that are necessary to fund their liabilities.

Public employees were made a promise in good faith about their pension benefits and have based their retirement decisions around these assumptions. Going back on this promise has eroded confidence in government, as pensioners and taxpayers think twice about the state’s ability to meet other commitments. However, the financial realities of the pension system demand attention, and reforms are needed to avoid future budgetary crises.

Some maintain that future reforms should consider every public employee as a candidate for transition to defined contribution plans. Such changes would immediately stop governments from increasing their unfunded pension liabilities, but suddenly moving all 623,011 active members into defined contribution plans may be politically impossible and perhaps unnecessary.

A gradual approach, allowing current retirees and long-vested employees to keep their benefits, shifting recently vested employees into defined contribution plans, and requiring new employees to do the same, is the most practical policy reform in the short term. A less bold but hands-off solution, though, would remove existing laws that encourage underfunding for municipal pensions, like the requirement that cities use additional property tax revenue to fund additional benefits.

Municipal public pensions might be fixed locally once onerous state requirements are removed. SB 1902, which was proposed (but not passed) in 2010, would have reversed the 1999 law and allowed Florida’s municipalities to switch employees to defined contribution plans as they see fit. Removing state demands on municipal governments is a needed reform, since they force cities to guarantee benefits not all can afford to pay.

Local pension plans will need to change, but many reforms can best be decided at the local level. Removing the State of Florida’s unrealistic requirements on local governments would allow municipalities the flexibility to do so.

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