Pension Comparisons

Sick Children, Florida Lottery, Door Burners, Book of Genesis, and the Katrina Twins:  An open letter to the City issued by the Retired Employees Association of the Consolidated City of Jacksonville.

The City of Jacksonville Retired Employees Association (REA) would like to address five subjects relating to the City’s proposal for pension reform.  These subjects deal with Sick Children, the Florida Lottery, Door Burners, the Book of Genesis, and the Katrina Twins.  You may ask yourself what these subjects have to do with pension reform. But when we are through, it will all make sense how all of these seemingly unrelated subjects come together to explain the current situation we find ourselves in terms of the large unfunded pension liability and rapidly escalating costs of the City’s Retirement System.

First let us address the subject of Sick Children. The recently issued JCCI Report on City finances chronicled the large disparity between the level of City pension contributions made to the Police and Fire Pension Fund (PFPF) verses the General Employees Pension Plan (GEPP).  The JCCI study documented the fact that the City contributed more than six times the rate of contribution to the GEPP versus the PFPF over an extended period of time.  These two pension plans symbolize two children.  In this illustration, the GEPP represents one child who is well fed, clothed, and cared for.  By comparison, the PFPF represents a second child who is poorly fed, poorly housed, and asked to work in the field for long hours in the hot sun with no hat on.  When you consider the much different treatment of these two children over a long period of time, it is no wonder that years later, one child grew up very healthy and one child grew up very sickly.  This analogy parallels the different levels of City pension contributions extended to the GEPP and the PFPF.  After years of being put on a financial diet it is also no wonder that the PFPF has a large unfunded liability and is in need of catch-up contributions.  The Mayor likes to say that the PFPF situation is like Social Security on steroids.  It is more like the provision of badly needed protein after years of neglect.  Despite this treatment, the PFPF is pre-funded at the level of 52% for the next 30 years while Social Security is basically a pay-as-you-go proposition with essentially no pre-funding.

Let us now turn our attention to the Florida Lottery.  You all remember the promises of the Florida Lottery.  You were told that if you authorized this form of gambling in our State we would have solved the issue of funding the needs of education.  As we examine the record, many people suspect that the State used the Lottery revenue as a tool to divert other funds that otherwise would have found their way into education budgets. A similar experience is found in the State Chapter Funds that are described in Sections 175 and 185 of the Florida Statutes.  These Chapters describe a small tax that is tacked on to our homeowners policies, sent to Tallahassee, and re-routed back to the hundreds of public safety pension funds that are established throughout the State.  The State legislation stipulates that this source of funding is to be used for “enhanced pension benefits” for public safety pension plans. This source of funding dates back to 1939.  After almost 50 years of these dollars flowing from the State to local governments, local pension plans began to ask questions about whether these dollars were in fact being properly used for “enhanced benefits”.  The ability of the City of Jacksonville to get by with the low level of City contributions over the years was partially made possible through the City’s reliance upon the State’s Chapter Funds to pay some of the bill.  This is the same technique seemingly used for the Florida Lottery revenues. After realizing that the Chapter Funds were in fact being improperly converted by local governments, pension plans across the State began to file a number of class action suits and many plans sought and received corrective measures before their respective City Councils.  The dispute was resolved locally between the PFPF and the City by their agreement to enter into a Settlement Agreement.  This Agreement manages the Chapter Funds and earmarks their use for “enhanced benefits” over the period extending to September 30, 2030.  The agreement was intended to resolve all differences and charged both parties to work harmoniously together to enforce the provisions of the contract.  The Mayor is currently pursuing a campaign that would cut pension benefits that are contractually provided for through the year 2030.  Thus, the harmony has been disturbed.  The members are understandably sour on this idea inasmuch as they advanced many millions of Chapter Funds to purchase the current package of benefits over a 30 year period. Members are sympathetic with the Mayor’s Budget issues, but they feel that a contract is a contract which one party cannot unilaterally abandon.

Now to the subject of Door Burners.  There is a story of a family that lived in a cabin in the northwoods.  As winter arrived they failed to fell trees and gather wood for their fireplace. A storm and a severe winter came early in the year.  They became very cold and huddled together to stay warm.  When they could not stand it any longer, they started to strip the cabin of its interior doors and threw them into the fireplace.  This felt good for a time but the fuel quickly was gone.  They began to get more desperate and decided to pull off the front and rear doors for fuel.  This too felt good for a time, but resulted in a far worse and far more costly situation.  This story parallels some of the recent fiscal practices of the City and the JEA.  Both entities were previously driven by the desire to provide the lowest taxes and the lowest electric rates to the citizens of our community. Like the Door Burners in our example, this felt good for a time. In their effort to maintain this posture they burnt many doors.  The JEA drew down its reserves to dangerously low levels. We are now seeing the result of this shortsighted policy in the form of multiple rate increases within a relatively short period of time.  The City also cleaned out many reserves and trust funds to avoid dealing with the issue.  You all remember the City’s past millage reduction campaign.  We drove down the millage rate to unsustainable levels in our continuing drive to have the lowest taxes in the country.  The millage reduction program was partially made possible by the City’s decision to declare “pension contribution holidays”.  The City was able to avoid making payments into the pension funds through the use of this budgeting technique.  The City commenced the practice of declaring “pension contribution holidays” in 1992.  This practice continued for over a decade.  The City now recognizes the folly of this budgeting technique and has declared that they will never do it again.  That decision has effectively been made for them already because the pension reserves that had formerly been used are essentially depleted.  The use of pension reserves to engineer pension contribution holidays has cost the pension funds over $275 million. Future generations will pay this bill.

Now to the Book of Genesis.  The Book of Genesis describes the story of Joseph and the dreams of the Pharaoh.  Joseph correctly interpreted the dreams that foretold the future of 7 years of bountiful harvests followed by 7 years of famine.  After accepting these future events, the Egyptians gathered grain and stored it in a warehouse during the 7 bountiful years for use during the following 7 years of anticipated famine.  We can associate the 7 bountiful years with the bull market of the 1990’s which delivered extraordinary gains in the stock market.  We can also associate the 7 years of famine as the period from 2000 to the present time.  As the bull market of the 1990’s raged, many pension plans maintained sound funding policies and continued to make strong contributions to their pension plans. Others took the opportunity to introduce unsustainable practices.  One example of a program that consistently followed sound funding policies during the good times and the bad times is the Florida Retirement System (FRS).  The FRS increased their funded status to 118% as the bull market ended.  This financial cushion served them well during the 7 years of famine that followed.  As recently as 2008, the FRS still had a funded status of 107%.  This posture has since weakened, but they are still about 95% funded. Other plans, such as the City of Jacksonville, did not have the financial cushion to effectively deal with the 7 years of famine and must now address the aftermath of its past funding policies.

Finally, let us now discuss the Katrina Twins.  Hurricane Katrina is described as an event that happens only once during a 50 year period.  In the financial markets we have encountered 2 Hurricane Katrina’s within a span of 6 years.  We endured the first Hurricane Katrina with the dot com market crash that started in April, 2000 and continued through the year 2002.  This event at its time was documented to be the worst market set-back since the Great Depression.  This event was thought to be our 50 year financial storm.  Then 6 years later, we encountered the global financial crisis that continues to this day.  The impact to financial assets during the current episode has now been documented to be the second worst financial event since the Great Depression, pushing the dot com crash to #3.  Given the fact that we have suffered twin financial disasters within such a short period of time, it is no wonder that we have a large unfunded liability and must now contribute more resources to our pension plans.

The Mayor and other City officials are currently pursuing a campaign of pension reform.  They paint the picture that pension benefits are too generous and must be cut back to deal with the rapidly increase in pension costs.  The situation that we find ourselves in currently is not primarily the result of too generous pension benefits. The primary culprits are the City’s past funding policies and the impact from the Twin Katrina’s.  We have looked at the current pension benefit structure and find it to be very mainstream to what you will find in many other public pension plans.  The Florida Times Union conducted a survey in September, 2008 to address this issue.  They found that the Jacksonville plans had a lower pension benefit structure than all of the other major pension plans that were surveyed.

The City’s pension plans have been demonized by the City and the press for over a year now.  Much of the information that has been circulated to advance this campaign is baked with half-truths and misinformation.  We recognize that the City is in a very difficult financial situation and that our citizens are facing difficult times.  However, the effort to position an overly generous pension benefit structure of the PFPF as the root cause of the current financial situation is inaccurate and a misleading proposition being presented to the citizens of Jacksonville.