What Happened
The city of Palm Beach Gardens, Florida, is altering the pension benefits of existing police department employees, in an effort to avoid raising taxes. The city council decided to raise retirement ages and reduce maximum pension benefits after watching annual costs skyrocket from $880,000 to $4.5 million in just 12 years.
The Challenge
With one out of every eight city dollars flowing to pension benefits, the city council and mayor realized it was time to act. Numerous factors were fueling pensions costs, including the fact that pensions were being calculated with the inclusion of overtime and personal leave, and cost-of-living allowances were not tied to inflation.
The Changes
Following similar measures taken this past spring to cut benefits for the city’s firefighters and paramedics, Palm Beach will raise the retirement age to 59, from 52, for any police officer having worked less than 10 years. Additionally, maximum pension benefits will be reduced from 99 percent to 75 percent. One proposal the city council looked at was calculating pensions on base pay only.
It is estimated that these measures alone will save $5.7 million over the next three years. Combined with the firefighter cuts, the city should save more than $10 million total through 2015.
Police department employees currently contribute 8 percent of their salaries into retirement funds, but those contributions have not kept up with costs. While the police union will likely vote down the measure this summer, the city council has the final say. The city council discussion of a recent pension actuarial report that lead to the changes are available for review. Agendas, minutes, and audio from the Police Pension Board are also available. If you have questions about the changes, you can reach the city’s finance administrator Allan Owens.
Across the State
Palm Beach Gardens is not the only community addressing pension challenges in Florida. In Sarasota, major changes to pensions were recently passed by the city council, and additional changes are being considered for October, such as:
- COLA adjustments would drop from 3.2 percent to 1 percent and begin at 65 years of age;
- Pension calculations would be defined as 1/12 of an officer’s average salary for the 3 highest of his/her last 10 years of service for current officers; calculations for new officers would be 1/12 of the highest five years based on final 10 years of service;
- Overtime pay of more than 300 hours would not be included in benefit calculations;
- In the case of death, surviving spouses would receive a 10-year Certain-and-Life-Thereafter annuity, rather than 67 percent of the pension.
The city’s latest pension plan for police officers has been posted, and Sarasota’s pension plan administrator is Benita Saldutti.
The city estimates this plan would save $1 million on the pension for an officer who retires at 52 (in 2032) at a final salary of $90,000. Instead of receiving $3.7 million over 32 years of retirement, the officer would receive $2.6 million.
Required Reading
A comprehensive report filed by the city’s finance director details costs and challenges associated with the current pension plan.
Gov1 highly recommends reading this documents, which includes a review of how the current pension became unsustainable, citing:
- Premature benefit improvements
- Long amortizations
- Overly optimistic investment forecasts
- Inadequate risk management factoring
- Moral hazards in governance
The report also includes redesign options and actuarial studies of alternatives (i.e., hybrid plans, 401ks, cash balance plan), as well as legal and political considerations. The report also discusses how to balance the competing objectives of financial affordability and benefits adequacy.