What Happened?
The Florida state Senate is considering a pension reform proposal focused on police and fire pensions. The legislation would alter how tax revenue on insurance premiums could be reallocated to fund pension liabilities.
The Goal
The Florida Senate Bill 246 would enable local governments to pay for public employee benefits with a portion of insurance premium tax revenue. Officials would have to set up a defined contribution plan for police and fire employees moving forward, to prevent unfunded liabilities from increasing any further.
Like pensions found in many other states, Florida’s police and fire plans are currently defined benefit plans. These pension systems provide employees with a fixed amount of benefits even if investments underperform. These pensions are funded by employee contributions and state premium tax revenue on property and casualty insurance.
Local governments in Florida were able to use insurance premium tax dollars however they wanted to pay for police and fire pensions until 1999. That year, state lawmakers froze how much of the insurance premium tax revenue local governments could use to cover pension costs based on the amount allocated to each agency in 1997.
In 2012, a state agency sent the city of Naples a letter suggesting the insurance premium tax be used to cover minimum public employee benefits and additional funds could be put toward the creation of new benefits. As a result, Naples and other cities are negotiating with unions to reduce benefits and increase employee contributions to create a more sustainable pension system similar to those used in the private sector. This strategy is different from the proposal in Senate Bill 246, while both focus on the role of insurance premium tax on pension support and reform.
Reform, Reform Everywhere
Also facing a massive unfunded liability, Illinois lawmakers are reworking tax dollars to cut down on pension costs. Chicago residents may experience increases in property tax over the next five years totaling nearly $250 million. City employees will also face pension contributions of at least $300 more annually to support the flailing pension fund. Rather than relying on public employees to make all the sacrifices to sustain the pension system, Chicago lawmakers are looking to pass on some costs to property owners as well.
For five consecutive years starting in 2015, Chicago property tax will increase revenue streams by $50 million annually. Property owners will see a jump in costs of about $58 a year, while Chicago Board of Education and Chicago Park District employees will pay more toward their benefits by 0.5 percent over the same five-year period, up to 9 percent of their annual paychecks from 8.5 percent currently. By 2019, affected public employees will contribute 11 percent of their paychecks to the pension system.
In addition, Chicago officials are proposing city employees forfeit compounded cost-of-living adjustments to further lower pension costs. Currently, city employees get a three percent cost-of-living increase compounded annually. Under the proposed reform, public employees will receive the lesser of an annual three percent increase on the original benefit or 50 percent of the consumer price index.
Uphill Battle
Gov1 has kept a close eye on state and local pension reform efforts that work to cut down millions in liability costs.