George Gibbs Center for Economic Prosperity

2012–June22 Pr⁠i⁠n⁠t⁠ Med⁠i⁠a: Tallahassee Democra⁠t⁠ – Perr⁠i⁠n on Publ⁠i⁠c Pens⁠i⁠on Reform

By: The James Madison Institute / 2012

The Tallahassee Democrat prints JMI Public Affairs Director Thomas Perrin’s opinion editorial “Leadership Is Needed for Pension Reform” (PDF).Text of Editorial
Is the Florida Supreme Court stalling? The Court has announced that it won’t begin oral arguments until Sept. 5 on a union lawsuit seeking to block a 2011 law requiring members of the Florida Retirement System to contribute 3 percent of their pay toward their pensions.This case, filed by the Florida Education Association and expedited to the state’s highest court, will have a major impact on the state budget. An adverse ruling could even lead to a special legislative session to redo the state budget and find a way to refund millions of dollars to FRS members.This case will also set a precedent for the Legislature’s ability to set the terms of public employment. Therefore, the schedule raises a curious question: Why is the Court taking so long to hear such a high-profile case?After all, it accepted jurisdiction on March 28, more than five months before the first scheduled hearing. Three of the justices are up for an increasingly publicized “merit retention” vote this November. Some critics may surmise that those justices want to delay this potentially controversial decision until after the election.Pensions are indeed a hot-button political issue. They were a factor in Wisconsin Gov. Scott Walker’s victory in a recall election. Now other states and municipalities are becoming more wary of union-negotiated pension contracts, once viewed as untouchable.Unfortunately, the pension reforms the Florida Legislature passed in 2011 and 2012 did not adequately address the major problem of traditional pension plans: the unpredictability that makes budget-planning difficult.In contrast, the private sector realized years ago that these “defined-benefit” retirement plans were unwise, and that contributing annually to a 401k-style defined-contribution plan simply made more sense. This not only made costs more predictable, but it also provided a mechanism for the employees to control how their money was invested.Such pension plans also have the advantage of portability, so employees needn’t lose their nest eggs if they leave their government job. Moreover, their investments can be tailored to fit their individual needs. A young worker with decades until retirement might prefer riskier higher-yield investments, while an employee nearing retirement might well opt for safer lower yields.Unfortunately, governments have been slow to take advantage of these innovations. Indeed, most are stuck with the archaic defined-benefit plans, which have now all but vanished from the private sector.In Florida, advocates of the status quo claim that reforms such as switching to defined-contribution plans aren’t necessary because the FRS is well-funded. Indeed, the FRS’s well-managed investment portfolio even meets the new federal accounting standards gauging pension funds’ ability to meet future obligations.However, nobody knows who will manage the FRS in the future, nor can anyone predict what a future Legislature might do. Therefore, switching the FRS to a defined-contribution plan would be a prudent safeguard and, more important, would send a powerful message to Florida’s municipalities, where the severe problems lie.Many Florida cities operate their own pension plans — separate from the FRS — for police, firefighters, and the other employees. Now several of these cities are facing the tough choice of keeping overly generous promises or engaging in massive layoffs and cutbacks.A 2011 LeRoy Collins Institute study revealed that 32 percent of these non-FRS pension plans deserve a grade of D or F, because they’re funded at less than 70 percent of what’s needed to meet their future obligations. These struggling plans aren’t isolated, either; Panama City, Jacksonville, Ocala, Fort Myers, Palm Beach Gardens and Homestead all had plans graded F.Hollywood’s defined-benefit plan became so burdensome that the city was forced to choose between reducing police pay by 12.5 percent or laying off 13 officers. Officials ultimately decided to reduce the officers’ pay, but this served as a warning that cities may soon start reducing police and fire protection to cover untenable pension costs.There’s a way to avoid this dilemma. In 1997, Michigan became the first state to end its defined-benefit plan for state employees. The results have been very beneficial. A Mackinac Center study reveals that the legislation “is estimated to have saved state taxpayers $167 million in pension normal costs, $2.3 billion to $4.3 billion in lower unfunded liabilities …”If Michigan could produce these savings, just think what the numbers could look like in Florida.ABOUT THE AUTHOR
Thomas Perrin is the director of public affairs at The James Madison Institute, a nonpartisan, public policy research center based in Tallahassee. Contact him at .