City’s Pensions Cloud Sunny Budget

Like many cities in Florida, Fort Myers is enjoying rapid growth. Ample sunshine and a low cost of living are drawing new residents.

U.S. Census Bureau estimates say Fort Myers’ population has grown 24% since 2010 and now exceeds 77,000. City revenues have grown at nearly the same rates, rising from $167 million in fiscal year 2010 to just shy of $200 million in fiscal 2016.

And yet, the city is not able to fully fund basic services.

In his May State of the City address, Mayor Randall Henderson warned that general fund revenue is not covering all recurring operating expenses. Despite all of that growth in population and the city’s tax base, the costs of health insurance and pension contributions are growing even faster.

Unfortunately, this is a problem that won’t be going away any time soon. As of last year, the city’s three pension plans held assets only sufficient to cover 63% of the pension benefits promised to current and former city workers. In total, there are at least $168 million in unfunded pension promises — equivalent to twice the size of the city’s general fund revenue.

All of this pension debt has driven up the annual pension debt contribution rate the city must pay to try to get the pension funds stable again. Fort Myers’s 2016 Comprehensive Annual Financial Report says the city made $26 million in pension contributions — of which $18 million were just to pay down the debt on its current 30-year schedule.

The total pension payments in 2016 accounted for 13% of total city revenue — for most cities, the pension cost to total revenue ratio is below 10%. Financially strong cities like St. Petersburg are often under 5%. Fort Myers pension payments were also more than a quarter of the $85 million in general fund revenue. A city’s general fund usually covers core governmental functions like police, fire and public works, and it reflects the most consistent source for recurring expenses.

Pension contribution requirements look even starker when measured as a percentage of each employee’s salary. City actuarial reports show Fort Myers is making contributions of 80% of salary for firefighter pensions, 72.1% of salary for police officer pensions, and 38% of salary for the civilian pension system. Each worker is costing the city far more than his or her salary costs.

Despite all of that, the situation is likely even worse for Fort Myers because all of those contribution rates assume the city’s pension systems will earn a rate of return between 7.625% and 8%, depending on the pension plan. Achieving these rates over the long-term is highly unlikely.

Defined benefit pension plans like in Fort Myers collect contributions and invest the assets, providing two sources of revenue to pay promised pension benefits. Whenever investment returns are less than assumed, it means taxpayers have to cover the difference, which is what leads to pension debt payments.

Capital markets experts like those at McKinsey & Co. expect stocks and bonds to yield well below 7% annually over the coming decades. This means the assumed rates of return being used by Fort Myers are unrealistically high. The city is relying on rosy investment return forecasts to make artificially low pension fund contributions, kicking the can down the road to future taxpayers.

Fort Myers needs to take a page from other Florida cities that have taken drastic measures to stop pension plans from bleeding out.

In 2013, Ocala told its existing civilian employees they would keep their benefits accrued to date, but get a less generous pension benefit on future earnings. They also closed their general defined benefit plan to new employees, offering them a defined contribution plan instead. More recently, Jacksonville closed its pension plan to new members and imposed a half cent sales tax to pay down its unfunded liabilities. And Fort Pierce, whose general employee fund is 93% funded, caps non-uniformed employee pensions at $100,000, or 75% of final average salary, whichever is lower.

While Fort Myers has a range of possible reform options, the temptation will be to defer changes and hope the city can grow out of its predicament. However, without meaningful changes in pension debt, Fort Myers will continue to grow and crowd out resources for other public goods and services. The last thing the city wants is for the population to stop growing while pension debt continues to expand full steam ahead.

This column previously appeared in the Florida Business Observer.