Hollywood, Florida’s Pension Debt Problem

The city of Hollywood, Florida’s most recent financial statement showed a negative net position of $400 million. This amounts to over $2,600 in red ink for each of its 151,000 residents. Hollywood’s financial challenges are primarily attributable to over $1 billion in pension and retiree health care debt.

The three pension systems offered by the city of Hollywood, which provide benefits for firefighters, police officers, and general employees, are each approximately 58 percent funded. This means that for every dollar in retirement promises made to Hollywood’s employees, the city only has 58 cents in assets to pay for them.

By pulling more and more funds from the city’s budget each year, this pension debt could threaten other public priorities like road repairs, public safety, and other key government services. If Hollywood’s economic growth plateaus or another economic recession hits, there will likely not be enough money to both pay retirees and fund essential services. This would likely mean increased taxes, higher contribution rates for employees, or benefit cuts.

Funding for Hollywood’s pension plans has deteriorated sharply since the year 2000, when all three pension plans had more than 80 percent of the assets they needed to pay for future benefits. One reason for this is that the city’s pension plans use overly optimistic investment return assumptions. For example, the city’s fire and general pension plans assume annual investment returns of 7.5 percent, and the police plan assumes an 8 percent return on investments. The average assumed rate of return nationwide is only 7 percent. And a half of a percentage point difference can add hundreds of thousands more in debt each year.

Although Hollywood’s pension plans have had a few years with good investment returns recently, much of this growth has gone to current retirees rather than improving the position of the severely underfunded municipal pensions. As the Sun-Sentinel reported in 2019, Hollywood is one of only five Florida cities to offer pensioners a so-called “13th check” — an extra monthly pension payment when asset returns are strong.

In addition to Hollywood’s pension debt, the city makes no effort to save for retiree health care benefits. Instead of putting aside funds each year and letting the assets grow in the investment market, the city chooses to take the more expensive route and pay retirees out of pocket each year. As a result, the city’s balance sheet shows another $530 million in retiree health care benefit debt.

Relative to other Florida cities, Hollywood’s retiree health care benefits are quite expensive. The city offers retirees similar health benefits to those it provides active employees at an average monthly cost of over $1,200 per retiree. By contrast, nearby Fort Lauderdale only provides retirees insurance premium subsidies of between $100 and $400 per month and stopped offering this benefit to anyone hired after 2015. As a result, Fort Lauderdale’s other post-employment benefit (OPEB) liability is a fraction of Hollywood’s despite its larger population. The city of Weston does not subsidize retiree medical benefits at all, and thus has no OPEB liability.

Thus far, Hollywood’s outsized retirement obligations have not weighed heavily on its bond rating or ability to raise funds on the municipal bond market. But taxpayers’ continued ability to shoulder these large obligations is not guaranteed.

Ninety years ago, Hollywood was among the many South Florida governments that defaulted on municipal bond payments after expected growth failed to materialize. If a natural disaster such as a major hurricane or a sea-level rise stunts Hollywood’s growth, the city could once again struggle to service the billion-dollar debt.

To secure the retirement of its public servants and protect taxpayers, Hollywood’s policymakers need a better plan to fund the city’s pension plans and manage the costs of its health care plan.

A version of this column previously appeared in the South Florida Sun-Sentinel.