Innovators in Action (February 2015 edition): Reforming Public Safety Pensions in Tequesta, FL

Commentary

Innovators in Action (February 2015 edition): Reforming Public Safety Pensions in Tequesta, FL

The latest interview in Reason Foundation’s Innovators in Action 2015 series focuses on the Village of Tequesta, Florida’s 2010 reforms to its public safety defined-benefit retirement plans. Village officials negotiated significant reforms to police and firefighter pensions in the collective bargaining process-including a full transition to a defined-contribution, 401(k)-style system for new police officers and a realignment of benefits for new firefighters entering their defined-benefit pension system-putting the plans on a path toward sustainability. I recently interviewed Tequesta Village Manager Michael Couzzo on the reforms enacted, the resulting benefits and more. Here’s an excerpt:

Gilroy: Can you describe the specific reforms enacted?

Couzzo: First, we wanted to make sure that the defined-benefit plan for the existing public safety-police and fire-workers remained as it was, so there’s been no change in the benefits for the employees that were with us before the change in the collective bargaining agreement.

Then what we were looking for was that when we brought newer employees into the police department specifically, that they would come in under a defined-contribution system. And we did that knowing that we would give up some money that the state distributes to municipalities under what’s known as the “185 program,” where insurance premium tax dollars the state collects from municipalities are sent back to qualifying police pension plans in those municipalities to help fund additional pension benefits. We felt like it was worth forgoing those dollars to make the changes.

In the new police defined-contribution plan that started in 2010, the village would match employee contributions up to 5%. And we recently just did another contract that also provides an automatic employer contribution of 3%. So back in 2007 before the reforms were enacted, we were contributing at a level of roughly 26% of payroll, and now we can predict where we’re going to be and our exposure is no greater than 8%, which is the 3% automatic contribution and our employer match up to 5%. Our police and fire workers also get social security.

We negotiated changes to our firefighters’ contract at roughly the same time. Again, we did not change the benefit levels for the current employees at that time, and instead of moving them to a defined-contribution plan like the one for police, we chose to move to a different pension multiplier. For the new employees that come into the fire department, the multiplier went from 3.3 down to 2, which is the same multiplier that our general employees have.

We focused on public safety and not our general employees because the contribution rates and the multipliers for the public safety pensions are significantly different than those for the general employees. And in our general employee defined-benefit plan, the funded ratio was 105% at the time we did our reforms in 2010, and the return on investment assumptions were being met, so we didn’t feel that reforms to that system needed to be done.

But in the public safety systems, there were unfunded liabilities. And the cost to continue to provide those kinds of benefits well into the future just seemed to be multiplying.

Gilroy: What results have you seen thus far since your reforms went into effect in October 2010?

Couzzo: On the police side, our reforms have exceeded our expectations in realizing a significant reduction in the cost to the taxpayer to provide pensions to the police. The reforms have been in place for a little over four years, and the funding ratio for the police pension plan has gone from somewhere in the mid-80’s in 2010 to what the latest actuarial statement shows as almost 132% funded now and projected to rise to 134%. So there’s been a significant change in the funded status, and the contribution rates for the employer as a percentage of payroll have dropped from around the low-20% range to around 11% now.

On the fire side, it’s a little longer of a process, but in the years to come we’re going to see a similar improvement, and in the future we’re not going to need to be funding their pensions at the rates that we were previously and at the rates that many other jurisdictions in Florida are facing.

And overall we’re going to be able to assure workers that they are going to be able to receive the pension that was agreed upon at the time of their employment.

Check out the full interview here. Other articles featured in the Innovators in Action 2015 series are available here.

Leonard Gilroy is vice president of government reform at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He also serves as senior managing director of the Pension Integrity Project at Reason Foundation, which assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.