In 2010, the Village of Tequesta, Florida-a small, incorporated community of nearly 6,000 residents in northern Palm Beach County-achieved something that would make many larger municipalities envious: it reformed its public safety defined-benefit retirement plans to put them on a more financially sustainable path.
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. As a result, the legacy police defined-benefit pension system has gone from underfunded to significantly overfunded, new police officers benefit from a more individualized and portable retirement plan that is less costly for taxpayers, and the firefighter pension plan is on a sustainable path.
The negotiating team-led by Tequesta Village Manager Michael Couzzo and also consisting of Finance Director JoAnn Forsythe and Human Resources Director Merlene Reid-successfully negotiated these reforms during the collective bargaining process. Couzzo recently sat down for an interview with Reason Foundation Director of Government Reform Leonard Gilroy to discuss the reforms enacted, the resulting benefits and more.
Leonard Gilroy, Reason Foundation: What prompted the push for pension reform in Tequesta?
Michael Couzzo, Village Manager, Tequesta, Florida: One of our biggest concerns was the ability to sustain the plan as a defined-benefit plan, given the fluctuations in the market, and the costs to the Village to provide those benefits to its employees. It was our desire to continue to provide those benefits as they were agreed upon at the time of employment.
We were starting to recognize that the unfunded liability in our police pension system was increasing over the years, which caused some concern for us. We wanted to make sure that we would be able to fund the promised benefits and not be so heavily reliant upon the swings in the market.
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.
Gilroy: To what do you attribute the dramatic reversal in the funded status of the police pension system since the Village Council enacted the reforms in 2010?
Couzzo: It was a combination of factors. We certainly didn’t predict that that turnaround would happen as soon as it would happen, but there were some changes in personnel. We’ve only got about 20 sworn officers to begin with, and we had a few people retire and a few others relocate-about eight total-so when you had the people replacing them coming into the new defined-contribution plan, that made all the difference in the world. Now when the actuary does their study, some of the people they had projected being there for 25 years are now gone, which had a big impact.
Gilroy: How did you build the case for reform?
Couzzo: We knew that we were changing what was near and dear to the unions, but we made reasonable arguments that helped us get it done. We made it clear that the unknowns and fluctuations in the marketplace potentially jeopardized our ability to provide our public safety employees what we agreed upon when they were hired. And there was also the inability to continue to fund the increases that we predicted were going to come. Given the level of benefits we were providing, the defined-benefit systems were in need of modification.
Fortunately, we have a good rapport with our unions here, and once we laid out the situation, they understood it and realized that it was time to make the changes. And the current workers were kept intact, and their benefits were better insured, so to speak, as a result of the changes. Everyone saw the handwriting on the wall that something needed to change in order to be able to pay for those benefits down the road.
There were some concerns raised that we might be selling out the future employees, but we felt like in the long run, we were actually helping them because somewhere down the line they would have had to find a mechanism with which to fund retirement benefits. In some jurisdictions, that means letting go of law enforcement personnel, for example, in order to fund their existing pension plans. That doesn’t help workers down the road, and it certainly doesn’t help their communities.
Gilroy: How do you think the reforms will affect your ability to attract and retain future workers?
Couzzo: That argument was raised, and there’s a potential for that to happen, but we really haven’t seen that here. Agencies like ours always have to be thinking about how to make themselves competitive in order to attract highly qualified personnel. You may have to give them a better salary structure, and if you’re paying that up front, it doesn’t have the same impact on the bottom line that a pension does. And we have had pay increases for our public safety workers, and during the entire recession we did not have one layoff.
Also, most people in today’s society are going to have seven or eight jobs in their careers. So the old notion of “cradle to grave” employment is a thing of the past. One of the things that I emphasized was that given the fact that you may not be here forever, the defined-contribution plan gives you the flexibility of managing your money on your own. And in a defined-benefit system, your retirement benefit isn’t really going to be affected by increases in the market, which it would be in a defined-contribution plan. And I think that a lot of people would rather manage their own money. If that’s explained correctly, people will be willing to listen to that argument.
Gilroy: What are some of the lessons learned from your pension reform efforts that you would offer to peers in other jurisdictions contemplating similar moves?
Couzzo: I think reform is essential and is achievable if you maintain a good relationship with the affected parties and collective bargaining units. That’s going to go a long way towards getting you there. And honesty is really important. You have to show them the numbers and show them that you’re not out to hurt them. They have to be part of the process.
What we’ve done for the residents is taken a lot of risk away by going to a defined-contribution plan. We know exactly what to expect, and we can predict what the costs are going to be. The costs don’t vacillate with the market.
And even with our defined-benefit plan for police, now that we’ve made the reforms, the plan is so strong now that it can easily weather any future adverse market conditions and still provide the benefits for the employee who has possibly dedicated their whole working life to us. Retirement is important, and people have a right to retire with decency, and it’s incumbent upon us to provide that for them. They’re out there ensuring public safety, so we have to ensure that their needs are being met down the road.
Michael R. Couzzo, Jr., is the village manager of Tequesta, Florida and has over 30 years experience in local government covering contract negotiations, finance and budgetary oversight, public works, planning and development, parks and recreation, utilities, engineering and public safety. Couzzo has a B.A. in Professional Studies and an M.P.A. in Public Administration. He has been with the Village of Tequesta for 14 years.
Along with Couzzo, the other members of the team that negotiated the pension reforms discussed in this interview included Village Finance Director JoAnn Forsythe, CPA, who has over 25 years experience in governmental accounting, auditing and management, and Human Resources Director Merlene Reid, who has over 20 years experience in human resources, contract negotiations and risk management.
The Village of Tequesta is located in northeast Palm Beach County with an estimated 6,000 residents. Tequesta was incorporated in 1957, occupies 2.28 square miles (1,456 acres), and is surrounded by the northwest fork of the Loxahatchee River, the intracoastal waterway, Jonathan Dickinson State Preserve and the Atlantic Ocean. The Village of Tequesta maintains a council-manager form of government, currently led by Mayor Abby Brennan, Vice-Mayor Vince Arena, and Council Members Tom Paterno, Steve Okun and Frank D’Ambra.
Other articles in Reason Foundation’s Innovators in Action 2015 series are available online here.