Florida Cities Need to Fix Pension 'Leaky Roofs'

A homeowner with a leaky roof may be better off than one whose kitchen is on fire. But he still has a serious problem.

That’s something public policymakers – and everyday citizens – may want to remember as they try to make sense of the emerging debate over pension reform in the state of Florida.

The AFL-CIO recently held a major press conference in Tallahassee designed to minimize the need for pension reform legislation. The union leaders argued – correctly – that Florida’s state pensions are in better shape than those in California, Illinois, New Jersey, and several other states in financial crisis.

But just because Florida’s state pension problems aren’t (yet) a three-alarm fire doesn’t mean that many cities in the Sunshine State can afford to ignore their extremely leaky roofs. Because a number of municipal pension plans in Florida are suffering from the very sorts of mismanagement that have plagued state plans elsewhere. And some city pensions are so seriously underfunded that they will go belly up unless public policymakers step in and take bold action.

According to economist Randall Holcombe of Florida State University, government pension programs get into financial trouble because politicians often make promises today that have to be paid for by taxpayers tomorrow.

“There is always a temptation on the part of government officials to promise increased compensation in the form of unfunded pension benefits, because by doing so they can push the present cost of government into the future,” Dr. Holcombe notes in a new report of The James Madison Institute. “Generous pension benefits promised a decade or more ago are now placing significant burdens on government budgets.”

Or, as they say in Marianna, the chickens are coming home to roost.

Dr. Holcombe believes there are a number of ways that city governments can curb pension spending. Lowering the projected rate of return on pension fund investments would be a start since “taxpayers are left with the responsibility of making up the difference” when overly-optimistic scenarios don’t pan out.

And putting an end to pre-retirement “spiking” would also help. Spiking is the all-too-common practice in which government employees work as much overtime as possible in their final year of employment so that their rest-of-life pension benefits are based on an artificially-high “spike” in final-year pay.

But the most significant – and only permanent – means of addressing pension problems would be for governments to begin replacing their “defined benefit” plans with 401k-style “defined contribution” plans. Dr. Holcombe says this “would ensure that the present costs of government would be funded in present budgets.”

And it means that politicians would no longer be able to offer overly-generous pension benefits on the backs of the “future poor” (tomorrow’s taxpayers).

Several Florida municipalities – such as Fort Lauderdale and Pembroke Pines – have already switched to “defined-contribution” plans (following the well-established trend in the private sector away from General-Motors-style “defined benefit” plans). And Sen. Jeremy Ring, (D-Margate), believes the state government needs to look at ways to facilitate pension reform at the municipal level – especially since some states have had their credit ratings adversely affected by refusing to rescue local pension plans going bankrupt.

Ring plans to advance pension reform legislation through the Senate committee he chairs. And Ring appears to have little patience for the Pollyannas who pooh-pooh pension problems in the state. “They can either come to the table and be part of the solution and offer suggestions or they can simply be obstructionist and say the system is fine and doesn’t need reform and they won’t be welcome at the table,” Ring recently told several state newspapers.

Floridians should be glad that its state pension problems aren’t (yet) as bad as California’s. But Florida taxpayers should also be glad that there are public officials heeding Dr. Holcombe’s warnings and championing the need for reform.

Because even though a homeowner with a leaky roof may be better off than one whose kitchen is on fire, he still has a serious problem.

William Mattox is a resident fellow at The James Madison Institute, a public policy think tank based in Tallahassee.