VERO BEACH — Before department heads can begin working on the 2010-2011 budget for the City of Vero Beach, they need to know how much to figure in for pension contributions. How the city will manage pension benefits going forward is a complex issue that the city council will decide in the spring.
During last week’s meeting, council members listened to a presentation by actuary Steve Palmquist, whose basic message was that there are no easy or cheap answers.
“The City of Vero Beach is not alone in feeling the confluence of several factors over the years that have made the costs of its pension plan go up,” Palmquist said.
What the city has to pay into the pension fund varies each year because the city has what is called a Defined Benefit Plan, which means that each of the 204 vested employees is guaranteed a certain amount when they retire and the city bears all the risk of market downturns.
“In the eighties and nineties, pension costs were stable or declining because the market was good, but unfortunately, this decade has not been that way,” Palmquist said.
One problem is that the plan is based on the assumption of a very optimistic 8 percent annual return. When the stocks, bonds and funds in which the pension monies are invested net greater than 8 percent per year, the city benefits. When the market returns less than 8 percent, the city has to pick up the rest, according to Palmquist.
Employees contribute 2.25 percent of base salary into the plan. The city’s contribution, to catch up from the hit taken from investment losses, has risen to about 20 percent of payroll expenses for covered individuals. Investment losses in 2008 alone amounted to nearly $9 million. In the 1990s, the city’s contribution was about 8.5 percent.
Under the current plan, a 25-year employee earning an average of $44,000 over the last five years of employment would receive $27,750 annually for the rest of his or her life. That breaks down to $2,063 per month, which is subject to a 1 percent cost of living increase each year.
Options on the table include increasing the employee contribution to 3 percent, increasing the penalty for early retirement to 5 percent, to going to a whole new plan. The new plan would be a Defined Contribution Plan, which would shift the risk of market downturns to the employees, leaving the city on the hook for a set amount. Most cities with Defined Contribution Plans contribute between 6 percent and 12 percent of the employees’ base pay. The other option is to join the Florida Retirement System, which has taken devastating hits recently from bad investments. The main downside of entering the FRS is that the city could never exit the system.
Leaving the system as it is would increase the city’s contribution to about 26 percent over the next eight years, with the contribution leveling off to about 16 percent by 2014. This increase, combined with reduced property tax revenues and declining state tax-sharing due to the economy, would force the city to make some tough staffing decisions and to also implement further cost-cutting measures.
No matter what changes the city makes to the system, the benefits of employees who have already retired would remain the same. The city could make changes that would affect current employees or only new hires, but changing only new hire policies would result in negligible savings in the long-term. A major overhaul of the system could save the taxpayers up to $1 million over the next 15 years.
Though Councilman Tom White stated that “we have to do a lot of research on this,” City Manager Jim Gabbard reminded the council that they don’t have forever to study the issue.
“In the next two to three months, we need to be in a position to make some decisions so we can do a budget,” Gabbard said.
