BRADENTON, Fla. — Two major Southeast governments announced plans Tuesday to join the popular trend of adjusting or eliminating defined-benefit pension plans that they deem unsustainable.
Atlanta Mayor Kasim Reed pledged to push the City Council to approve pension reforms before the new fiscal year begins July 1, while Florida Gov. Rick Scott, a Republican who took office Jan. 4, promised changes in the state’s pension system.
A defined-benefit plan promises a specified monthly benefit at retirement, which may be the pledge of an exact dollar amount or be calculated through a formula that considers factors such as salary and years of service.
“The current pension system is not working for anyone — the city, its citizens, [or] its employees,” Reed said.
The mayor acted after a study panel presented ways to reduce pension costs, which are nearly 20% of the city’s budget with a long-term unfunded accrued liability of $1.5 billion.
The reforms outlined by the study panel included eliminating the defined-benefit pension plan for grandfathered employees, requiring greater employee contributions for pensions, increasing retirement ages, and changing cost-of-living adjustments and the years of service employees need to become vested.
Pension changes would only affect future benefits. Benefits already accrued would remain intact, the panel said.
Atlanta, which operates the world’s busiest airport, has 5,977 people enrolled in its three pension plans for general employees, police, and firefighters. Most of them are in a defined-benefit plan, according to the 2010 comprehensive annual financial report.
“If no action is taken, the city’s financial position will weaken and the quality of city-provided services will slip,” Reed said.
Pension liabilities have already contributed to downgrades of Atlanta’s general obligation rating.
Standard & Poor’s cited ongoing pension pressures when it placed a negative outlook on the city’s A rating in October. The agency cited the pension among the reasons for downgrading the GO rating to A from AA-minus in early 2009.
Moody’s Investors Service cited similar concerns when it downgraded Atlanta to A1 from Aa3 and placed a negative outlook on credit in 2009. Moody’s upgraded the city to Aa2 last year during its ratings recalibration. Fitch Ratings does not cover Atlanta’s GO credits.
“It’s important to tackle this challenge immediately to reverse the growth in pension obligations the city doesn’t have the money to pay for,” Reed said. “An oversized promise that isn’t properly funded is of no use to anyone.”
The various options for reforming Atlanta’s pension system now go before the City Council, where changes will require a two-thirds vote of support.
Though it wasn’t part of the study to review other post-employment benefits, panelists recommended hiring a professional firm to tackle changes to reduce the city’s $1.1 billion unfunded OPEB liability.
The panel also recommended changes to investment practices after a cursory review found that “investment performance is at best average for all three plans.” One reason for average performance is that the pension plans have about 50 fund managers, which the panel felt was a high number.
The 14-member pension review panel included representatives of Atlanta’s three major unions covering general employees, police, and firefighters.
In Florida, the government retirement system covers state, local, special district, and school employees. The pension fund was valued at $126 billion and was 87.9% funded as of last July. It covers more than 650,000 workers but state employees do not contribute any wages.
Calling it a “modernization” plan, Scott wants employees to contribute 5% of their salaries and to require new employees to enroll in investment plans similar to the 401(k) plan used in the private sector.
Scott said his proposed changes would save the state $2.8 billion over two years, though he did not provide details on how the savings were calculated.
“We must bring Florida in line with the private sector and nearly every other state in the country by requiring government workers to contribute towards their own retirement,” Scott said.
In addition to changing the contribution requirement and creating a new pension plan for future employees, Scott said he wants to close the deferred retirement option program to new participants starting July 1. DROP enabled older workers to retire and draw a pension, then return to work for the state.
Scott said the cost-of-living adjustment on retirement benefits would be eliminated for all service earned after July 1 under his proposal. Current retirees would not be affected. Scott is likely to get support for some of his proposed pension changes in the Republican-controlled Legislature.
Lawmakers have already pre-filed a number of bills proposing their own changes to Florida’s retirement system and they are currently undergoing committee review. The regular legislative session starts March 8.
Scott’s proposal was called “punitive” by Doug Martin, spokesman for the Florida Public Employees Council 79, which represents 110,000 state and local government employees. He said actuarial studies by the Legislature last year showed that moving to a plan like the one Scott has suggested would actually increase costs for quite some time.
Scott held no other political office before his election, and took office Jan. 4. In addition to pension system changes, he is proposing to merge a number of state agencies and privatize some of them.
The new governor’s first budget is due Monday. Florida is facing a more than $3.5 billion budget gap in 2012.
“Government workers, like private-sector employees, deserve the opportunity to save for the future, but taxpayers shouldn’t be asked to foot that bill alone,” Scott said.