Yesterday, Public Information Officer Derek Cosson sent out the following “open letter” by Mayor Ashton Hayward:
In the summer of 2010, I began my campaign for Mayor by talking about how our City could, and should, be competing for jobs, talent, investment, and recognition on the national and international stage. Part of that conversation included getting our financial house in order, specifically regarding our pension debt. I talked about countries like Spain, Greece, and Ireland, where the financial meltdown combined with long-term pension liabilities threatened to cripple those countries. As we now see, that crisis happened, and Europe is still trying to figure out how to survive it. I don’t want us to get to that point as a City, so I am taking on this issue now.
Pensacola is no stranger to pension problems. For at least the past decade, previous City Councils have wrestled with the rising costs of the old, defined-benefit pension plan. However, we can no longer sustain the continued increases in our yearly pension costs and mounting pension liability. Since 2003, our yearly pension expense has increased five-fold from $3 million to 16.4 million, and our total pension debt has increased by over 50% to $116.7 million. If you calculate these numbers using actual market performance for the past ten years rather than the existing investment assumptions, those numbers almost double.
To put these numbers in perspective, in the upcoming budget year if no changes are made, we will spend $16.4 million for the pension benefits of 1,491 active and retired employees. Our projected property tax revenue for this upcoming fiscal year will be around $13 million. We are on track to spend more on pensions than our entire ad valorem revenues. This is just not sustainable. So it is time to act.
Soon, I will be recommending a plan to stop this financial hemorrhaging. That plan will need to be negotiated with city unions, and the City Council will need to approve that plan as well. It will not be an easy task, politically or emotionally. I have seen and experienced in the private sector, first-hand, the type of challenge we are facing. I understand and am sensitive to the fact that retirement is a serious commitment to our dedicated employees. I know that countless life decisions have been made based on these commitments. However, the cost of not acting now is one we literally cannot afford, and I want to share with you – citizens and employees alike – what my priorities are in this process.
First, we must stop the bleeding. We cannot continue applying band-aid solutions when we need major surgery. Let’s fix the problem, not the symptom. We cannot sustain continued increases to our yearly pension payments. This will be a tough job, but now is the time for us to stop delaying and start acting. Failing to act now would threaten our bond rating, cause us to re-examine our ad valorem tax rates and current staffing and levels of service. Those are outcomes which I believe are unacceptable.
Second, I want this process to be fair to everyone, including taxpayers, citizens, and employees. Specifically, I want to fix this problem without resorting to layoffs, and every employee should receive the retirement funds he or she has already earned. But fair also means that the City provides a reasonable, adequate retirement benefit – consistent with the private sector – which our taxpayers can afford.
Third, this process should be transparent. I am making every effort, from employee meetings with my Pension Committee Chair, to public communications like this one, to ongoing discussions with City Council, union and employee representatives, to ensure that we are communicating the financial realities of our current and future situation. I am also hoping that any annual savings we can find through this pension reform will allow us another look at our employee compensation program. As we ask our employees to accept changes to their retirement benefits, it’s only fair that we explore the opportunity to improve current compensation packages.
I believe that if we are transparent, fair, and focused on real solutions to our pension problem, we can and will find a way to protect the financial future of both our City and our employees.
The coming weeks and months will be challenging for all of us – citizens, employees, elected leaders, and union representatives. I know, though, that together, we can meet this challenge. Our circumstances demand that we act – and the taxpayers whom we serve should expect nothing less from us.
Ashton J. Hayward
Mayor of Pensacola
There’s no question that city pensions are the biggest problem facing the city budget, and that a failure to solve this problem could hurt our bond rating. The problem is there just aren’t any easy answers left. The biggest single step was already taken five years ago, when the city closed the general plan to new hires and encouraged general plan participants to convert to the Florida Retirement System (FRS).
Last year Mayor Hayward appointed an advisory committee to find options for solving the pension problem. Chaired by David Penzone with members Bill Rankin, Rick Fountain, Richard Grover, Kim Aguiar, Rodney Eagerton, and John Peacock, the Mayor’s Pension Advisory Committee delivered their final report last October. Among the committee’s recommendations:
- Change the definition of “Pensionable Income.”
- Lower the retirement multiplier used to calculate pension benefits and/or place a lower cap on the maximum replacement value of “final average earnings.”
- Change how “Final Average Earnings” are calculated.
- Increase employee contributions to the Plan.
- Modify the Cost of Living Adjustment (COLA) factor.
- Extend the “Normal” retirement age and years of service requirement.
- Extend the “Early” retirement age and years of service requirement.
- Increase the reduction factors for early retirement.
- Increase the vesting period.
- Change the Survivor benefit allowance.
- Change the DROP interest rate and COLA.
- Close existing defined benefit plans to new employees.
- Freeze existing plan benefits.
Hayward has taken off the table any solution that would affect “already earned” benefits. Pretty much all of the remaining options would require major cuts to the police and fire plans — the “third rail” of local politics — and would therefore require collective bargaining with their respective unions, both of which supported Hayward in the 2010 elections.