The pension crisis is bearing down hard on the City of Jacksonville, much like a Category 3 storm that has the potential for increasing wind speed. With a current unfunded liability in excess of $1 billion, the problem has now become an issue so large our elected officials can no longer ignore it.
The City Council formed a Special Pension Committee to make recommendations as to actions the City can take to deal with the deepening issue. Their report, which was due to the Council President on June 2, has been pushed back to June 30. This extension will coincide with the incoming Council Presidency of Richard Clark, at which point he will have the option to determine whether or not the committee should continue if they have not yet finished up their report.
Not surprisingly, Jacksonville is not alone. A website entitled The Pension Tsunami gives daily headlines of cities and states dealing with pension problems from around the country. Different governments are dealing with the problems in different ways. One Florida city, Pensacola, made the decision to move all of their general employees to the Florida Retirement System. This change, which went into effect on June 18, 2007, resulted in a reduction in city contributions from 50% to 9.85% for the regular class employees who are now part of the FRS.
While the FRS may be an option for Jacksonville’s general employees as well, we do not have the option of folding the police and fireman’s pension funds in the FRS because of a number of reasons, including the fact that the City receives money from both the state and federal government for the funds. For the Police and Fire Pension Fund, the City contributes money, the members contribute some and a small contribution is also derived from court fines. Additionally, there is roughly $10 million that is contributed each year from the state. The bulk of the money that is paid out—about 85%—comes from earnings. Jacksonville has guaranteed an 8.4% return, something that is not feasible given the current market conditions. (The Florida Retirement System, as an aside, guarantees a return of 6.4%.)
In January, JCCI recognized the reality that the city’s needs were unsustainable at an 8.48 millage rate and suggested several steps the city could take in righting the ship. Among those were:
• Real estate transfers—which would help meet the City’s obligations and create jobs to
renovate the real estate at the same time.
• Overfund in good years to create a cushion for bad stock market years.
• Make pension contributions on DROP participants
• Strengthen the Ordinance Code to 90% funded before benefits can be enhanced for
both pension funds.
• Greater discretion in investment options.
• Refinance the unfunded liability by stretching out obligation and/or using POB’s
Another solution is to, once again, revisit what the city is promising to new employees. The city’s new defined contribution pension plan, which is not as good as a defined benefit plan, is still guaranteeing a return of 7%—a full 1% above most defined contribution plans.
The Police and Fire Pension Fund has also suggested several solutions, including turning over parts of Cecil Field, the Jacksonville Shipyards and building future fire stations, which would then be leased back to the City.
It’s important to realize that while real estate may be part of the solution, it will not solve all of Jacksonville’s pension problems. For starters, real estate is not a guaranteed investment. In fact, the California Public Employees’ Retirement System has seen their real estate portfolio shrink by $3 billion over the past few months. They now stand to lose the entirety of a $922 million investment in a 20,000 home development that failed.
The solution, regardless of what it is, will not be painless and will likely require concessions from both the unions and the city—meaning the taxpayers. Perhaps the most important and pressing matter is the acknowledgement from all involved parties that the city is truly on the brink of a crisis with its pension funds and the time to act is now. If Council members haven’t yet gotten that message, they may learn it the hard way via a voter revolt in 2011.