Freeze & 40: A Plan for Pension Reform in Jacksonville

The following proposal to reform Jacksonville’s Police and Fire Pension Fund is authored and humbly submitted by a team of four Jacksonville residents who desire the best for our city’s future. We consider this reform proposal to be a working draft and offer it to the public to be chiseled and polished by our fellow Jacksonville citizens, as well as interested parties across Florida and the nation.

We are grateful to the Stanford Graduate School of Business for offering the open online course, “The Finance of Retirement and Pensions,” which attracted over 44,000 participants from around the world. The course equipped us with the knowledge and tools to assess the Jacksonville Police and Fire Pension Fund and propose reforms. We are honored our proposal was one of five from across the nation to be hand-selected as having the most promising ideas to address the trillions of dollars in unfunded pension liabilities that are threatening the financial future of many U.S. state and local governments. As described within, we believe the condition of the Jacksonville Police and Fire Fund is the greatest threat to the short- and long-term financial health of our city government and Jacksonville’s quality of life. It is our hope the insights and reforms in this report can help reposition and strengthen Jacksonville’s financial future.

We would appreciate your feedback to make these reform proposals stronger. Please send your
comments to jaxpensionreform@yahoo.com.

Respectfully,

Tom Majdanics
Michael Yang
Christopher Owens
Felisa Franklin

Page 1: Guiding Principles of Pension Reform

Page 2: Police & Fire Pension Economics 101 – Summing the Benefits

Page 3: Finding The Source of the $1.7 Billion Unfunded Liability

Page 4: Freeze & 40: Piecing Together a Joint Pension Reform Solution

Page 5: Summary Conclusions, Sources, Exhibits

Part 1 - Introduction

The condition of the Jacksonville Police and Fire Pension Fund (“PFPF” or “the Fund”) is presently the greatest threat to the short- and long-term financial health of our city government and Jacksonville’s future quality of life.

The size and depth of the PFPF’s challenges are daunting.  While the Fund has only 5,000 combined active employees and retirees, its $1.7 billion Unfunded Accrued Actuarial Liability (“unfunded liability”) is nearly twice the size of Jacksonville’s general revenue fund.  Today, $148 million - nearly 15% of Jacksonville’s general fund budget - is allocated to the Fund alone for current and future pension benefits. The $148 million allocation to the PFPF exceeds the combined budget for city-wide Public Works, Parks and Recreation, Public Libraries, the Jacksonville Children’s Commission, Neighborhoods Department, Economic and Downtown Development, Special Events, the Cultural Council, Public Service Grants, and Veteran’s Services.

In its most recent filing, the PFPF reported $1.1 billion in assets and $2.8 billion in liabilities, a funding level of 39%. This funding level is dangerously far below the recommended  80% threshold suggested by the U.S. Government Accountability Office.  It ranks among the very worst pension plans not only in Florida but also the nation.  Despite claims that the city consistently met its annual required contribution to the PFPF, the Fund’s unfunded liability has skyrocketed from $125 million in 2000 to its current level of $1.7 billion – an increase of over $100 million per year.  We are now faced with addressing a $1.7 billion burden, which equates to $2,000 for every man, woman, and child in the city.

Given the size and scope of the problem, taxpayers must follow the pension situation with the attention it demands.  It is our duty as citizens, bearing a share in our city’s responsibilities, to form a clear opinion and make up our minds on what ought to be done.  In the past decade, things have gone from bad to worse.  Ten years ago, the taxpayer-funded allocations to the PFPF totaled $22 million. Four years ago, it was $81 million.  Today, it is $148 million.  The future points to even higher allocations to the Fund.

Most recently, the increased allocation to address the PFPF’s unfunded liability resulted in the city’s largest one-year property tax millage increase in a generation.  As a result, Duval County property tax rates are now at its highest levels since 1991. Current examples like Detroit or Stockton (California) illustrate the path ahead for Jacksonville if existing trends continue – a path littered with higher taxes, large cuts to city services including public safety, and/or financial bankruptcy.

This historic tax increase is only the first sip, the first taste of a bitter cup which will be offered annually to the citizens of Jacksonville – unless action is taken toward reform.

While the problem is daunting, it is fixable.  There is a way forward.  A principled and fair solution can be crafted which preserves financial peace of mind of retire

Part 2 - Guiding Principles of Pension Reform

The following proposal is authored and humbly submitted by four Jacksonville residents who desire the best for our city’s future.  We consider this reform proposal to be a working draft and offer it to the public to be chiseled and sharpened by our fellow Jacksonville citizens as well as interested parties across Florida and the nation.  Our reforms have been crafted in alignment with six guiding principles:

1.  50-50 shared responsibility.  Responsibility for the PFPF’s $1.7 billion unfunded liability shall be equally shared between taxpayers and all pension fund members (current employees and retirees).  Through acts of commission and omission, this daunting problem was jointly created and has placed our city’s financial health and future quality of life in jeopardy.  Only jointly can we solve the problem.  Current and future taxpayers cannot shoulder the burden alone.

2.  No new taxes.  No new tax increases or other revenue charges – including higher utility rates or sales of taxpayer-owned city land or assets – shall be enacted to pay off the $1.7 billion unfunded liability.  As noted above, Jacksonville taxpayers have just borne the largest one-year property tax millage increase in a generation, resulting in the highest tax rates in over 20 years. Another large tax increase will place Jacksonville on the path to competitive bankruptcy – where the relationship between Jacksonville’s tax burden and its offering of public goods and services to taxpayers will be grossly uncompetitive versus surrounding counties and peer Southeastern cities.  Incremental tax increases will correspondingly reduce any remaining advantage Jacksonville possesses to attract new business investment and grow our city economy.  In addition, new taxes will crowd out taxpayer capacity to fund improvements to roads, public libraries, education, parks, veteran services, or downtown development. Ironically, tax increases to pay for police and fire retiree benefits will negatively impact our ability to fund today’s police and fire departments, increase the size of the police force, or add fire stations.

3.  Preserve retiree peace of mind.  Current retirees, particularly those aged 65 or greater with limited benefits, must retain peace of mind in their retirement years.

4.  Continue to attract and retain top quality talent to our city’s police and fire departments. Reforms to our pension system cannot come at the expense of a quality public safety workforce and the public safety services provided to citizens.

5.  Provide clear transparency of retiree benefits to all citizens. Pension benefits are complex to dissect and scrutinize for the average Jacksonville taxpayer.  Our civic ability to monitor the compensation levels of our public safety workforce is hampered by a convoluted maze of benefit multipliers, rate of return projections, life expectancy assumptions, cost of living adjustments, and actuarial analyses.  Reform must be accompanied by changes to public retirement benefits that allow citizens to clearly and easily comprehend how their tax dollars are committed.

6.  Guarantee that another pension financial calamity will never be experienced again.  It took multiple failures and oversights over multiple years to build the $1.7 billion liability we must now jointly address.  Reforms must be structured such that taxpayers have confidence that this portion of our history will never repeat itself.