2011 Pension Reform Proposals

1. 2011 Pension Reform Proposals

2. General Information • 410 municipalities (cities, towns, villages) • No requirement to provide a pension or retirement program for employees • Most do provide either voluntarily or through collective bargaining

3. General Information • Municipal employees have the right to collectively bargain for retirement benefits (Florida Supreme Court case, City of Tallahassee v. Public Employees Relations Commission, 410 S2d 487 (Fla. 1982)) • Pensions and pension benefit increases must be funded on a sound actuarial basis (Article X, Section 14, Florida Constitution, and Part VII, Chapter 112, Florida Statutes)

4. General Information Options for Municipal Pension or Retirement Programs • Defined Benefit Plan • Defined Contribution Plan • Chapter 175 (Firefighter) or Chapter 185 (Police) Defined Benefit Plan • Deferred Compensation Plan • Florida Retirement System • Any Combination of the Above

5. General Information • There are approximately 450 different municipal defined benefit pension plans (some cities have more than 1: general, police, fire, etc.) • The total asset market value is approximately $23 billion with approximately 100,000 active employees and 60,000 retirees/beneficiaries. • (This information is from 2009 and is the most current comprehensive information available).

6. Municipalities in Florida Retirement System • Voluntary participation since 1970 • Approximately 150 municipalities participate in various membership classes, but make up less than 5% of the participants/members of the FRS • FRS membership classes include: Special Risk (Police and Fire), General Employees, Elected Officials, Senior Management

7. Municipalities in Florida Retirement System • Once in, current and future employees are compulsory members • 1996 “opt-out” of FRS authorized for new employees only – about 50 municipalities opted out • Issues: mandatory contribution rates; legislature controls all benefit levels and participation requirements.

8. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1939 the Municipal Firefighters’ Pension Fund and in 1953 the Municipal Police Officers’ Pension Fund were created by the legislature. • Insurance premium tax revenues provided to cities to encourage the creation of defined benefit pensions for city firefighters and police officers.

9. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • From the 1950s through the 1970s, the legislature (and police and fire unions) attempted to direct how insurance premium tax revenues could be used, directing cities to provide minimum funding for plans in order to continue receiving premium tax revenues. • Cities receiving insurance premium tax revenues also came under the administrative control of the Department of Insurance, which required certain annual and actuarial reporting.

10. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1986, the legislature changed the composition of a plan’s board of trustees to include five members: two members selected by the city, two members selected by the plan participants/employees, and the 5th member selected by the other four.

11. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1986, the legislature completely revised Chapters 175 and 185, Florida Statutes, by raising the minimum benefits levels and establishing minimum standards for a “uniform retirement system” for police officers and firefighters. • Local governments challenged the constitutionality of the 1986 amendments, but the courts determined that the 1986 law did not violate the constitution. City of Orlando v. Department of Insurance, 528 So.2d 468 (Fla.1st DCA 1988).

12. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1986, the state agency charged with administering 175 and 185 (then the Department of Insurance) proposed a number of new rules to implement the 1986 legislation. • The rules essentially mandated that all the statutory minimum requirements must be included in all city plans.

13. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • The Florida League of Cities along with a number of individual cities challenged the rules. • The courts determined that the Department of Insurance had exceeded its authority, holding that the proposed rules were invalid and did not preempt municipal home rule powers to set benefit levels. Florida League of Cities v. Department of Insurance, 540 So. 2d 850 (Fla. 1st DCA 1989)

14. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1988, the legislature lowered the percentage charge of the tax on insurance premiums used to fund the plans (Fire went from 2% to 1.85%, and Police went from 1% to .85%).

15. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1995, the Division of Retirement withheld insurance premium tax revenues from a number of cities, asserting the plans did not comply with various provisions of Chapters 175 and 185. • The cities successfully challenged the Division’s actions and the Division was ordered to release the premium tax monies and pay the cities’ attorney’s fees.

16. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In 1996, the Division of Retirement supported legislation developed by the police and fire unions to totally rewrite Chapters 175 and 185. Legislation was filed but did not pass in 1996 and 1997. • In 1998, the bill passed but was vetoed by Governor Chiles because of internal inconsistencies in the bill and its fiscal impact on cities.

17. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • Despite continued heavy opposition from cities, the bill was revised and passed as the first bill in the 1999 legislative session, was signed by Governor Bush on March 12, 1999 (not even two weeks into session), and was codified as Chapter 99-1, Laws of Florida.

18. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • Prior to the 1999 legislation, cities were largely free to bargain with local police and fire unions, or provide for their non-unionized police and firefighters, the pension benefits that best fit the priorities and needs of the city and its police officers and firefighters.

19. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • The 1999 law made virtually all provisions of Chapters 175 and 185 expressly applicable to all participating police and firefighter pension plans. • All plans were required to meet the specific “minimum benefit” standards.

20. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • The requirement to provide “extra benefits.” • The 1999 law substantially revised how cities could use insurance premium tax revenues. • Remember the original intent of the tax revenue was to encourage cities to create and fund pension plans for their police officers and firefighters.

21. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • The 1999 law turned this revenue source on its head and provided that additional insurance premium tax revenues over a base amount must be used to provide additional or “extra” benefits in firefighter and police officer plans. • The legislature further defined the term “extra benefits” to mean benefits in addition to those given to general employees and in existence in a pension plan after March 12, 1999

22. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • What this means is if a city provided a new pension benefit under its firefighter or police officer pension plan on or before March 11, 1999, the city could not use additional insurance premium tax revenue to pay for the benefit; however, if the city had provided the exact same benefit on or after March 13, 1999, it could have used additional insurance premium tax revenues to pay for the benefit. • This arbitrary date punishes cities that offered heightened pension benefits to their firefighters and police officers prior to March 12, 1999.

23. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • In aggregate numbers, it is estimated that cities have had to provide over $400 million in “extra pension benefits” to firefighters and police officers since March 12, 1999. $400 million is the amount of additional insurance premium tax revenues over the stated base amount. • Stated differently, city tax payers have had to fund $400 million in pension costs while at the same time an additional $400 million in tax proceeds was required to be spent on new or extra pension benefits for firefighters and police officers.

24. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • The 1999 legislation did not specify exactly what “extra benefits” must be provided; rather, the legislature left this to be negotiated between cities and the unions representing their police officers and firefighters.

25. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • Examples of extra benefits that have been adopted include: • An increased benefit multiplier (multipliers of 3%, 3.5%, 4% and even higher) • Yearly cost-of-living adjustments • Lower retirement ages • A 13th monthly pension check • The creation of “share plans”, which is basically a defined contribution plan funded with additional insurance premium tax revenues and is in addition to the defined benefit plan

26. Chapter 175 (Firefighter) and Chapter 185 (Police Officer) Municipal Pension Programs • The effect of the 1999 law and similar state pension mandates has been to massively increase cities’ funding liabilities and to create a structural deficit that worsens with every passing year. • As a result, many cities are paying amounts equal to 50, 60, and 70 percent of a police officer or firefighter’s salary toward funding their pensions. • By comparison, counties and the state typically pay only 20 to 25% for employees in the Special Risk Class (police and firefighters) of the Florida Retirement System.

27. Disability Presumptions • Section 112.18, Florida Statutes, establishes a disability presumption for firefighters and police officers who suffer any health condition caused by hypertension or heart disease. The presumption is that the condition occurred because of the job. • The presumption can only be “overcome” upon meeting a high evidentiary standard.

28. Disability Presumptions • The presumption is frequently used to obtain workers’ compensation and disability pension benefits. • Removal of the presumption does not mean that firefighters and police officers are not entitled to workers’ compensation or disability pension benefits, rather it means that they would have to show entitlement to the benefit just like every other benefit claimant.

29. Subsidized Insurance Coverage for Retirees • Section 112.0801, Florida Statutes, requires every city (as well as the state, counties, and other governmental entities) that provides life, health, accident, hospitalization, or any other kind of insurance for its officers and employees and their eligible dependents to allow former personnel who have retired, and their eligible dependents, the option to continue to participate in the group insurance plan or self-insurance plan.

30. Subsidized Insurance Coverage for Retirees • Retirees and their eligible dependents must be offered the same health and hospitalization insurance coverage as is offered to active employees at a premium cost of no more than the premium cost applicable to active employees. • The cost for this coverage may be paid by the employer or by the retired employees. • To determine health and hospitalization plan costs, the employer must comingle the claims experience of the retiree group with the claims experience of the active employees. • This is a significant other post-employment benefit (OPEB) on government employers.

31. Issues With Current Florida Statutes • Can cities use all Chapters 175 and 185 (fire and police) insurance premium tax revenues to pay for current plan benefits and obligations? • Answer: No

32. Issues With Current Florida Statutes • Can cities under Chapters 175 and 185 (fire and police) prevent using overtime and payments for unused leave times in determining “average final compensation?” • Answer: No

33. Issues With Current Florida Statutes • Can cities under Chapters 175 and 185 (fire and police) place newly hired firefighters and police officers in the Florida Retirement System and continue to receive insurance premium tax revenues until the current pension plan is fully funded? • Answer: No

34. Issues With Current Florida Statutes • Can cities under Chapters 175 and 185 (fire and police) change the governance structure of pension boards of trustees? • Answer: No

35. Issues With Current Florida Statutes • Are actuaries required to give 30 year cost projections on any proposed benefit increase to a defined benefit pension plan? • Answer: No

36. Issues With Current Florida Statutes • Can cities reduce defined benefit pension levels if it is determined to be actuarially appropriate in order to stabilize the plan’s funding and keep the plan properly funded? • Answer: Non-chapters 175 and 185 Plans: Possibly yes – if agreed to or impasse. • Answer: Chapters 175 and 185 Plans: No

37. Issues With Current Florida Statutes • Can the state Division of Retirement perform non-rule based administrative activities and provide interpretations of state statutes related to public pensions (Chapters 112, 175 and 185) that result in increased pension costs to cities? • Answer: Yes

38. Issues With Current Florida Statutes • Can cities in the Florida Retirement System opt to move their employees to a different retirement plan, such as a hybrid or modified “defined benefit/defined contribution” plan? • Answer: No

39. Issues With Current Florida Statutes • If a city firefighter or police officer suffers a health condition associated with heart disease or hypertension, is the condition presumed to be job related thereby enabling the employee to claim workers’ compensation benefits and disability pension benefits? • Answer: Yes

40. Issues With Current Florida Statutes • Do city retirees have the option to continue in the city’s health, hospitalization and other insurance coverages at the same premium costs applicable to current city employees? • Answer: Yes

41. 2011 Pension Reform Proposals 1. Allow cities receiving insurance premium tax revenues under Chapters 175 or 185, Florida Statutes, (fire and police defined benefit pension plans) to use these funds to pay for current plan benefits. This would remove the state law mandate that specified insurance premium tax revenues be used only for “new or extra” pension benefits for firefighters and police officers.

42. 2011 Pension Reform Proposals 2. Require that determinations of average final compensation in public employee defined benefit pension plans include salary only, and do not include pay for overtime, unused leave times, or any other additional payments.

43. 2011 Pension Reform Proposals 3. Allow cities to convert firefighter and police officer defined benefit pension plans operating under Chapters 175 or 185, Florida Statutes, to the Florida Retirement System without losing insurance premium tax revenues.

44. 2011 Pension Reform Proposals 4. Allow cities desiring to place their public safety officers (police and fire) into the Special Risk Class of the Florida Retirement System the opportunity to purchase past credit service at an up to 3% annual accrual rate rather than the current up to 2%. This will remove a practical barrier to convert plans to the Florida Retirement System.

45. 2011 Pension Reform Proposals 5. Change the governance structure of pension boards of trustees to move away from having plan participants serve on the boards.

46. 2011 Pension Reform Proposals 6. Require 30 year cost projections on any proposed benefit increase to a defined benefit pension plan.

47. 2011 Pension Reform Proposals 7. Allow cities to reduce defined benefit pension levels within all plans if it is determined to be actuarially appropriate in order to stabilize the plan’s funding and keep the plan properly funded.

48. 2011 Pension Reform Proposals 8. Restrain the state Division of Retirement’s non-rule based administrative activities and restrict the Division’s broad interpretations of the provisions in Chapters 112, 175 and 185, Florida Statutes, that result in increased pension costs to cities.

49. 2011 Pension Reform Proposals 9. Provide flexibility to cities in the Florida Retirement System by allowing them to either retain a standard defined benefit plan, or at the employer’s option move to a different retirement plan, such as a hybrid, or modified “defined benefit/defined contribution” plan. This will provide flexibility to cities in the FRS to decide at the employer level which pension plan to provide to its employees. The goal would be to reduce long term tax payer impacts and provide a reasonable pension plan with economic diversification for plan members.

50. 2011 Pension Reform Proposals 10. Remove statutory disability presumptions for firefighters and police officers claiming disability pension or workers’ compensation benefits.