Freeze & 40: A Plan for Pension Reform in JacksonvilleMarch 3, 2014 12 comments Print Article
A Proposal to Reform the Jacksonville Police and Fire Pension Fund and Restore Jacksonville’s Financial Future submitted by Tom Majdanics, Michael Yang, Christopher Owens and Felisa Franklin Read their proposal and respond with suggestions if you like! Join us for some serious wonky analysis after the jump!
Part 3 - Police & Fire Pension Economics 101 – Summing the Benefits
Before we propose changes to the pension system aligned with the above guiding principles, we must first define the roots and genesis of the problem – that way, we know where to focus reforms.
The economics – and the potential flaws – of a pension fund are revealed by answering several questions. What pension benefits is a retiree eligible to receive, based on years of service? How much is an employee contributing to his future pension while working? (Note: While we recognize some PFPF retirees are women, we will address a retiree as “he” going forward.) How soon can a retiree begin collecting his pension? How, if at all, are the retiree’s benefits adjusted annually for inflation? How long are we assuming the retiree – and his spouse – will live and collect pension benefits? What investment rate of return are we assuming on pension fund investments made by taxpayers? How are we representing the present value of future pension liabilities? And just how did this $1.7 billion unfunded liability happen in the first place?
By illustrating the pension benefits of a standard Jacksonville police officer, we can view how the problem came about and how it can be solved. As the saying goes, the devil is in the details. The source of our $1.7 billion unfunded liability is in the details as well.
So let’s look at a standard Jacksonville police officer as an example. (The below explanation is illustrated in Exhibit 1 at the end of this report.) On its website, the Jacksonville Sheriff’s Office (“JSO”) notes that salaries for police “officers start at $36,235 annually, reaching $54,696 after six years and $62,476 after seventeen years.”
Let’s assume a new, male officer is hired at age 23 and receives incremental raises to $54,696 by year 6 of his service. He receives additional raises in his career leading to a salary of $62,476 in his 17th year of employment. This salary remains for years 18-20 of his service at the JSO. Over his 20 years of work, the officer will earn approximately $1.1 million in salaries and pay 7% of his salary over his time of service, or about $80,000, into the PFPF as a contribution to his pension. Based on the current pension agreement, having served 20 years, the officer is eligible to retire and can begin receiving a pension immediately at age 43. His initial pension is 60% of the average of the last two years of his salary while working. In this example, the officer made $62,476 in each of his final two years of work – 60% of which is $37,486.
In year 1 of retirement at age 43, the officer will collect a pension $37,486. Per the agreement, in year 2 and in subsequent years, his pension will grow by a fixed amount of 3%, compounded annually, regardless of inflation. Thus, in year 2, the retiree will receive a pension of $38,610. How long should we expect the retiree to live and collect a pension? According to the Federal Social Security website, a 43-year old male is expected to live on average about 40 more years. So we can expect, on average, that in year 40 of his pension (at age 83), the retiree will receive $118,718, and then pass away. But we’re not finished yet with benefits. A surviving spouse is entitled to receive a pension benefit equal to 75% of the benefit when the retiree died – and this benefit also grows at 3% annually. On average, we assume that a male retiree is married to a woman three years his junior. So the 80-year-old widow will receive a benefit of $92,106, growing at 3% per year until she passes away. Per the Social Security website, we can expect this survivor benefit to last six years in this example.
In summary, based on the above assumptions, current and future taxpayers should expect to pay a total of $3.4 million in pension benefits to the officer and his surviving spouse during their lifetimes over a retirement span of 46 years - 40 years of the officer’s retirement and six years of survivor benefits to the spouse. Using the same method, we can also estimate the value of benefits for two other hypothetical retirees – one is a firefighter who retires after 20 years – starting at a $32,000 salary and ending at $50,000 at age 43. The other is a senior department leader who retires after 30 years of service at age 53, earning $100,000 per year in his last two years of service (he is eligible to retire with a pension equal to 80% of his final salary, since he worked 30 years.) We can estimate the total salaries earned, total employee contributions to the PFPF, and the total estimated pension benefits to be collected by each of the three employees in Chart 1 below.
Chart 1 - Estimated PFPF Total Retiree Pension Benefits for Varying Salary Levels
The PFPF hires actuaries and statisticians to estimate the total amount of pension benefits all current employees and retirees will receive over the coming decades. In addition, actuaries calculate an annual “normal cost” to the city. The normal cost is the amount the city needs to place into the Fund to pay off estimated pension payments earned in the past year, which will be paid out in later years. As of this writing, the PFPF has approximately $1.1 billion in assets and a discounted projection of $2.8 billion in outstanding pension liabilities. Since the $2.8 billion liability is greater than the funds $1.1 billion in assets, the PFPF has a $1.7 billion unfunded liability, and is funded at the 39% level ($1.1 billion in pension assets divided by $2.8 billion in pension liabilities). Actuaries also calculate the amount of monies needed annually to pay off the unfunded liability over time. As both the normal cost and the unfunded liability grow, the city’s contribution to the PFPF grows in tandem. That’s how annual taxpayer contributions grow from $22 million to $148 million in a decade.