Jacksonville s Fix to a $3 billion Problem. Presentation to Southern Municipal Analyst Society: September 7 th, 2016

Transcription

1 Jacksonville s Fix to a $3 billion Problem Presentation to Southern Municipal Analyst Society: September 7 th, 2016

2 Quick Overview of Jacksonville Largest City in Florida and in the Mainland US by landmass at 840 square miles $1 billion+ annual General Fund budget 890,000 residents (1.4mm in MSA) Large Navy, Healthcare, and Financial Services presence No state income tax, moderate local taxes, and low cost of living has been attracting new and expanding business 16,000 pension plan participants 2

3 Jacksonville s Pension Problem $3 billion Unfunded Liability across the City s three pension plans. (P&F, Corrections, General Employees) Funded Ratios ranging from 40% to 65% Employer contribution rate of 120% of payroll to P&F $260 million+ in annual contributions, of which the majority is the payment on the Unfunded Liability Approximately 25% of annual budget going to fund pensions. 3

4 How did we get here? Early 2000 s the City decided to use past excess contributions to make ARC payments while also granting additional benefits and growing government. (Times were good and pension funding was healthy) Markets turned south and actuarial pain was deferred. Then the great recession hit. As with many issuers, Jacksonville s revenues declined in the aftermath as the value of homes and sales taxes came under pressure. While revenues were on the decline, pension costs were on the rise, nearly doubling over 5 years, from 10% of GF revenues to approximately 20% as actuarial pain was recognized and the City cut its overall budget. 4

5 Responses Large reduction in workforce over two years following great recession. Limited new capital spending/borrowing as well as deferred some capital maintenance. The first tax increase in many years, placing Jacksonville mid-range versus other large cities in Florida. (Was not a painless process!) Despite these cost-cutting and revenue generating measures, pressures from pension costs continued to mount as investment losses were recognized and assumptions reigned in. The City realized that this cost trajectory was unsustainable and that Retirement Reform was necessary. 5

6 Retirement Reform Jacksonville began down the long and winding road to pension reform in 2010/2011. Challenges Faced: State Law protecting past benefits earned 90-95% of the Actuarial Accrued Liability was a result of already earned benefits, which are non-touchable under Florida Law Actuarial standards requiring acceleration of UAAL amortization if plan is frozen (like switching to a DC plan for current and/or future hires) Labor negotiations and PFPF Board insertion into the process Legislative body support Community buy-in (Civic Councils and business leaders) Prior agreement with the Fund Local press Public Perception 6

7 Reform Result After many attempts, and several years, the first major benefit reform in decades was achieved for public safety employees in Key Modifications: Current and Future Employee Benefits reduced Governance changes Additional payments toward unfunded liability Result: A substantial decrease in the employer normal cost of benefits going forward. Old package = 29% New package = 9% (similar to private sector cost of 6% social security and a 3% DC match) (Jacksonville employees do not receive Social Security) 7

8 Key Modifications: Employee Benefits COLA reduced to mirror social security rates with a cap of 1.5%, from a previously guaranteed 3% Accrual rate reduced to 2.5%, from 3% Eligibility moved out to 30 years, from 20 DROP abolished for future hires; DROP interest rate changed to actual investment earnings rate for current employees, from a guaranteed 8.4% Employee contribution rate increased to 10% from 7% for all employees. 8

9 Key Modifications: Governance Governance: Benefit negotiation returned to collective bargaining process with unions (the way it should be) Professional criteria for board members and executive director established Actuarial best practices laid out in agreement Finance and investment advisory committee created 9

10 Key Modifications: Funding Funding: Agreed to additional contributions, above ARC to pay down UAAL more quickly. Additional $5, 10, 15, and then $32 million over 10 years for more rapid paydown. Fund will match City contributions at $5, 10, 15, and then $8 million for 10 years through applying previously reserved accounts (for excess benefits and budget stabilization) to UAAL annually, rather than funding additional benefits. Funds for matching now residing in the new Unfunded Liability Payment account. 10

11 Funding Mechanism By achieving significant benefit reform for our most underfunded plan we have reduced the costs going forward, but how do we handle the bill from the past? Options explored in the community (among others): Ad Valorem (2-3 mills) Painful and lacks political will. No guarantee that proceeds will go to fund pensions. Special Fire Services Surtax Need voter referendum, then requires ad valorem decrease to offset. POBs Market timing risk and conversion of soft debt to hard debt Extension of existing sales tax (chosen path) Required state legislation and voter referendum. Only revenue option that can only be used specifically for pension liability pay-down by law. 11

12 ½ Cent Pension Liability Sales Tax The option that was chosen was to effectively extend an existing ½ cent sales tax set to expire in The bill, which passed the state legislature and became law, requires the following: Current ½ cent infrastructure sales tax must be set to expire Collective bargaining to close plans which receive benefit from the surtax and to ensure 10 % employee contributions Successful voter referendum Enacting ordinance, detailing how the sales tax will be used UAAL amortization period of plans must be reset to 30 years Surtax can only be used for pension liability funding 12

13 ½ Cent Pension Liability Sales Tax (cont.) Bill introduced in early 2016 with unanimous local City Council resolution of support as well as Police and Fire union leadership support in Tallahassee. The sales tax passed a conservative legislature and was signed by the governor in early Referendum placed on the August 30 primary ballot and passed by a 65/35 margin. Collective bargaining now commencing to close current plans and replace with market-based retirement plans. Final step will be an enacting ordinance by City Council. 13

14 Does a 2030 surtax help today? Yes, it helps by: Resetting the amortization bases to 30 years This frees up $40-60 million annually until the dedicated revenue stream kicks in. It secures an estimated $100 million+ revenue stream dedicated legally to only paying down pension costs. The bill also allows for the possibility of borrowing against this revenue stream in advance or actuarially recognizing the present value upon passage. The City may also do neither of these and simply wait until 2030 to receive the revenue in light of the relief explained above. 14

15 Next Steps Now that the state created this surtax and we have adopted the local referendum, the steps remaining to achieve the benefit of this dedicated revenue stream are: Collective bargaining to close and replace current pension plans with new market-based retirement options. An enacting ordinance determining the details of how the surtax proceeds will be used. The pension liability surtax expires in 2060, or when the plans reach 100% funded, whichever is sooner. 15

16 Conclusion We have come a long way in reforming our retirement system and are now nearing completion of the funding component, which has enjoyed broad support. We are cautiously optimistic that this problem will finally be solved once and for all in the near future. Success in achieving comprehensive retirement reform will allow for: Much needed capital investment and maintenance Greater allocations to essential government services such as public safety, libraries and parks General improvements in quality of life for citizens 16