By Dr. J. Robert McClure, President and CEO of The James Madison Institute
Originally Posted on WCTV6-CBS Editorial Blog on March 15, 2011
Until recently, Florida’s legislators have had little reason to notice the serious pension problems confronting several of Florida’s major cities. After all, the Florida Retirement System (FRS), which covers employees of the state government, counties, and school districts, is in reasonably good shape, especially compared to those in other states. Moreover, few can argue that the state government’s own employees or Florida’s schoolteachers are overpaid.
Granted, even the FRS could face problems in the future, especially if the state government’s legislative and executive branches ever came under the control of pro-union forces for even a couple of years – long enough to commit the state to the kinds of overly generous pensions that now plague other states. See currently the bankrupt retirement systems of California and Illinois as the proverbial “canaries in the coal mine.”
That’s why it’s important to require the state’s future hires to participate in 401k-style “defined contribution” plans rather than the traditional “defined benefit” plans, while also encouraging current employees to switch as well. Moreover, requiring those state employees who remain in the traditional plan to contribute a small percentage of their salaries could help encourage more of them to make the switch.
Meanwhile, it’s not correct to assume that bloated pensions are a problem only in places such as California and Illinois. The South Florida New Times recently reported that a Miami Beach police officer received $99,700 in 2007 in overtime alone — plus a six-figure salary. In the nearby city of Miami, a 52 year-old police officer with 30 years experience can retire with a final salary of $94,000, and could be entitled to a lump sum payment of $832,000 plus an annual pension of $92,000.
There have been similar examples reported in numerous other state newspapers as well. The stories all point to one inescapable conclusion: These kinds of lavish benefits are not financially sustainable.
This doesn’t mean that taxpayers do not appreciate the work done — and the risks taken – by police officers and firefighters. However, these “first responders” will be among the first losers in the future if financial excesses cause the cities that employ them to go broke.
Granted, in the past, some public employees received generous pension deals in lieu of higher salaries. Subsequently, however, many received the higher salaries as well, especially in cities where the public employees’ unions exerted more clout than the taxpayers.
Moreover, in some cities the unions negotiated deals that also allow for “spiking,” a system where senior employees nearing retirement pile up overtime, vacation days, sick leave payouts, etc. in their career’s final year or so.
This bloated “final compensation” rather than their base salary then becomes a factor in pensions based on a formula that takes into account the employee’s salary times years worked times a percentage for each year worked.
There are two reasons why the Legislature has to be concerned, even if the Florida Retirement System is sound and most of the public employees who are covered by it are not among the conspicuously overpaid.
First, in some career fields — especially law enforcement — the state essentially competes with local governments. For example, the state invests a lot of money to train state troopers, then often loses them to local sheriffs and city police departments where the unions have won extremely generous contracts. Reining in the excessive salaries and benefits offered by local governments would benefit the state government.
Second, if any of these pension-strapped cities were to go belly-up and default on their debts, the state’s good reputation for fiscal prudence would be seriously damaged, and its own credit rating could be downgraded, thereby raising the cost of borrowing.
Concern for Florida’s fiscal reputation is why Gov. Lawton Chiles dispatched Lt. Gov. Buddy MacKay to Miami to help straighten out that city’s precarious finances back in the 1990s, when that city was at risk of going broke.
Miami and several other major Florida cities – especially those in Southeast Florida that maintain their own pension plans separate from the FRS — are once again teetering on the brink of financial ruin, with the problem exacerbated by the steep drop in property values and, thus, property tax revenues.
For the state government to ignore the self-imposed plight of these cities would be akin to ignoring a malignant melanoma “because it’s only on my foot.” Therefore, meaningful pension reforms that address the cities’ problems as well as the state’s potential for problems down the road ought to be among this year’s must-pass legislation.