Randall G. Holcombe DeVoe Moore Professor of Economics, Florida State University Senior Fellow, The James Madison Institute

EXECUTIVE SUMMARY

• Municipal governments across the country, including some in Florida, are facing the problem of underfunded pension liabilities. Governments have promised to pay their retirees more money than they have set aside to make those pension payments.

• Governments are not held to the same level of oversight as private firms that offer pensions, and it is tempting for governments to shift the present cost of government into the future by offering generous pension benefits, without setting aside enough money to fund them. Some of the compensation paid to present employees in the form of pension promises exemplifies the shifting of current costs into the future.

• Many governments around the nation, and in Florida, find themselves saddled with pension liabilities created by their predecessors. Generous pension benefits promised a decade or more ago are now placing significant burdens on government budgets.

• Even municipal governments in cities that have been responsible stewards of their pension programs are subject to the same incentives to pass their current costs forward in the form of underfunded pension liabilities. Moreover, local officials in these municipalities often find that state mandates have limited their options in dealing with pension problems. For the many Florida municipalities that are not currently facing unfunded pension liabilities, the time to address these potential problems is now, before they develop into a crisis. Florida should learn a lesson from other states that now face pension crises, rather than to wait until that happens here.

• The problem can be addressed by encouraging local governments to place all new employees in 401k-style “defined contribution” pension plans rather than “defined benefit” plans, and to encourage current employees to convert to defined contribution plans as well. This would help ensure that that the present costs of government would be funded in present budgets. Municipalities that wanted to offer defined benefit plans should be encouraged to offer them through the state government’s Florida Retirement System; this can be encouraged by removing the disincentives that currently discourage municipalities from entering — or re-entering — the FRS.

Read the Backgrounder here.