LARGO – After more than two years of negotiations with the respective unions, Largo commissioners approved several changes to the police and firefighter pension plans May 6, allowing the city to pay its retired officers their promised retirement benefits into the future.
Governments across the nations are taking similar action to ensure future sustainability of their pension funds, most of which lost a great deal of money during the Great Recession and haven’t been able to recover.
“Most pension plans actually started experiencing financial troubles even earlier than that,” explained Kim Adams, Largo’s finance director. “Pension plans just weren’t earning enough on their investments pretty much throughout the whole 2000s.”
At its lowest point, on Oct. 1, 2011, the city’s defined benefit plan had only 59.4 percent of funds it was liable to pay its police and firefighters. The fund has gradually increased since then; the most recent actuary report puts the city’s plan at 74.4 percent of its liability. But the environment for pension plans has dramatically changed, Adams said.
To start, police and firefighter retirees are living longer, meaning the pension fund has to pay set annual benefits for a longer period of time. Second, the markets where the plans used to earn “double-digit investment returns for years” seemed to be experiencing “a pretty radical shift,” even before the recession, Adams said.
“Going forward, we’re not going to see double-digit returns. We’re probably going to see, hopefully, high single-digit returns,” he said. “Most plans didn’t feel they were going to be able to rely on investment earnings to the same extent they had previously.”
That, combined with the fact that the city’s pension fund was underfunded even before the market crash – at 88 percent liability in 2007 – called for a dramatic change in what the city promised its retired police officers and firefighters.
The changes, finalized after the second reading of the ordinance May 6, will gradually make the plan sustainable into the foreseeable future, Adams said. However, they did not come easily.
“There was reluctance to reduce benefits,” Adams said. “It was hard to get to a point where everybody understood the plan might need to be adjusted because things have changed.”
Under the new plan, employees will contribute more of their paycheck to the pension plan. Employees hired before Sept. 30, 2013 will see their contribution increase from 5 percent to 8 percent over the next few years. Those hired after that date will automatically contribute 8 percent of their salary.
New employees will have to work 25 years before being eligible to receive their pension, instead of 23 years currently required. They will be eligible to retire with 10 years of service at age 55 or at age 62, regardless of time served.
The benefits new hires will eventually receive have changed as well. Currently, retirees average the salary they received in their last three years of employment and multiply that average by 3.25 percent per year they served. So if they serve 20 years before retiring, they will receive 65 percent of their averaged salary in an annual pension each year.
Under the new plan, eventual retirees will have their salary from their last five years averaged. Their benefit multiplier will be 2.75 instead of 3.25, meaning if they serve the same 20 years, they will receive only 55 percent of their averaged salary.
“The change still provides a very substantial benefit. It’s lower, it’s definitely lower,” Adams said.
The benefits changes won’t dramatically improve the funded status of the pension plan for the next several years, likely as long as a decade, Adams said.
“But as current employees begin to retire and new employees are hired, it will eventually make a big difference,” he said. “Essentially there’s less benefit at the end, so the plan has to put in less money and there’s less of a liability so it’s more sustainable.”
Adams said he didn’t see the pension benefits needing changes at least for another 10 years. Benefits were last changed in 2001, when they were increased because the pension fund was overfunded, as high as 122 percent of liability at its peak.
“Times were very much different back in the ’90s,” Adams said.