City’s innovative strategies fuel pension reform
Updated On: Jan 24 2012 04:26:49 PM EST
The City of Fort Lauderdale is diligently working to ensure our conservative fiscal policies continue to build upon the positive economic momentum we are finally seeing in key industry sectors, including tourism, marine commerce, real estate, film and entertainment, and capital investment.
Through a disciplined financial approach over the last three (3) years, Fort Lauderdale residents have benefitted from, and will continue to benefit from, no property tax increase, no fire assessment fee increase, and no reductions in vital City services. Our current tax rate ranks as the second lowest among the top 25 cities in Florida and among our neighboring municipalities. Our sound financial management will lead to a projected year end reserve fund balance of more than $50 million, which exceeds national standards, helps enhance our bond ratings, saves taxpayers millions of dollars in interest costs, and strengthens our long-term financial stability.
Using the same disciplined approach that has resulted in our economic strength, the City Commission is also tackling the challenge of pension reform. Funding pensions is one of the most pressing priorities currently facing local, state and federal governments. Pension costs have a direct effect on current budgets and a long-term impact on financial flexibility. Significant increases in pension costs coupled with a decline in tax revenue can put added strain on local governments.
The City of Fort Lauderdale has already taken several steps to reduce pension costs. By replacing the general employees pension plan with a defined contribution 401(a) plan, we have reduced the City’s contribution rate from 32.75% to 9% for new employees; a move that is projected to save $100 million over the next 30 years.
The City Commission is now looking at implementing additional innovative strategies to control pension costs, reduce the financial burden on taxpayers, and generate millions of dollars in added savings.
One strategy being considered is using pension obligation bonds to manage costs. This concept would involve borrowing funds at a low interest rate to pay off pension debt. The funds would be invested in the pension plan to generate a higher rate of return. The difference between the interest rate on the borrowed money and the rate of return generated by the plan could result in a significant economic benefit to the City.
For instance, if the City wanted to pay off 75% of its current pension liability, we could issue pension obligation bonds to borrow approximately $200 million at an estimated interest rate of 4.75%. These funds would be invested in the pension plan, which is projected by the actuary to earn a 7.75% rate of return based upon historical returns. The difference between the low interest rate on the loan (4.75%) and the plan’s higher rate of return (7.75%) could generate up to $6 million in pension costs savings in the first year alone. Over a 20-year period, the City could reduce its pension costs by more than $60 million if the actuarial rate of return is earned.
In addition to eliminating a significant pension liability, the bonds would provide the City with a consistent, fixed amount to budget on an annual basis to cover the debt service on the borrowed money. Stay tuned for updates on this strategic approach as we evaluate our options.
The City is also reducing pension costs by changing the timing of when we make our annual required pension fund contribution. In past years, the City has made the payment in October and has been charged nine months of interest on the money owed at a rate of 7.75%. Last month, the Commission approved a plan to allow staff to borrow the money at a low interest rate and make the payment in December. By doing so, we will pay off the loan in October at an interest rate of 1.62% on the borrowed money as opposed to paying a 7.75% interest rate on the money owed. The difference between the two interest rates means the City will save nearly $1.5 million with this financing approach in Fiscal Year 2012.
These are just a few of the methods the City is employing as part of its overall plan to manage, control and reduce pension costs. We recognize the need for pension reform is great. As such, we have made, and will continue to make, meaningful changes to our retirement systems in order to ensure their long-term sustainability and provide much-needed financial relief to our taxpayers.
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