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Sun Sentinel: Dominic Calabro: Pension crisis could lead to municipal bankruptcy

Wednesday, April 10, 2013

Most everyone knows that there’s a problem in the municipal pension system in Florida, and elsewhere around the country, but what is surprising (alarming, honestly) is the number of people who do not realize just how serious a problem this really is.

In a joint report released in February with the Leroy Collins Institute, Florida TaxWatch concluded that if some Florida municipalities do not take significant action to deal with their pension funding issues they may be forced to reduce their police and fire departments, reduce other services to their citizens, or in the worst case, file for municipal bankruptcy, which provides relief for municipal entities and assists them in restructuring their debt.

While it has not happened here yet, Florida is one of 24 states that does authorize municipal bankruptcy (with approval by the Legislature and Governor).

In one specific case, Reuters has placed Miami on a list of “major [U.S.] cities and counties in danger of defaulting on their debt,” and notes that one of the reasons for being on the danger list is “low reserves and high pension obligations.”

The effects of not solving the problem are not to be taken lightly. In order to avoid bankruptcy, the city of Belleair Bluffs closed their pension system and fire department completely. The city is now contracting out fire services to neighboring Largo, a move that could affect jobs, response times and the safety of the community.

Unfortunately, young and hopeful police and firefighters suffer the most in these cases because they lack a safety net, and the restructuring necessary to fix some of the problems will likely have a direct affect on their retirement and long-term employment opportunities.

Similarly, cities in Michigan such as Flint and Detroit (both rank in the 10 most violent cities in America) have been unsuccessful in reducing pension liabilites, and have been forced to reduce their police force significantly, to a point that it may, in fact, be tangibly endangering the public.

According to the Wall Street Journal, Flint halved its police force in 2008 to pay for retirement benefits. Since then, the city has seen homicide rates increase by 60 percent, along with spikes in other crimes.

Unable to find a compromise before the worst-case scenario was reality, Prichard, Alabama filed for bankruptcy in 2009 because of its inability to afford their pension obligations. Due to the complete depletion of funds in the pension fund, the city stopped sending pension checks to 144 retirees (equating to $140,000 per month). This problem was exacerbated by an economy that was not producing jobs, and made even worse because some of the retirees were too young to collect Social Security or Medicare.

Florida TaxWatch research shows that there are a variety of steps that municipalities can take to help fund their pension systems. Some steps directly impact the pension fund itself, such as: eliminating or reducing cost-of-living adjustments; reworking the formula for calculating average final compensation; switching to a defined contribution (401(k)-style) plan; making changes to or eliminating the DROP program; and/or declaring “Financial Urgency” as a way to reopen union contract negotiations. Other steps are felt by current employees a bit more, such as: increasing the contributions of employees; restricting salary increases; cutting pay; and limiting the availability of overtime and sick pay.

The good news is that many Florida municipalities have realized the gravity of this issue and are taking the first steps in addressing the problem prior to it becoming irreversible. The rest need to follow suit, for the good of all of Florida’s taxpayers, and the stability of our local governments.

Few of the options for fixing what is a growing and dangerous pension funding problem are easy, and certainly none of them are going to be popular. Our politicians must have the courage to make the tough choices, and taxpayers must understand: reform, right now, is necessary.

Dominic Calabro is President and Chief Executive Office, Florida TaxWatch

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