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Vero, Shores grapple with out-of-control employee pensions

STORY BY LISA ZAHNER, (Week of April 5, 2012)

Vero Beach and Indian River Shores are finally being forced to come to grips with a reality state and local governments all over the United States face – public employee pensions out of control.

Vero currently sinks $4.1 million into its pension fund each year – the same amount it collects in property taxes – and the city is still $34 million short of 100 percent funding of the plan. The Town of Tiny Indian River Shores this year will pay more than $1 million into its two pension funds and that number will rise next year based upon changes the town has made to shore up the funds.

For both municipalities, between 20 and 25 percent of their general fund budgets go toward employee pensions.

Vero and the Shores have what are called defined benefit plans. Very simply, that means that employees are guaranteed a percentage of their last and highest salary for each year they work for the city or town.

For example, Vero Beach employees get 2.25 percent of their pay for every year of service. It’s not uncommon for city employees to work past the 25-year retirement point. If an employee worked for 30 years and reached a salary of $80,000, he would receive about $54,000 per year, plus whatever he might get from Social Security, plus any income from an Individual Retirement Account he might have set up aside from the city plan.

The city guarantees that $54,000 per year no matter how the city’s pension fund is performing. The taxpayers bear all the market risk in this type of pension plan.

Indian River Shores also has defined benefit plans for its employees.

The other type of plan is a defined contribution plan, which is the type of retirement provision most people in the private sector are now most familiar with. Employers contribute a fixed amount, and sometimes match additional employee contributions. This is like the typical 401(k) plan where the employer’s exposure is limited to the annual contribution and, if the investments lose money, the employee just gets less when he or she retires.

Vero Beach City Council members heard a proposal last week for closing the city's defined benefit plan and starting from scratch with a defined contribution plan. Employees would keep what they’ve earned in the plan already, but benefits would be frozen at their current-day salaries and would not accrue once the plan is closed. The move would save the city about a half million dollars annually in contributions to the old plan.

To start the new plan, the Vero council would need to decide what percent of payroll it wanted to contribute for employees. Each percent of payroll for city employees, separate from the police, would cost an estimated $190,000 per year.

So, in theory, the city could contribute 2 percent per year, costing $380,000 per year and with the annual savings of $500,000, could avoid $120,000 per year in pension costs. After about 15 years, city pension costs would go down substantially as the old, closed-out plan would approach being fully funded, depending upon what the market does over the intervening years.

The City Council has asked City Manager Jim O’Connor to work with the finance staff and pension plan managers to bring a plan back showing how the changeover might work.

When asked what the timeline would be for the city to close out the defined benefit plan and start a new defined contribution plan, O’Connor declined to give details, saying only that, “Changes in the pension plans are negotiable items by law so we must have any proposed change included in contracts agreed to by the city which are approved by council. We are negotiating in good faith with the unions so a firm date has not been set.”

Shores officials have not begun looking at changing the nature of the pension plan from a defined benefit plan to a defined contribution plan, but the town faces some major budget issues because of pensions.

Town officials recently lowered the expectations of the pension fund earnings, thereby increasing the amount that taxpayers must contribute to keep the plan afloat.  Just the increase in those expenditures is expected to amount to $380,000 in the coming year. That is a huge increase, considering the entire budget for the town is just under $4.7 million. The Shores plan is much smaller because the pool of employees is smaller, but the town still has more than $2 million in unfunded pension liabilities.

Town Manager Richard Jefferson is working with the volunteer finance committee and with department heads to come up with a plan to balance the books.

The two options are cutting expenses and raising property taxes.

“We’re probably going to have to do a little of both,” said Mayor Tom Cadden.