Key West Employee Pension Plans Under Review

By Pru Sowers

Konk Life Staff Writer

Key West City Manager Jim Scholl is finalizing a consultant contract to overhaul the city’s two employee pension plans, including the money-losing police/firefighter plan.

Scholl is negotiating a $75,000 contract with Foster & Foster Actuaries and Consultants, based in Fort Meyers, to “evaluate and review” the city’s two defined benefit pension plans and provide alternatives. The move could change what employees pay into the retirement plans as well as affect the pension payouts to retirees.

The review should have been done sooner, Scholl said, because Key West has a history of agreeing to increase the city’s contribution to staff pension plans in lieu of annual employee salary raises. This has put the city in a potentially dangerous financial position, he said, including a revenue shortfall in the police/fire pension fund that has to be made up with taxpayer money each year.

“Every year I was city manager before, and I am assuming for the two years in between, it has required a budget expense to make sure it was fully funded,” Scholl said about the police/fire pension fund. “It runs between $800,000 and $1 million a year.”

Although retirement benefits for all city employees are paid out of a municipal pension account – the police and firefighters have a separate pension account from the city’s general employee retirement fund – money to pay the monthly benefits is dependent in part on the investment return the pension account generates each year. Currently, the police/fire pension account totals approximately $83 million and generated a gross investment return of 12.9 percent in fiscal 2014.

But commissioners voted against increasing the police/fire pension payout in March, worried about the long-term financial impact if the stock market takes a hit like it did this past summer, when the Dow Jones Industrial Average fell from 18,120 on July 16 to 15,666 on Aug. 25. The market regained much of that loss by the end of the year.

The city currently contributes approximately 30 percent of non-retired police and firefighters’ salaries annually into their pension account. The city’s contribution towards the general employees’ pension account is approximately nine percent a year.

“In the last 10, 15 years many municipal government entities have gone bankrupt because they were too generous with their pension plans. You don’t want to go bankrupt on a pension plan that is not financially viable,” Scholl said.

One option to explore, Scholl said, is to change the current defined benefit pension plans, where retirees receive a fixed amount every month, to a defined contribution plan where employees pay in a set percentage of their salary each month – matched in part by the city contribution – and that money is invested into the stock and bond markets. The retiree payout is dependent on the success – or failure – of those investments, taking the payout responsibility off of the city’s shoulders.

Defined contribution plans are geared more towards a transient workforce, Scholl said. Employees no longer are likely to work at one company for their entire career. As a result, an employee may not qualify for a defined benefit pension because he or she doesn’t stay at a company long enough to meet the longevity requirements for the plan. In a defined contribution plan, the company’s pension contribution can be kept by the employee after what is usually a relatively short job tenure requirement.

“People are going to move around. So there is more need to have a portable pension to take around with them,” Scholl said.

The pension plan study is expected to take three to four months to complete. Any recommended changes will go first to the pension boards of the two employee unions and then to the city commission. Contract negotiations with the employee unions would then begin.

“It’s going to be a long lead time” before any change goes into effect,” Scholl said.

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