BALANCE SHEET BLOG – HOLLYWOOD, FL


Firefighters 8% Investment Guarantee Extended
June 28, 2009, 9:31 PM
Filed under: Budget

June 28, 2009

Urgent: Firefighters pension & retirement provisions are on the city commission agenda July 1. This is a matter of major concern and the question must be asked: Have our elected officials lost control of the firefighters Deferred Retirement Option Plan (DROP plan)?

DROP Plan

What is the Firefighters DROP Plan? It allows the employee to “retire” and make no more contributions to the retirement plan, while continuing to work for an additional eight years at full salary. During the eight-year period, the city is required to pay the employee’s pension into the 8% investment fund (known as the employee’s DROP account). The pension will accumulate interest for eight years at which point the employee must actually retire, take the DROP account as a lump sum payment and reinvest it elsewhere.

It is essential that firefighters be well compensated. There is no question about that. But there is question about $2.7 million per retiree in addition to annual pension ($70,000 or more) and Social Security, if that amount has not been part of collective bargaining.

The firefighters DROP fund is a steadily profitable investment plan for firefighters. The plan provides for an 8% rate of return no matter what happens in the market. In the past year, the plan’s assets earned less than one percent (0.86%), but employees in the plan still get their 8% return. This much is the result of collective bargaining, and it is up to Hollywood taxpayers to make up the difference ($9,159,036 to cover the 2009-2010 shortfall, as opposed to $7,562,399 last year). Details are provided in the City of Hollywood Firefighters Pension Fund Actuarial Report on the City’s official website.

Although the Hollywood charter specifies eight years for DROP accounts, we have recently learned that the Firefighters Pension Board some time ago decided to allow the employee to leave money in the DROP account for 15 additional years after the employee stops working — a total of 23 years at 8% guaranteed interest. As a result without any city commission action, Hollywood taxpayers are now on the hook for potentially millions of additional dollars, the exact amount dependent on pension investment decisions and fluctuating markets.

The pension board’s DROP account extension raises questions as to whether the board has exceeded its legal authority and whether it is violating its mission by risking the stability of the pension fund. All seven members of the city commission wrote a  letter to the City Commission’s sole representative on the pension board earlier this month raising both of these points. We are unaware of any response from the board.

Firefighters Pension Board Stacked

As specified in the City Charter, our Firefighters Pension Board consists of five Trustees: The Fire Chief, three regularly employed firefighters, and one Trustee appointed by the City Commission. Mark Butler has been the commission’s appointee for many years.

If the pension board is found to be acting within its legal mandate, we wonder if the commission has delegated powers to the board that it has no right to delegate given the substantial financial impact on the taxpayers from this board decision.

According to the union, eight years in an 8% DROP account would yield, on average, a nest egg of $830,000. This sum left in the account for 15 additional years (year 23) would mushroom to $2.7 million. In addition to these investment funds, the retiree separately receives his/her annual pension plus Social Security when age eligible.

The commission is expected to approve the firefighters pension plan at its July 1 meeting. The union wants city approval of the pension board action and has offered to reduce the return from 8% to 6% in order to sweeten the deal. (At 6%, the union estimates the employee’s 23-year DROP account at $1.8 million instead of $2.7 million).

The pension board’s action increases taxpayer liability exponentially.We believe the city commission owes it to the public to make a thorough legal determination as to whether the pension board acted within its authority and mandate before it simply endorses what the board has done, albeit at 6% instead of 8%. At a minimum, given the questions raised in the commission’s letter to the Pension Board (link to letter above), the commission should not be approving the Board action without resolving those questions.

Instead of conducting business as usual by allowing the city’s pension liability to balloon ever larger every year, the commission should have the courage to return the plan to the bargaining table until the city attorney has fully informed the commission as to when and how the eight years at a steady return became 23 years, and whether such action was both fiscally prudent and within the pension board’s mandate.

If you have an opinion about whether an unelected pension board should have the authority to add to the city’s interest obligations outside of collective bargaining, you’d better contact your City Commission before July 1 when this matter is expected to be approved.

Sara Case
June 28, 2009

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