Handshakes and smiles ruled the day when the Jacksonville City Council unanimously backed a 30-year agreement with the Police and Fire Pension Fund in 2001, spelling out pension benefits for police and firefighters.


The good spirits didn’t last.

A host of assumptions developed by the Police and Fire Pension Fund and agreed to by the city proved to be widely off the mark, opening a huge hole in the financial projections underpinning the agreement.

Taxpayers are paying the price — City Hall’s annual contribution to the fund has soared to $144 million a year, which is almost 15 percent of the city’s operating budget.

The fallout stoked criticism of the dual role played by the Police and Fire Pension Fund. As an independent agency in charge of administering the pension plan, the fund also has negotiated pension benefits for police and firefighters since the early 1990s, and it can block the city from cutting those benefits.

The arrangement poses an “inherent conflict of interest,” said Bill Scheu, chairman of a pension reform task force that recommended changes in governance of the fund, including more power for city officials in appointing trustees to the fund’s five-member board.

Scheu said the fund has a duty to manage the pension plan with a goal of keeping benefits in line with financing.

“We felt that the manager-fiduciary should not also be an agent for negotiating on behalf of police and fire employees because those benefits, as has happened, would strap the resources of the fund,” he said.

John Delaney, who was mayor in 2001, said the agreement always contained an “escape hatch” that said if circumstances changed, both sides would agree to alter the terms.

“They cannot unreasonably refuse to make adjustments when the fund is billions in debt,” Delaney said. “They do have a fiduciary responsibility to that fund, and that means they cannot be unreasonable about what they’re willing to concede to the city.”

He said if the fund refuses, the City Council should pass legislation changing benefits, including for existing police and firefighters, which the fund has resisted.

“I really don’t get what all the hand-wringing is about. Just impose it,” he said, adding that if the city is sued, it can argue the cuts are reasonable.

John Keane, executive director of the pension fund, declined to say what the fund’s response would be if the City Council changed benefits without the fund’s agreement.

“We deal with history and facts, not speculation,” he said. “I wouldn’t have any comment on something that may happen somewhere off in the future that’s not even conceived at this point.”

The fund and Mayor Alvin Brown’s administration are entering into two weeks of intensive talks about pension reform. Keane said the fund has always been willing to meet with city officials and has previously agreed to cut pension benefits for new hires, only to see the City Council reject those deals.

The 30-year agreement, Keane said, made clear the city would benefit financially if the pension fund’s investments were strong, and likewise would bear the risk of market downturns.

“It’s not like somebody got underneath a table and put a bucket over his head and thought up something,” Keane said. “It was all well thought out after hours of discussions with city officials and their staff, and City Council members. Our members in good faith agreed to the agreement. We’ve lived by every word and comma in there.”


The foundation of the 30-year agreement was a host of assumptions used to determine the long-term cost of making good on pension promises approved by the City Council and administered by the Police and Fire Pension Fund.

In the same way a transportation department will use traffic projections to build a bridge so it will be wide enough to handle traffic decades down the road, a pension plan projects the cost of future pension obligations and builds up its assets to ensure it can cover that expense.

Currently, the Police and Fire Pension Fund is short $1.65 billion of what it would need to pay pension obligations over the next 30 years. City taxpayers are on the hook to make up that difference by paying higher amounts to the fund each year to close the gap.

The biggest driver of the financial woes has been the sub-par investment returns that damaged pension funds nationwide — a sharp reversal from the 1990s, when the stock market was booming and pension plans thrived with double-digit investment returns.

Keane said if the fund had hit the assumption of 8.5 percent investment growth each year, the $1.65 billion unfunded liability facing the city would be $735 million lower.

But it wasn’t the only assumption that didn’t pan out.

At the time the City Council approved the 30-year agreement, the pension fund was using a Society of Actuaries mortality table developed in the 1980s to project how long retirees and their surviving spouses would live.

The Society of Actuaries produced an updated table in the mid-1990s. But the pension fund didn’t start using it until 2008 at the insistence of the state Division of Retirement, which oversees local pension plans. Keane said the fund previously had reviewed the mortality table every five years and determined the 1980s table mirrored the life spans of the fund’s retirees.

The updated tables projected people living longer lives. For instance, the 1980s table showed a man reaching the age of 45 could expect to live to the age of 78.74 years, but the 1990s table put the expected total life span at 80.38 years.

The pension fund also changed the 30-year agreement’s assumptions about how soon police and firefighters would retire.

In 1999, the average age of police and firefighters entering the Deferred Retirement Option Program was about 53 years old. This year, it’s about 48 years old.

Keane said workers have been hearing about how city officials want to cut pension benefits, so they’re locking them in as fast as possible.

“The constant drumbeat of we’re going to change this, we’re going to change that causes the members to retire much earlier than they normally would,” he said.

The upshot is police and firefighters are retiring years earlier and living years longer, which means they are drawing pensions over longer periods and increasing the cost of future pension obligations.

The fund also changed the original assumptions for salaries and payroll growth, reflecting that they weren’t growing as fast.

Keane said “strengthening the actuarial assumptions” resulted in about $560 million of the $1.65 billion unfunded liability.


The fund is an independent agency of the city, overseen by a five-member board of directors that ultimately will vote on any changes to the 30-year agreement.

Police officers elect one board member, firefighters elect another and the City Council appoints two others. Those four members jointly select the fifth member — former Sheriff Nat Glover.

Glover, the president of Edward Waters College, draws a pension from the Police and Fire Pension Fund. His own pension wouldn’t be affected by pension reform because Florida courts have ruled governments cannot alter pension benefits already earned.

Glover also is a member of the Jacksonville Civic Council, a group of corporate and civic leaders that backed the pension reform task force’s recommendations for a combination of a tax increase and pension benefit cuts. The task force also recommended giving the mayor the power to appoint the fifth board member, joining the two City Council selections to fill three of the five seats.

“There are two parties to this relationship,” Scheu said. “There’s the city that funds it and the members that get the benefits. It’s not just carte blanche.”

Scheu pointed to the pension plan continuing to guarantee 8.4 percent interest on Deferred Retirement Option Program accounts belonging to police and firefighters, even though the fund assumes its own investments will generate only 7 percent a year. (A 3 percent annual cost-of-living adjustment also increases the value of pension payments going into DROP accounts.)

DROP, a program used in other cities as well, lets police and firefighters technically “retire” and start collecting their pensions in DROP accounts while also working at their regular salaries for up to five years. They can collect upward of $200,000 in pensions during that time and either take it in a lump sum after leaving their jobs or get it paid out in monthly installments.

If they take it in monthly installments, the 8.4 percent interest continues on the DROP accounts until the money is gone.

Keane said there’s no conflict between assuming the fund’s investments will only grow 7 percent and guaranteeing those entering DROP will get 8.4 percent growth on their money.

The fund generated a 19 percent investment return in 2013, so in that year, the fund made money off the DROP accounts because only 8.4 percent went to the members, Keane said. He said he’s confident the fund can keep hitting above 8.4 percent in the future.

“The 7 percent is a planning number and a budgetary number based on the conditions and circumstances that exist in today’s marketplace,” he said. “I could very easily argue that 7 percent is too low based on the last two years.”

But the 7 percent assumption has a real impact on the city, which has to commit to pay whatever the fund assumes it cannot earn from its investments. The city has seen its annual contributions double over the past three years as the fund dialed back its prior assumption of 8.5 percent returns.


Though the city’s cost has escalated in recent years, it also scored some financial benefits from the 30-year agreement.

The pension fund poured $29 million into a reserve account the city used to help pay its annual contribution until 2006. The fund also agreed to use insurance premium refunds — money the state sends to police and fire pension plans — to assist the city every year.

The fund has shared an average of $5.2 million a year from those insurance premium refunds for a total of $68 million and counting since 2001.

Delaney said securing that revenue stream was a big win for the city. He said the severe magnitude of the 2008 recession upended the original assumptions, but the agreement was always set up to revisit terms of the agreement, including pension benefits.

The agreement states such discussions “shall be guided by a mutual desire to ensure the continued application of terms and conditions that are fair and equitable given circumstances that may present themselves” after the agreement was signed in 2001.

The city is seeking three main changes for current police and firefighters:

■ Increasing their paycheck contribution to 10 percent from 7 percent in phases.

■ Future entrants into the DROP program would earn interest based on what the fund actually gets on its investments, with a range of zero to 10 percent for DROP accounts.

■ The 3 percent COLA for pensions would be cut to 1.5 percent or Social Security adjustments — whichever is less — for benefits earned after the COLA change takes effect.

This month’s talks between city officials and the fund are sure to have lots of financial analysis and actuarial science. But at the end of the day, they also will go back to how each side interprets what is fair and what is equitable, considering all that has transpired since that upbeat night in February 2001 when City Council voted 18-0 for the agreement.


David Bauerlein: (904) 359-4581

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