A.G. Gancarski
Prologue: A Monday meeting of the Jacksonville Police and Fire Pension Fund centered around the ultimate actuarial impact of Lenny Curry‘s pension reform package, with presented actuarial analysis from the board proving to be more pessimistic than that of the city about rates of tax revenue growth, payroll growth, and amortization schedule.
Ultimately, not much of that mattered in the trustees’ decision making.
The Jacksonville City Council currently is considering legislation that would close the current defined benefit plans to all new hires, open up defined contribution plans for new hires, and pay off the city’s $2.8B unfunded pension liability with a sales tax extension starting in 2031.
The unfunded liability will be re-amortized, with a longer payment term and higher overall costs on the pre-2017 pension debt, which would be paid off in full by approximately 2051, asserts the city.
While the PFPF doesn’t get to approve the deal, they do get to weigh in via an impact statement.
The PFPF trustees were encouraged by the city to use the city’s anticipated rates of growth for tax proceeds (4.25 percent per annum) and payroll growth rate (1.5 percent).
Yet the board’s actuarial projections (3.34 percent for tax, and 1.25 percent for payroll) are less optimistic — by far.
In a meeting that sprawled over four hours, PFPF actuaries threw some cold water on the mayor’s push toward pension reform, suggesting that the city of Jacksonville’s assumptions could put the underfunded police and fire pension fund in danger of not meeting liquidity targets, and that more conservative benchmarks are recommended to protect the fund in the decades to come.
The crux of the fund’s decision, however, was simple: to accept the city’s 1.5 percent payroll growth rate, or the more conservative 1.25 percent that plan actuaries believe is appropriate.
The 1.25 percent was accepted. Along with the 4.25 percent expected growth in anticipated tax revenue increase annually, which was the city’s projection — one that was less conservative than that by the pension fund’s own actuary.
Also accepted: the 30-year amortization agreement of the deal.
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Board attorney urges skepticism on Curry plan: Fund attorney Bob Sugarman noted that state law required the trustees to offer an actuarial impact statement to the city council.
“They’re not bound by it,” Sugarman noted, adding that the Board of Trustees would offer comment on the ordinance at a later point, as part of a “two-step procedure.”
As well, committee members should not be “guided by the impact on the city … the unions … collective bargaining agreement.”
Focal points of board analysis: the amortization schedule; rate of payroll growth; growth of surtax revenue.
On all of these issues, Sugarman posited that the city and the fund would have different interpretations of efficacy.
On surtax revenue, Sugarman posited the PFPF can define that, based on independent actuarial opinion.
“The law doesn’t say who values the surtax. I believe it’s the board,” Sugarman noted.
And Sugarman added that the city has an “irreconcilable conflict” in setting this up, and, moreover, there are conflicts with statute in doing so — a move he framed as a way of shirking contribution burden.
With all that said, there was some wiggle room for those on hand.
“Are you protected by relying on the opinion of the General Counsel’s office? The answer is yes,” Sugarman said.
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Sales tax revenue estimates diverge: John Pertner of GA Public Solutions offered the fund’s actuarial statement.
He posited that there may be economic recessions between now and 2060, when the tax is slated to sunset. As since 1974, over a decade was spent in economic recovery — including a seven year decline and recovery period between 2006 and 2013, a period which saw sharp decline followed by gradual recovery.
That indicated what the report called a “significant impact” from recessions.
“You’re going to run into negative performances,” Pertner said, with the question being how long recovery takes.
Pertner projects a 3.34 percent YOY increase in sales tax revenue, compared to a more optimistic 4.25 percent per annum increase from the city.
Jacksonville CFO Mike Weinstein cautioned that whatever number is used “will be reviewed every year,” as per ordinance.
“The four and a quarter will be reviewed every year. This is a reasonable expectation of where we are today,” Weinstein said.
“It’s not like Better Jacksonville where we borrowed a billion and a half at 5 percent and the money went to debt service,” Weinstein said.
All told, the PFPF projects that $6.637B could be brought in by the surtax by 2060.
But the recommendation is to use the lower growth rate assumption, rather than the city’s, as a starting point.
Similar pessimism was to be found in payroll growth revenue.
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Negative amortization qualms: The board offered an experience study from Pete Strong, the board’s internal actuary, to analyze payroll growth.
The city posits 1.5 percent growth per annum. Strong was not so bullish on that, saying the historical average was .67 percent.
Strong notes that in a closed pension fund, a payroll growth rate historically is factored in. But current state law requires a reflection of “open group payroll.”
Strong also indicated the possibility of negative amortization, where payroll growth doesn’t cover the interest on the unfunded liability, presenting a “risk to the health of the plan.”
In that context, a 1.25 percent payroll growth rate — half of that of the city’s projection — is Strong’s advice.
Also discussed: whether DROP assets can be invested separately. That may be a heavy lift, given the anticipated 8.4 percent return. Strong continued to outline issues created by the ordinance, including the use of chapter funds and issues deviating from “reasonably sound actuarial analysis.”
Among those: using the future revenue stream as a present asset, which Strong said was unprecedented.
The “unique structure capitalizes an unknown future revenue stream as present dollars,” Strong said.
Meanwhile, discussions ensued of the potential for a constitutional challenge of the legislation, in that it passes on present costs to future generations.
Strong noted increased costs: $176M in benefit payments from salary increases, $64M in benefits from the new ordinance.
City contributions would go down, and so would the fund’s funded ratio — from 45 to 43 percent. And, because of the asset provided by tax revenue, the UAAL for the police and fire pension fund would go down $580M, to $1.42B.
“However, this is not the revised funded ratio for the fund,” Strong noted.
Strong discussed the difference between 4.25 and 3.34 percent for tax revenue growth as meaning a potential shortfall of $10M for the city’s contribution.
That, coupled with the 30 year amortization, means the “funded status could deteriorate in the short term.”
As well, “it is our opinion that current costs will be transferred to future taxpayers under this arrangement.”
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30 year projections: Strong presented a number of possibilities.
One such had no changes. Another was a “stress test” with a -15 percent yearly return (with a recession in mind). Still another was under the city’s plan, with a built in stress test. And yet another dealt with the more pessimistic projections from PFPF actuaries.
Under the current scenario, the plan would be fully funded by 2033; with the negative return year built in, that would be 2036, assuming the city applied $460M of payments required by the 2015 agreement.
Board Chair Richard Tuten noted these payoff dates are around the time money kicks in from the Curry plan.
Under the city’s assumed rates of payroll and sales tax increases, the plan will be 51.85 percent funded by 2047 — though that doesn’t factor in the sales tax.
The “stress test” would strain the plan, putting the 5 to 1 liquidity ratio mandated by the ordinance in jeopardy for a full decade, according to the PFPF actuary projection.
“This only happens when we assume a stress test,” Strong noted.
With a 3.34 percent anticipated tax revenue increase and a 1.25 percent payroll growth increase, the fund would be more able to withstand the stress test, Strong added.
No matter which projections are accepted, Strong said, the unfunded liability grows, peaking right as the surtax begins to come in.
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Weinstein strikes back: It was inevitable that CFO Mike Weinstein would have his say.
He noted the 4.25 percent projection for tax revenue growth is conservative, and “each year it doesn’t go down gets us closer to the present value.”
As well, Weinstein said the distribution of funds would be adjusted yearly based on the needs of the discrete pension funds.
“The payroll growth piece — we’ve had numerous calls and visits to Tallahassee,” Weinstein said, and the state is “comfortable” with the city’s projections.
The projections can’t change from the city’s, said Weinstein, given the two-year process “getting us where we are today.”
“We stand by the 1.5. And we stand rigid on the 4 and a quarter,” Weinstein said.
The city feels good about the projections, especially in terms of Jacksonville’s permits “skyrocketing.”
As well, Weinstein expressed comfort with the liquidity floor.
“You can’t pay off a $2.86B debt without an impact,” Weinstein said.
General Counsel Jason Gabriel chimed in his periodic reminder that his office holds authority over the city’s independent authorities — including this board.
Gabriel noted that the city sits on firm legal ground, and that the city controls these pension reform deals relative to the discretionary sales tax, with the board having limited powers.
Board Chair Tuten fired back, saying “no matter what we recommend to you, you’re going to do 4.25 and 1.5.”
Gabriel denied that assertion, but did say the city determines the use of the surtax.
The difference between the projections helped carry those in the room into the fourth hour of the meeting.
Weinstein stressed that, if things go south, the city will have to pay up in lean years — and that the City Council would be charged with yearly review of the plan, including the rate of surtax growth, to determine the city’s contribution.
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Deliberation: A motion was issued and seconded by the Financial Advisory committee to accept the 1.25 percent yearly payroll growth increase from the PFPF actuary, and was quickly seconded, as a “more conservative, more rational” approach.
That motion carried.
From there, the question of tax revenue growth.
Questions emerged about a lack of robustness of the analysis, which only goes back historically to 2000.
Before that, of course, the 1/2 cent tax was not in play.
A desire for conservative estimates colored the discussion; however, the Financial Advisory committee — with cavils and caveats — accepted the 4.25 percent yearly projection of tax revenue increase — the city selected rate.
With committee recommendations, the full board of trustees accepted the terms.
The fund will provide more fleshed out opinions next week to the Jacksonville City Council.
