Question Raised on Largo Funding for Pension Plans
By Leo Coughlin
LARGO - Another issue has arisen with Largo's financial picture, this time with the return on investment assumption for the defined benefit pension plans.
The city is already borrowed to the hilt with anticipated revenue from Penny for Pinellas over the next 10 years hypothecated against that debt. Maybe more has been borrowed than can be repaid from that fund. Only time will tell.
City estimates place that anticipated income to be far higher than the county itself, which administers the Local Option Sales Tax (LOST), the official name for Penny for Pinellas, has predicted.
Now comes the question, raised by Commissioner Curtis Holmes, as to what current return on investment the city is assuming to finance the defined benefit pension plans.
Defined benefit means the pension payout is guaranteed and not subject to market fluctuation. Shortfalls have to be made up by the city injecting fresh money into the fund. This is what has been necessary over the past several years since the finance markets have been perilously upset.
The question appears to be most pertinent given Largo's lavish salary and pension benefits, which include double dipping aspects.
In the current economic climate with interest rates perhaps at an all-time low, Holmes queried Kim Adams, Largo's Finance Director, about what assumption the city was making on interest rates for the city money invested in the pension funds.
The response by Adams was positive and showed no alarm whatsoever given current conditions but Holmes's concern could be well founded.
A recent Wall Street Journal story pointed out that many of the country's big pension funds are sticking to expectations of the kind of returns on their investments that were justified just a few years ago, when 8 percent was considered a norm and even a little low.
But the paltry returns since the crushing economic crisis began could leave many plans in a hole.
This is particularly pointed in a city like Largo where pensions are a defined benefit and shortfalls mean the taxpayers are hit to make up the deficit.
Adams, in his reply to Holmes, showed no concern whatever, evincing full confidence that the 8 percent range being assumed on return for Largo pension investments will continue.
To many people, who watch the markets and interest rates, this does not seem likely. In any event, defined benefit plans put the city in a position that is very dangerous, according to those with financial expertise and who know economic history.
Holmes points out that if expected returns do not materialize as expected, "The real crusher comes later when taxpayers have to cough up what are going to be very big pension payments unless we change course soon."
He thinks the city needs to re-think defined benefits. "If we don't, within one generation the existing defined benefit pension plans could conceivably bankrupt the city."
Since being elected to a first term on the City Commission last November, Holmes has focused on these kind of money matters, concern for taxpayers being uppermost in his mind.
He has put the spotlight on expected revenue from Penny for Pinellas (because of the heavy borrowing) and other city expenditures, subjects that seem not to have entered the minds of his colleagues who seem most content to "go along" and collect their pay checks.
Adams said that the city's police and fire fighters pension plan - both defined benefit - have an 8 percent assumed return. "We are preparing a presentation (on the plans) that will include a review of (their) financial condition," Adams said.
Adams pointed out that return on investment assumptions "are usually not adjusted frequently or significantly, because pension plans have very long-term projects of 15 to 30 years."
The sticking point, however, as Holmes points out, is the defined benefit aspect. A plan without that proviso can adjust payments.
But in Largo's case, the police and fire fighter pension amounts are guaranteed. If the pension plan runs out of money, the city has a legal obligation and then the money has to come from the taxpayers.
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