A group of citizens studying the future financing of Jacksonville city government met recently in a small room at the Jacksonville Community Council Inc. (JCCI) building on Atlantic Blvd. After a short introduction to the city pension problem, the meeting was opened up for questions and comments. It quickly became apparent from the ensuing dialogue that many were uncomfortable with the taxpayer being on the hook for city pension fund obligations if investments are not sufficient to meet them. As of September 2007, Jacksonville is looking at a half billion dollar unfunded liability for the police and fire pensions alone.  Add to that the unfunded liability of the city employee pensions and we are approaching the operating costs for a single year of city government operating expenses.  As the moderator of the JCCI discussion asked, who will be expected to assume the risk that these pension plans are not able to meet their financial obligations in the future?

I will make a few observations. For the most part, private industry has moved away from pension plans towards 401(k) defined contribution plans principally due to the immense financial costs associated with pension plans. The question is why has the city not done so?  First, the police and fire unions oppose it. They want the guaranteed payouts of a pension system no matter how costly it is to the taxpayer.

Second, this illustrates the problem when one group of people finances the benefits received by another group of people and the ultimate decision on the size of the benefits is made by another group of people. The group receiving the benefits (city employees) has no incentive to reduce the cost of the benefits since it only has to pay a fixed portion of these costs. The group that ultimately determines the size of the benefits (City Council) also has no incentive to keep costs down since it relies upon political support from the benefit recipients and can rely upon a third largely unorganized group (Jacksonville taxpayers) that is not part of the negotiations between the employee unions and the city but can be taxed as needed to make up the difference between what was invested and what is needed to fully fund pension payouts.

If we want to keep city employee pension plans from overwhelming city finances, we need to move from a defined benefit plan to a defined contribution plan. The city would match employee contributions dollar for dollar until a maximum annual contribution is reached.  Within the new retirement plan, the employee can select investments consistent with his retirement goals but cannot rely upon the taxpayer to supplement his retirement if he makes bad investment decisions.