Study Results Show Critical Need for Police and Firefighter Pension Reform

Transcription

1 Study Results Show Critical Need for Police and Firefighter Pension Reform BY ERIKA BRANCHCOMB FLORIDA LEAGUE OF CITIES 44 Florida League of Cities

2 As we have seen during this legislative session, one of the issues that remains most critical to Florida s cities, towns and villages is ensuring that pensions for local police and firefighters are sound, secure and sustainable. That s why pension reform for municipal police and firefighters is also a top legislative priority for the Florida League of Cities. In this article, we highlight disability retirement and normal retirement benefits administered by city police and firefighter pension plans using data gathered through a statewide study conducted by an independent, third-party researcher for the League s Center for Municipal Research and Innovation. This portion of the study examines: Pension-board disability retirement determinations. Normal retirement benefits, including compensation add-ons such as overtime, age at retirement, and multiple benefit awards received under primary and supplemental plans such as share plans. The report of key findings cites many examples from city police and firefighter pension plans in Florida, and makes recommendations on how to improve the system. While no specific cities are identified in this modified version of the report, these examples of municipal pension cases in Florida use real-life data and facts to communicate the current situations taking place within many of the plans. Methodology Florida has 351 municipal police and fire pension plans for the 215 municipalities participating in the minimum benefits program under Chapters 175 and 185, Florida Statutes. At the end of 2010, these plans had a combined fund balance of around $14.6 billion and provided retiree benefits within a complex financial and regulatory framework that includes cities, pension boards, police officers, firefighters, the state Legislature and state agencies. The 2010 annual reports filed by each pension fund with the state Division of Retirement served as a primary data source for this study. Other sources included customized requests for information filed with individual pension boards, municipalities and state agencies; summary plan descriptions; special acts, municipal ordinances and collective bargaining agreements; pension-board meeting minutes; and news reports and other case-specific information available online. More than 50 public records requests were made in an attempt to obtain the information necessary to complete this report. In total, pension fund data from more than 20 police or firefighter pension plans were examined. This review also included an examination of share plans, an additional source of retirement benefits similar to defined contribution plans. The data and examples included in this report run through the period ending September 30, 2010, except where otherwise indicated. Disability Retirement State law sets the benefit floor for municipalities that receive insurance premium tax revenues under Chapters 175 and 185, Florida Statues. This law requires participating cities to pay line-of-duty disability retirees a minimum of 42 percent of their average monthly compensation, regardless of how long they are on the job when the disabling injury occurs. The receipt of a disability retirement is based on a pension board 1 determination of disability. Abundant awards result in significant fiscal liabilities for pension funds, cities and, ultimately, the taxpayers who provide the bulk of funding, since line-of-duty disability retirees receive a sizeable percentage of their salary and may do so for a much longer period of time than regular retirees. Under some plans, disability retirees receive a percentage of their salary generally comparable to normal retirees, regardless of their years of service at the time of the disability. Under a special act enacted by the Legislature, one city allows police officers and firefighters qualifying for disability retirement to automatically receive 80 percent of their salary, regardless of the number of years on the job when they suffered the disabling condition. Another city was even more generous, providing a guaranteed benefit for police officers and firefighters equal to 85 percent of their salary. Not surprisingly, in 2010 this city had the largest average annual disability pension payouts among the plans examined: $56,155 for police and $53,759 for firefighters. 1 Beginning in 1986, the Legislature transferred all operational and administrative control of city police and fire defined benefit pensions to legislatively created boards of trustees. These boards are separate legal entities apart from the city and exercise broad powers outside the city s control, such as directing all investments of pension assets; hiring plan attorneys, actuaries and other professionals; and making regular and disability pension determinations. All costs and expenses, including investment losses, incurred by the boards of trustees of pension plans ultimately become a cost to the city because the city is responsible for paying for all pension benefits. In addition, boards of trustees are not required to provide fiscal transparency or accountability for substantial amounts of public funds. OPPOSITE PAGE: PHOTO ISTOCKPHOTO.COM/DNY59 Quality Cities March/April

3 Largest Average Annual Benefit Payouts to Disability Retirees $56,155 $53,759 $42,164 $36,851 $36,825 Source: Figures derived from 2010 Annual Pension Fund Reports Several pension boards awarded an exceptionally large percentage of disability pensions. Two cities fire pension boards, which we ll call City A and City B for purposes of this example, have awarded an exceptionally large percentage of disability pensions over the years. Based on information from their 2010 annual reports, 36 percent of retired firefighters from City A and 29 percent of firefighters from City B were receiving disability pension benefits in During that same period, one out of every four retired police officers in City B, and in another city that was part of the study, was receiving disability pension benefits. Pension Boards Awarding the Largest Percentage of Disability Pensions Among Plans Reviewed 26% 36% 24% 29% 25% Being disabled does not necessarily mean the firefighter or police officer is unable to work. Under state law, a police officer or firefighter must suffer an injury that renders him or her permanently and totally disabled in order to qualify for a line-of-duty disability pension. Generally speaking, the phrase permanently and totally disabled means a police officer or firefighter cannot render useful and efficient service as a firefighter or police officer (as applicable) and is likely to remain so disabled continuously and permanently from the injury. It does not mean he or she is unable to engage in gainful employment or work in some other capacity. In fact, it does not necessarily even mean the police officer or firefighter is unable to serve as a police officer or firefighter in another town or in another capacity. Under some plans, the standard for disabled is even narrower that is, whether or not a police officer or firefighter can perform the duties of the member s rank held at time of impairment. In one case, a 52-year-old police captain with an administrative position was found to have met the presumption for a line-of-duty, heart-related disability. Even though he could continue performing the administrative responsibilities he was doing at the time of his injury, he received $118,000 in annual benefits since, based on his job description, he could be potentially called on to engage in activities that would require him to be combat-ready, and that type of activity would pose a threat to his physical well-being. In short, it was found that he could not perform all of the duties of his rank. The provisions governing one city s police plan also base disability on being able to perform at the firefighter s rank. In other cases, disability pensions have been awarded because there were no light-duty positions available at the time of the disability hearing. Certain situations seemed to contribute to the inconsistencies in pension disability awards. Here are a few specific examples of these recurring themes: Disability awarded because firefighter could not perform the full duties of an officer In 2009, a fire pension board awarded a pension that paid $72,000 in benefits for an orthopedic (i.e., foot) injury from sliding down the fire pole or repetitively doing so. Even though his workers compensation case settled in 2010 for $9,433, the claimant sought permanent impairment benefits based on just a 1 percent overall impairment rating. Source: 2010 Annual Pension Fund Reports 46 Florida League of Cities

4 Disabled with no impairment found in corresponding workers compensation claim A pension board awarded a $54,000 disability pension to a 37-year-old firefighter who received no percentage of permanent impairment rating in the workers compensation system. Declared disabled, yet able to engage in strenuous physical activities In 2001, a firefighter was awarded a disability pension for a back injury yet subsequently competed in running events. In 2004, the retiree ran a 4-mile race in just over 26 minutes, yet in 2010, he received nearly $49,392 in disability benefits. Over the course of his life, this could wind up costing taxpayers another $1.3 million. Disabled, yet re-employed by another city s fire department A fire pension board did not revoke the disability pension of a firefighter who subsequently went to work as a fire inspector in another fire department. As a result, the retiree was able to continue to draw a disability pension from the city while receiving a paycheck from another department. In a similar case, the same city awarded a disability pension worth $44,000 in 2010 to a then-36-year-old firefighter who, despite his disability, was later able to become an assistant fire chief in another city at a then-annual salary of $54,920. The disability pension was not revoked. Board awards disability pension after acknowledging a lack of qualifying injury A fire and police pension board awarded a disability pension to a police officer, even though the medical board found that the injury was not total because he could safely and adequately perform some of the duties of a police officer. Trustees of the pension board expressed concern that without a light-duty position available, the applicant would be without a pension and a job. Expensive heart and hypertension conditions account for a significant percentage of disabling conditions. Not only do heart and hypertension conditions typically account for a large percentage of the total number of disability pensions awarded by the plans examined, heart conditions are among the most expensive pensions. Among all retirees in the 2010 annual report, 77 percent of the disability retirements awarded by one city s pension board were for heart or hypertension conditions. These are the same conditions that are favored by a statutory presumption for line-of-duty occurrence. Another pension board made 38 percent of its disability awards for heart or hypertension conditions. At the other end of the spectrum, a third pension board reported no heart or hypertension cases among all retirees in its 2010 annual report. Percentage by Which Heart Benefit Payments Exceeded Payouts for All Other Conditions Combined Pension boards have awarded line-of-duty disability pensions to smokers under the heart presumption, even when the disability appears to result from smoking. Example In a workers compensation claim involving a firefighter, the judge of compensation claims (JCC), applying the heart presumption under the workers compensation laws, found all three medical experts agreed the claimant s heart disease was caused by his smoking and untreated hypercholesterolemia. In fact, the claimant s own treating physician testified that the claimant s cigarette smoking was the major contributing cause of his heart disease. Therefore, the JCC rejected the workers compensation claim. Despite the JCC finding that causation was established by clear and convincing evidence in the workers compensation proceeding, the fire and police pension board awarded this same firefighter a disability pension under the heart presumption, resulting in a pension that paid more than $50,000 annually. Once disabled, always disabled. 53% 50% 38% 36% 35% Source: Calculated based on information contained in 2010 Annual Pension Fund Reports State law requires pension boards to terminate pension benefits for any disability retiree found to no longer be disabled. This law defines recovery from disability as Quality Cities March/April

5 being able to render useful and efficient service as a police officer or firefighter. Many of the pension boards overseeing plans examined as part of this report have written policies and forms in place for handling review and recall of disability retirees. Despite these policies, the researcher was unable to identify a single case in recent years in which a police or fire pension member receiving a disability pension had his or her pension terminated and was then recalled for duty, even though many of those on disability have gone on to serve as fire inspectors, CPAs, police officers and football coaches. Line-of-duty disability pensions have been awarded for pre-existing conditions. A circuit court quashed the order of a police pension board that had denied a disability application as a preexisting condition. The court said a pre-existing condition is not one of the five enumerated exceptions to receiving a disability retirement pension. On remand, the board awarded the pension. Provisions governing another police plan speak directly to this situation and expressly state that a fund member cannot receive a disability pension based on a disabling condition that was pre-existing. Other police and fire pension boards have also wrestled with the award of disability pensions for a pre-existing condition. One board has rejected such awards, only to subsequently be overruled by the courts and essentially required to award a disability pension. Another board believes it may have no option but to award a disability pension unless clear and convincing evidence to the contrary exists that the condition was not pre-existing. Cases were identified in which pension trustees ruled on claims filed by their managers or personal friends. At one hearing, two pension-fund board members were friends of the applicant and the applicant supervised one of them. Both trustees voted to award the disability pension. In another case, one board member worked at the same station as the applicant. He seconded the motion to award the disability pension. Normal Retirement Many regular retirees received large benefit payouts, including payouts of more than $100,000. It s not uncommon for firefighter and police retirement plans to allow members to earn retirement benefits of up to 100 percent of their average final compensation. Many plans do limit maximum benefits at a lower, but still substantial, percentage (for example, 80 percent or 85 percent) of their compensation when employed. In one city, police and firefighters received average benefits of $77,164 and $71,298, respectively, for the 2010 reporting period. During this same reporting period, 27 percent received more than $90,000 in normal retirement benefits, and 37 firefighters in this city received benefits exceeding $100,000. Over a 25-year period, those 37 firefighters could receive more than $92 million in pension benefits. A large number of fire and police retirees in another city also received six-figure retirement payouts. Twenty-eight retired firefighters and 13 retired police officers received pension benefits in excess of $100,000 in the 2010 reporting period. Over a 25-year period, these 41 six-figure pensions could cost the city pension fund more than $100 million in pension benefit payouts. 48 Florida League of Cities PHOTO ISTOCKPHOTO.COM/DNY59

6 Firefighter and police officer compensation for retirement purposes is a mysterious mix of base pay and salary add-ons, from overtime to as many as a dozen others, complicating the determination of salary and retirement benefits, and contributing to larger pension payouts and future fund liabilities. Six of the plans examined allow overtime pay and a host of other add-ons for purposes of retirement compensation. One fund has more than a dozen forms of compensation, from retro pay to shift differential pay and certification pay. Others include longevity pay, which generates additional pay for firefighters and police officers reaching certain years-of-service milestones, such as five, 10 or 15 years. The additional cost of overtime and other compensation add-ons can significantly increase the amount of retirement benefits paid to retirees. In one city, overtime compensation increased pension payouts by approximately 21 percent for police officers and firefighters retiring in Over the next 25 years, this could result in an additional $7.4 million being paid out in retirement benefits, with the overtime alone costing the plan as much as $3.5 million in pension payouts. This issue has not gone unnoticed by lawmakers. In 2011, the Florida Legislature limited the amount of overtime earnings that could be included for retirement purposes to no more than 300 hours. Retirees sometimes receive benefits from both a defined benefit plan and a plan resembling a defined contribution plan, funded largely through stateauthorized insurance premium tax revenues. In 2010, a city fire supplemental plan distributed additional net benefits of $8.45 million to just 61 retirees an average payout of $138,551. Excluding those with a distribution of less than $10,000, the average distribution was $183,730. One retiree received $402,886. One couple retired from the city fire department at ages 46 and 56, with $68,000 and $131,000, respectively, in benefit payouts in That same year, they also received a combined $590,100 distribution from the city s supplemental or share plan. In one city, 43 percent of the members of the police share plan and 33 percent of the fire share plan had a supplemental retirement account valued at more than $100,000 in More than 58 percent of the members of another fire share plan hired prior to 1990 had an account balance of more than $75,000 to supplement their annual retirement benefit upon retiring. The average account value for that 58 percent was $97,324. The highest topped out at $162,498. Retirement often provides a richer (or comparable) benefit than working, and often comes at a relatively young age. Of the plans examined, the typical eligibility requirements for normal retirement benefits is a minimum of 10 years of service and attainment of a certain age, generally 50, or 20 or 25 years of service, regardless of age. In one city, about 30 percent of retired firefighters with normal retirement benefits of more than $80,000 received more money through pension benefits in 2010 than they received in base pay at the time they retired. Several retired police or firefighters from another city with an annual pension benefit of more than $80,000 received pension benefits in 2010 that either exceeded or were within 15 percent of their base salary in the year they retired. At age 46, a deputy fire chief in one city received a regular retirement of $155,000. A fire lieutenant from a different city retired at age 50 with an annual benefit of $108,000 on a base salary of $81,000, and, in that same city, another fire lieutenant retired at age 48 with a retirement benefit of $106,000 on a base salary of $81,000. Percentage of Regular Retirees Under Age 50 at Time of Retirement 69% 70% 69% 51% 47% Source: Calculated based on information contained in 2010 Annual Pension Fund Reports Quality Cities March/April

7 Recommendations The case study concludes with a list of very specific recommendations to help safeguard city police and firefighter pensions, including: Disability Retirement Provide that evidence of the presence of personal risk factors, such as smoking and obesity, on the part of the applicant rebuts the heart/hypertension presumption. Provide that prior medical records, not just a preemployment physical exam as currently provided, must indicate that no pre-existing condition exists in order for the disability presumptions to operate. As for permanent, total disability determinations, require that the applicant not only be unable to perform the regular and continuous duties of a police officer or firefighter but also be unable to perform other duty or duties available through the fire or police departments, respectively. In the case of a non-service-incurred line of duty disability, he or she could be required to be unable to perform any other gainful employment. Amend Chapters and , Florida Statutes, to provide that a retiree with a disability pension loses that pension when the disabling condition that gave rise to the award no longer is disabling, even though some other condition now precludes him or her from working. Pension boards should require a new application for that condition as a basis for a continuing award. Limit the statutory minimum disability pension award of 42 percent and 25 percent for line-of-duty and non-lineof-duty disabilities, respectively, to those suffering an injury that precludes them from performing other comparable gainful employment, or an injury that could not be caused by anything other than being a police officer or firefighter (for example, a gunshot wound while pursuing a suspect, as opposed to back pain from a degenerative disc). Add an express pre-existing-condition exclusion for receipt of a disability pension under Chapter 175 and 185, Florida Statutes. Like the workers compensation system, require pension boards to receive independent medical-examination certification of maximum medical improvement prior to determining the disability status and awarding a disability pension. As a condition of receiving a disability pension, require the retiree to notify the pension board upon becoming subsequently employed in any capacity prior to attaining age 62 and provide job title, employer and salary. Require police and fire departments to adopt and enforce a limited-duty policy to minimize the number of disability pensions awarded. Further limit the allowance of overtime for determining pensionable pay. Normal Retirement Cap the municipal share of total pension-fund contributions or the annual growth in such share, or have the burden of any increase shared equally by both the city and the membership. Another possibility could be to impose a lien on any excess earnings used to pay supplemental benefits to retirees and require those funds first be used to reimburse the city when city contributions have increased by more than a certain percentage over a given period of years. Cap retirement multipliers and require multiplier reductions when investment returns fail to meet plan assumptions. Limit retirement options to defined benefit or defined contribution. At the Florida League of Cities, we respect the work of police officers and firefighters, but also want to protect taxpayers from having to pay for unfunded mandates imposed on our cities. As this study clearly reveals, the current taxpayer-funded police and firefighter pension system is unstable and unsustainable. We support responsible reforms to create well-deserved pensions for police and firefighters that are sound, secure and sustainable not only for current officers and firefighters, but for those who choose to protect and serve in the future. Erika Branchcomb is communications specialist for the Florida League of Cities. 50 Florida League of Cities ISTOCKPHOTO.COM