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Pension fund rate of return unrealistic

April 21, 2012
Cape Coral Daily Breeze

To the editor:

Cities and towns across Florida are now receiving their Comprehensive Annual Financial Reports and reaching a conclusion that a majority of six members of the Cape City Council refuse to accept. That is, they need independent studies exclusive of those produced by consultants employed by the pension boards to determine the correct actuarial assumptions that should be used in determining the liabilities of their defined benefit pension plans.

Pensacola and Sarasota had such recent studies. Each study shocked the respective city. Each study concluded that it is unrealistic to assume an 8 percent compounded return on investment. When Sarasota applied a more realistic rate of between 6 percent and 7 percent, a rate now recommended by respected national pension consultants across the United States as well as the Government Accounting Standards Board (GASB), the unfunded liability of pensions and health care plans promised to employees ballooned from $329 million to $459 million overnight. Suggestions have now been made to dissolve the police department and merge it with the Sarasota County Sheriff's Department. Pensacola has already moved its regular city employees to a defined contribution plan similar to a 401k.

Cape Coral pension plans continue to use an assumed 8 percent rate of return. Even at that unrealistic assumption the City of Cape Coral had an unfunded liability for pension and health care benefits of $368 million dollars reported in the 2010 Comprehensive Annual Financial Report for the fiscal year ended Sept. 31, 2010. That is more than five times the annual property tax revenues of the City. In other words, on that date, every man, woman and child in Cape Coral owed $2,400 in future retiree pension and health care promises. If we apply the rate of return recommended in Pensacola and Sarasota to that debt, the promised amount explodes to approximately $500 million, more than half the present bonded indebtedness of the city including the cost of the North RO Plant, the UEP debt and the new Police Building.

The City Administration attempts to calm Cape taxpayers and employees by comparing this liability to a mortgage.

If the Cape pension plans were a mortgage the Cape taxpayer would have owed a principal balance of $10.7 million in 2003 and required a principal payment of $3.7 million. By Sept. 31, 2010 the principal balance was $176.5 million and the principal payment required $21.5 million. Some mortgage!! Some mortgage brokers!!

Administration does not even pretend that the health care benefits for retirees are a mortgage. They simply state that they pay as they go. In fact they reported an unfunded balance of $191.4 million for these promises in the 2010 Comprehensive Annual Financial Report as of September 31, 2009. Apparently they were unable to produce for the accountants an accurate figure as of Sept. 31, 2010 the closing date for the 2010 CAFR. In fiscal year 2011 under pressure from Fitch Bond Rating Agency, they deposited $1 million into an OPEB reserve account as a funding beginning but skipped a second deposit in this year's budget. I'm only surprised that the Administration didn't compare this liability to a second mortgage and assure the taxpayers that if no further growth in health care costs occurs they can pay off the principal balance in about 200 years.

Donald McKiernan

Former Chair, FAC



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