The National Institute on Retirement Security (NIRS) has published a case study examining the “cautionary tale” of the closing of the defined benefit pension for employees of Palm Beach, Florida, in 2012.
“The town learned the hard way that pension plans—provided to nearly all police officers and firefighters across the country—help keep experienced public safety workers on the job protecting our communities,” said Diane Oakley, executive director of the NIRS, and author of the report. “The Palm Beach saga was a painful and costly lesson that pensions are a critical workforce management tool to recruit, retain, and retire public employees.”
In 2012, the Palm Beach Town Council closed its existing defined benefit pension systems for all employees, including police officers and firefighters, and offered a hybrid defined benefit-defined contribution plan that the NIRS said dramatically lowered defined benefit pensions.
What followed was a swift exodus in the form of retirements and early departures of experienced police officers and firefighters to neighboring towns that were offering better pension plans. According to the case study, Palm Beach soon became understaffed and faced increased costs to pay overtime hours and train replacements for more than 100 public safety workers who left during a four-year span.
In addition to the 20% of the town’s workforce that retired after the pension change, 109 other protective officers left before retirement in the next four years, and 53 vested police officers and firefighters left between 2012 and 2015, compared to only two such employees between 2008 and 2011. Reeling from the losses, the Palm Beach Town Council voted in 2016 to ditch the defined contribution plans, and improve the pension plan.
The new plan raised the multiplier used to determine benefit levels to 2.75 from 1.25, lowered the eligibility age to draw benefits to 56 from 65, and increased public safety employee contributions to a range of 8% to 12% from 6.47%.
“Advocates of switching from DB to DC plans position the change as reducing employer costs for unfunded liabilities, but the move to DC accounts does nothing to reduce plan liabilities on its own,” said the NIRS report. “At the same time, significantly reduced retirement benefits under the DC savings plan create other workforce challenges, such as recruiting and retaining public employees.”
According to case study, not only did the pension switch hurt the town in terms of lost skilled employees, but it also translated to higher unforeseen financial costs, such as having to pay for “extremely high levels of overtime” for firefighters who had to fill staffing gaps, or the increased costs of having to train new unexperienced public safety officers. The case study estimated that it cost the city as much as $20 million, or $240,000 per officer, to train a new police officer through the rookie period in Florida.
“Public pension plans are an important workforce management tool for recruiting, retaining, and retiring public sector employees,” said the report. “The Palm Beach experience suggests that policymakers must carefully analyze the consequences of moving employees from DB pensions to DC accounts, particularly for public safety personnel.”