County Votes to pay 35% of cost of Convention Center Hotel

This morning, the Board of County Commissioners voted 4-2 (Marcus/Aaronson/Vana/Burdick in favor, Abrams/Taylor against, Santamaria absent) to “conceptually approve” a county subsidy of $27 Million to The Related Companies to build a 400 room Hilton next to the convention center. They also approved $200,000 from the General Fund Contingency Reserves to fund consultant and legal services to further develop the proposal.

While most would agree that a hotel is needed to support the viability of the county-owned convention center (The Marriott across the street is considered too small to support large gatherings), the fact that no private entity was willing to take on the project without this large subsidy should be a red flag. The $27M is in addition to another $8M that the planners hope to get in the form of federal “New Market” funds (which may have to come from the county also) which together make up about 35% of the total cost of the $101M project.

So what does the county get for putting up 35% of the cost of the project and the use of the county owned land?

An ownership stake or revenue sharing? NO.

Jobs? – Yes, 350 construction jobs for 2 years and 300 permanent, low-wage hospitality sector jobs. (In other words, $35M buys 300 jobs at $117K per job – and those jobs will pay about a quarter of that.)

Ongoing tax revenue? – Yes and no. The annual $2.2M bond interest on the $27M ($2.7M if on the hook for $35M) is to be a recurring expense drawn from the ad-valorem funded General Fund, while bed tax revenue from the hotel would be restricted to non-ad valorem TDC programs.

Commissioner’s Aaronson and Marcus raised the issue that they were not able to bring the Florida Association of Counties convention to PBC because the convention center support infrastructure is lacking. This may be true, but Commissioner Abrams pointed out that the much larger Florida League of Cities has come to the county many times – although to Boca Raton instead of West Palm Beach. Both Commissioner Abrams and Taylor raised issues with adding this additional burden on the budget every year at a time we are striving to reduce spending, and pointed to the drain that the Scripps subsidy is to our current budget. Of course they were not on the commission when the convention center decisions were made. Commissioners Aaronson and Marcus on the other hand (who were) have invested their reputations in those decisions and of course want to spend more money to vindicate the original move.

Many people came forward to speak in favor of this project, particulary those in West Palm Beach who will clearly benefit. The Mayor was absent, but it was said she “supports the project”. I would hope so – having all the county taxpayers fund what will mostly benefit her city is quite a boon.

The decision is for “conceptual approval” and commits only the continuance of the planning, yet it is a clear ‘GO’ signal for the project.

We believe that for the county to have a successful convention center, a nearby hotel large enough to service a capacity convention is necessary. That said, for the county to contribute 35% of the construction costs and get no direct return on investment sounds like compounding an error. You may recall that the original proposal for the convention center never projected a county subsidy for a hotel, assuming that it would be a profitable project for the private sector. We would have preferred a smaller subsidy by the county, some contribution from the City of West Palm Beach, and a return to the General Fund of some of the subsidy, perhaps by converting a portion into a loan. Although some of the $1M in annual subsidy for the convention center itself could be reduced by an improvement in business, there are no guarantees.

The Taxpayer did not win today. Thank you Commissioners Abrams and Taylor for having the courage to try to stop this train.

Today, the Taxpayer Won

4/1/11 Update: Wheelabrator has decided to protest the bid and will be heard at the SWA Board meeting on 4/13 at 9:00. They will have 45 minutes to make their case and B&W will have an equal time to rebut. See Agenda for more information.

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Low-cost bidder Babcock and Wilcox recommended by committee for SWA mass burn plant.

This afternoon at the Solid Waste Authority Visitor’s Center on Jog Road, the committee tasked with selecting one of the three responders to the Waste-to-Energy plant RFP met to pick a winner to recommend to the board. The three potential vendors are Babcock and Wilcox Power Generation Group (Barberton, Ohio), Covanta Energy (Spring Hill, Florida), and Wheelabrator Technologies (Hampton, New Hampshire). B&W team member BE&K operates the existing county burn plant and Wheelabrator operates one in Broward.

TAB has not been actively following the SWA budget, but when one of the teams representing a responder suggested we take a look at how the county was about to spend $800M (the bonds having been already sold), we decided to do a little research and attended the meeting.

Last month, the 7 member committee, which includes County Adminstrator Bob Weisman and Gardens City Manager Ron Ferris, scored the proposals on their technical merits, and today heard the cost side of things. Technical scoring evaluated 10 attributes and assigned scores out of 100, and considered the design, aesthetics, energy efficiency, operations and maintenance, as well as the amount of local hiring projected. Three members selected Covanta as their top choice, 2 for Wheelabrator, and one for Babcock and Wilcox, but it needs to be said that all vendors scored better than 90% in aggregate and there were no disqualifiers.

The financial attributes were analysed by a computer model created by SWA Consulting Engineer Malcom Pirnie, Inc., and used a net present value measurement to take into account energy production revenue and maintenance costs over 20 years as well as the costs of construction. Construction costs varied from a high of $830M (Covanta) to a low of $606M (Wheelabrator) – a wide spread given the closeness of the technical evaluations. On the NPV measurement though, Babcock and Wilcox was the clear winner as they actually showed a positive cash flow of $171M from energy sales and yielded a $20M/year operating cost versus $28M for Wheelabrator and $24M for Covanta. The calcuated NPV was: B&W: $500M, Covanta: $779M, and Wheelabrator: $626M.

Fifteen minute presentations by the three vendors were given prior to discussion, and both Joseph Threshler of Covanta and Jack Ristau of Wheelabrator spent their time arguing that B&W should be disqualified for violating the procurement rules. They accused their competitor with changing the corporate makeup of their team after the original Statement of Qualifications (SOQ) was decided, and that their performance bond did not meet the requirements of the RFP. They also brought up design differences where they thought B&W was inferior – namely the location of the plant’s superheater and the cladding in the lower level of the furnace. One even suggested that B&W’s own engineering handbook “Steam” suggested their design was flawed.

John Kitto of B&W put the matter to rest, stating matter of factly that each of the procedural issues had been resolved with the evaluation team. He also pointed out that if they had used the 2005 version of “Steam” instead of the 1992 edition, they would know that the thinking about the issues had changed.

Discussion and analysis by the Malcom Pirnie team supported Mr. Kitto’s contentions, and in their opinion, the proposals were so close in technical merit that the cost estimate made the choice of Babcock and Wilcox clear. The seven members of the committee agreed and voted unanimously to recommend Babcock and Wilcox to the SWA board at their April meeting. If the board (which is made up of the seven county commissioners) agrees, the contract could be signed as early as May 1.

TAB has not researched the arguments that led the board to proceed with acquisition of the burn plant, but it is supposed to greatly extend the life of the county landfill and generate significant energy as well. Picking the clearly lowest cost of the alternatives would seem to be the logical choice and if the board follows the committee’s advice the Taxpayers will win.

It would defy logic for the board to decide against the unanimous opinion of their committee, but of course that will be a political decision. The board has the ability to reopen the cost question with the vendors and re-negotiate (something the committee could not do under the procurement rules). There were a large number of IBEW union members in the audience but since there was no public comment it was not clear which vendor they preferred. We do know that other unions (carpenters and ironworkers) have protested the current plant operator (BE&K – part of the B&W bid team) because they had brought workers from out of state.

We look forward to following the board’s actions at their meeting on April 13.

Pension Reform and Implications for Palm Beach County

Highlights

• Governor’s FRS reform worth close to $100M / year to Palm Beach County (with schools included)
• Senate bill SB1130 implements only portions – reducing savings to about $30M
• Any change in special risk accruals are strongly opposed by the police and fire unions
• The legislature lacks the political courage to support the governor in these changes

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With the legislative session about to open, a battle is brewing over the Governor’s budget. (See “Budget Brawl set to get under way Tuesday” in the Sun Sentinel)

Extremely piqued over Scott’s rejection of the federal rail grants, which will likely stand now that the Supreme Court has rejected the legal challenge brought by Senators Altman and Joyner, the Senate is ready to rumble. How will the Governor’s budget fare? “Dead on Arrival” is how Budget and Tax Subcommittee Chair Ellyn Bogdanoff describes it.

The state budget affects those of the cities and counties in Florida, as grant money for things like transportation infrastructure and community services is cut. The most dramatic effect for Palm Beach County though would be in the area of pension reform. Unlike the cities, which mostly have their own pension plans, county employees, including PBSO, Fire/Rescue, as well as the employees of the school system participate in FRS – the state run Florida Retirement System.

Currently, FRS enrollees pay nothing to participate, accrue benefits at a rate of 1.6% for each year worked (3% for special risk classes such as police and fire), receive 3% cost of living increases every year they are retired, and can start collecting benefits after 30 years (25 years for special risk). The Governor has proposed requiring a 5% contribution, ending the cost of living adjustments, and reducing special risk accruals to 2% / year (for benefits accrued after July of this year).

When Governor Scott rolled out his template for FRS changes, we at TAB mapped them against the Palm Beach County workforce makeup (number of special risk enrollees, size of payroll, etc.) to estimate the financial impact to the county budget. Our estimate of approximately $55M (plus another $43M in the schools) assumed a 5% contribution by all employees, and a reduction in the special risk accrual rate from 3% to 2% for the approximately 2,100 PBSO and 1,300 Fire/Rescue employees in that class. Since any county savings from FRS changes may be offset by reductions in revenue sharing, it is not clear at this time what the net effect would be, but the budgeted appropriations for personal services would be significantly reduced. (See chart below)

Let’s put that number in perspective. In the coming fiscal year 2012, property valuations are expected to decline about 5%, while personal services costs are rising and federal and state grants are declining. The county estimates that the shortfall, if the millage were held flat (4.75 for the county-wide millage), will be in the $50-60M range – approximately the size of the savings that Scott’s FRS changes would bring.

Since that time, the county folks who track this stuff told us that the changes were unlikely to happen. They predicted (accurately as it has turned out so far) that the legislature will lack the political will to stand by the governor in such a radical change.

The Senate bill taking up FRS reform, introduced on February 15 by Senator Jeremy Ring (Democrat, Broward District 32), who chairs the Governmental Oversight and Accountability Committee, is SB1130, “Retirement”. A companion bill that addresses municipal pensions not covered by FRS is SB1128, “Public Retirement Plans” The companion house bill H0303 was withdrawn prior to introduction.

It should be noted that as of today the session has not begun and there are already 8 amendments to SB1130. It will remain a moving target and could possibly be improved as it moves through the committees.

SB1130 introduces an employee contribution component, but currently does not specify the percentage. (Several media reports have listed it at 2% but the bill is silent at this time.) COLA, special risk accruals, elimination of the DROP program and other aspects of the Governor’s proposals are noticeably absent from the bill. The bill does adopt the Governor’s proposal to close the defined benefit plan to new participants (in favor of a 401(a) type plan) after July of this year. The Sun Sentinel reported it thus: “Public employee unions, especially politically powerful police and firefighter groups, have strongly protested — and lawmakers seem to be listening”.

This table illustrates the differences between the Scott proposal and SB-1130

	Current FRS	Rick Scott Proposal	SB-1130
Accrual Rates	1.6% general 3% special risk	1.6% general 2% special risk	NO CHANGES to current plan
Participant Contributions	None	5% across the board	2% across the board
Defined Contribution Plan	Offered, with few takers	Only option for new hires	Only option for new hires
COLA	fixed 3% / year	Eliminated for accruals past July 2011 (protects current retirees and accumulated benefits)	NO CHANGES to current plan
DROP Program	Continue working for 5 years while pension accumulates, then lump sum	Eliminated after July, 2011	NO CHANGES to current plan

On Saturday, Senate President Mike Haridopolis visited a meeting of the grassroots group “DC Works for Us” in Coral Springs. During the Q&A, we asked him about this seemingly tepid response to the Governor’s reform proposals. In response, he said that the legislature does intend to pass FRS reform this year, with an employee contribution of “maybe 2-3%”, but when asked about the special risk accrual he replied that it was “not fair to cut back on something that was promised to our employees”.

We feel this answer is disingenuous, since the proposal is not a takeaway of existing benefits that have accrued, only a change to future accruals. Furthermore, since the original intent of special risk class was to allow employees in physically demanding jobs to retire at 25 years with equivalent pensions to 30 year normal retirees, a 2% accrual already exceeds that measure.

Since special risk applies mostly to police and fire, both of which have strong unions who operate very effectively in Tallahassee, it is clear that Florida is not Wisconsin – at least as far as the Senate is concerned. Since Senator Haridopolis has announced a bid for the US Senate, I guess it is not surprising that he doesn’t want to take on the PBA and IAFF.

The following chart illustrates the effect the Scott proposal would have on the county budget, and how very little of those savings have made it into the Senate bill. Maybe it is time for the taxpayers to remind our legislators why they were elected.

NOTE: Assumptions are: 1) contribution savings = total payroll x contribution rate, 2) special risk accrual going from 3% to 2% would drop employer contribution from 23.25% to 15.5% over time (2/3). 3. Payroll is projected from 2009 data.

Group	Number of employees	Average Salary	Governor 5% contribution	SB1130 2% contribution
County Staff	5,731	$45.9K	$13.2M	$5.3M
PBSO	3,919	$66.3K	$13.0M	$5.2M
Fire/Rescue	1,511	$88.1K	$6.7M	$2.7M
Schools	20,986	$41.3K	$43M	$17.3M
TOTAL (contr.)	32,147		$75.9M	$30.5M
			Governor 2% accrual	SB1130 no change
PBSO special risk	2111	$77.7K	$12.6M	0
F/R special risk	1303	$88.6M	8.9M	0
TOTAL (accr.)	3414		$21.5M	0
TOTAL (both)			$97.4M	$30.5

Public Sector Compensation – Some Perspective

With the conflict over public employee compensation raging in Wisconsin and likely to spread across the country, there are still misconceptions about how public employees are compensated (and how well), the role of unions in setting the levels of compensation, and the political aspects that typically are more significant than the economic aspects.

We at TAB believe that setting equitable compensation for public employees is as important to budget reform as finding and eliminating programs that have outlived their usefulness. Just as entitlements are the major challenge to the federal budget, state and local budgets are defined by their personal service costs.

The following is a list of facts (and some opinions) that we think will structure the debate in the coming months, both in faraway states like Wisconsin and Ohio, as well as in Tallahassee and at the county and municipal level all over the state.

• Salaries and other compensation are the largest government expense at the local level.
• Compensation dynamics are considerably different than the private sector. Providing government services is a monopoly where spending restraints (where they exist) are political not economic. Salaries are driven less by market forces than by what the taxpayers will accept.
• Conventional wisdom that “public sector = lower pay and better benefits” is no longer true. Flush with cash from the mid-decade runup in property valuations, municipal and county governments have allowed their personal services expense to far outpace inflation.
• Public sector unions have made a convincing case to local officials that they should share in the property tax windfall – both in salary today and in pensions to be paid in tomorrow’s dollars, and as long as the public wasn’t looking too closely, they didn’t feel ripped off.
• With both their employees and their unions making the case that they should “share the wealth”, and no organized advocates for the citizens, local officials have often been tempted to take the path of least resistance.
• Officials are further incented by the contributions and manpower that the employee unions can bring to their re-election campaigns.
• When local pressure is not enough, public sector unions have been very successful on the state level to get statutes enacted that constrain local governments from resisting upward pressure on personal service costs.
• It is only the current prolonged economic downturn that has shed light on how this whole system has gotten out of hand – when looking at ways to constrain spending, many are appalled and surprised at how their personal services costs have exploded, and how little they can do about it.
• State level resistance to unbounded growth in public sector compensation, initially led by Chris Christie, and followed by many more of the Republican governors and legislatures elected in 2010 (including Rick Scott) is a potential game-changer.
• Those municipal and county officials who would really like to restore sanity to public employee compensation have a small window of opportunity to get on the train before all this comes to a head this year.
• They could start by supporting FRS reform as outlined by the governor, which if enacted would save around $60M at the county level.
• Once established, FRS reform could be used as a blueprint for local pension plans.
• FRS reform is not “draconian” and would still provide better benefits than the private sector.
• For example, reduction in special risk accruals from 3% to 2% would return to the original concept – to provide an equivalent pension at 25 years for those in high stress jobs that other employees would get at 30 years.
• Another area for reform is longevity raises – this is a public sector phenomenon that provides a rapid escalation in salary, irrespective of merit or performance. During economic downturn, local governments should have the flexibility to freeze or even reduce salaries as an alternative to layoffs, just like in the private sector.
• As framed by the Wisconsin debate, the collective bargaining process by public employee unions is at the core of the problem. Pension and health care concessions in that state may fix this year’s budget, but next year (or when the economy improves) they will be back to the table to restore it. Once a mulit-year contract is in place (such as the PBC situation with PBSO and Fire/Rescue), necessary actions that would void the terms of the contract (such as a delay in raises) are not possible without justifiable economic distress – and maybe not even then.
• A similar conundrum is about to play out in Tallahassee as the legislative committees to take up the Governor’s FRS reforms are already talking about “restoring” the status quo as soon as FRS is back to 100% funding. These same legislators, many of them Republicans, have already proposed that 5% is too much, the COLA must remain, and we can’t possibly mess with the special risk accruals. We can only hope that Rick Scott stands his ground.

Only by having an honest dialog on these subjects with all parties at the table – including the taxpayer, can we avoid the train wreck that is coming in public sector finance. Luckily, many have taken up the subject and it is being discussed in the media at all levels. If Scott Walker can round up his missing Senators and pass his collective bargaining reform, many states will initiate changes in their situations that would have been unthinkable only a year ago. Even if some compromise is made in Wisconsin, a line has been crossed and the battle has been joined.

Nothing less than the economic survival of the American Experiment is at stake.

Florida Cities, Counties Can’t Afford Promised Pensions

In a recently released study, the nonpartisan LeRoy Collins Institute at Florida State has concluded that many local governments throughout the state cannot afford the pension obligations they have promised to their employees.

According to the Sally Kestin, in a Sun-Sentinel article today, municipal pensions account for more than half the payrolls in Miami, Pembroke Pines and Hollywood.

Called a “time bomb” by the report, and a “catastrophe” by state Senator Jeremy RIng (D-Parkland), the report makes several recommendations to ease the burden – none of which will be good news to those who have had promises made to them.

Read the story HERE.

It should be noted that Palm Beach County government, including PBSO and Fire/Rescue, participate in the state run Florida Retirement System (FRS). Although not fully funded this year, it is in better shape than some states, and Governor Scott has proposed major changes to FRS that will make it much more affordable for participating governments. By our measure, the Scott proposal could save up to $60M per year for PBC, although it will depend on some details that haven’t yet been analysed – particularly the contribution rate for special risk employees if the accrual drops to 2%. TAB will be publishing our estimates in this area in a coming article.

TAB Legislative Wish-List – an Update

Since we published our “Legislative Wish List” last month, the outlook for the coming session has come into focus. Two of the 4 items appear to be off the table, while one of them – FRS reform, has been exceeded by the just announced proposal by Governor Scott. Here is an update.

FRS Reform

We support the county’s desire to require employee contributions to FRS, modify the fixed 3% COLA, reduce the DROP program, explore Defined Contribution plans, and tighten the calculation of AFC (Average Final Compensation), but consider their “things to avoid” as too restrictive.

The Governor’s plan on the other hand jumps to a full 5% participant contribution, ends the COLA on accruals after July of this year, drops the DROP altogether, and offers new hires a Defined Contribution plan only. Furthermore, the plan would cut the accrual rate for the “special risk” class from 3% to 2%. He estimates this plan will save the state’s taxpayers about $2.8B over two years. In TAB’s quick calculation, just two of these changes – the special risk accrual rate and the 5% contribution, would save Palm Beach County about $17M per year from Fire/Rescue pension contributions, and about $21M from PBSO.

We therefore much prefer the Governor’s proposal to the county’s agenda and hope that the county Delegation can support it against the significant opposition that is sure to come.

The opposition that will follow this proposal needs to be put in perspective. When the FRS statute was first introduced, the “special risk” class accrual was 2%. Meant to apply to police, corrections officers and firefighters whose physically demanding jobs required them to retire at an earlier age, the differential was to provide them with a roughly equivalent pension at 25 years that a “general class” employee would get at 30 years (approximately 50% of AFC). During 2000, Special Risk Class accrual rates were increased from 2% to 3% for all years between 1978 and 1993 for all members retiring on or after July 1, 2000; the Legislature funded this $696.8 million change from an actuarial surplus in the FRS trust fund over a three-year period.

The following is from 121.0515 FS:

LEGISLATIVE INTENT.—In creating the Special Risk Class of membership within the Florida Retirement System, it is the intent and purpose of the Legislature to recognize that persons employed in certain categories of law enforcement, firefighting, criminal detention, and emergency medical care positions are required as one of the essential functions of their positions to perform work that is physically demanding or arduous, or work that requires extraordinary agility and mental acuity, and that such persons, because of diminishing physical and mental faculties, may find that they are not able, without risk to the health and safety of themselves, the public, or their coworkers, to continue performing such duties and thus enjoy the full career and retirement benefits enjoyed by persons employed in other positions and that, if they find it necessary, due to the physical and mental limitations of their age, to retire at an earlier age and usually with less service, they will suffer an economic deprivation therefrom. Therefore, as a means of recognizing the peculiar and special problems of this class of employees, it is the intent and purpose of the Legislature to establish a class of retirement membership that awards more retirement credit per year of service than that awarded to other employees; however, nothing contained herein shall require ineligibility for special risk membership upon reaching age 55.

We think returning to the original intent of the statute is appropriate.

The following table illustrates the current FRS attributes, the county agenda, and the Governor’s Proposal. An excellent summary can be found in the Sun-Sentinel HERE.

	Current FRS	County Agenda	Rick Scott Proposal
Accrual Rates	1.6% general 3% special risk	No Change	1.6% general 2% special risk
Participant Contributions	None	“Modest Amount”, indexed cap, sliding scale, “offsets”	5% across the board
Defined Contribution Plan	Offered with few takers	Incentives, but not mandatory	Only option for new hires
COLA	fixed 3% / year	Indexed to inflation	Eliminated for accruals past July 2011 (protects current retirees and accumulated benefits)
DROP Program	Continue working for 5 years while pension accumulates, then lump sum	Wait time lengthened, credit for federal employment	Eliminated after July, 2011

Palm Beach County Sheriff Career Service Legislation

The county wants to modify this statute to allow changes to current benefits during collective bargaining. Currently, no existing employer-paid benefits and emoluments to all certified and non-certified employees of the Sheriff with regard to the pay plan, longevity plan, tuition-reimbursement plan, career-path program, health insurance, life insurance, and disability benefits may be reduced except in the case of exigent operation necessity”. We support this change, but have been told by county staff and several commissioners that it is dead in the water. As it is a local bill, unanimous support in the Delegation is needed and the politics are just not there for a measure that would have union opposition.

Neither this item nor the following one were discussed at the recent joint meeting between County Commission and staff and the Legislative Delegation.

Fire/Rescue Sales Tax Surcharge Fix

The county wants to fix 212.055 FS to enable a return of a ballot initiative to raise the sales tax in the county to fund Fire/Rescue. We would prefer to repeal the provision and save us the trouble of a ballot initiative fight. Fire/Rescue should have to justify their budget every year, just like other county departments.

A bill was introduced to limit the use of revenues so collected, but was withdrawn when it was pointed out that amendments could have enabled the tax. As far as we know, no further action is pending and no bill had been introduced by the deadline last Friday by any of the county delegation.

Local Accountablility

HB107, “Local Government Accountability”, was introduced by Representative Jimmie Smith, FH43, Citrus County, and is now in committee, along with the companion Senate Bill SB224. We like it for its provisions on budget detail to be supplied by the Sheriff. The bill does the following:

Revises provisions relating to procedures for declaring special districts inactive; specifies level of detail required for local governmental entity’s proposed budget; revises provisions for local governmental entity’s audit & annual financial reports; requires local governmental entity’s budget to be posted online; revises budgetary guidelines for district school boards.
Effective Date: October 1, 2011

This was brought to our attention by the Clerk’s Office and we believe it deserves support by the local Delegation.

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