This year I sponsored legislation to reform the Florida Retirement System (FRS). This bill has proven to be very controversial. Many State Employee’s, including police, fire fighters and teachers have expressed their disappointment with this bill, or all bills that dealt with reforming the state pension system. I want to use this blog to lay out the facts.
FRS: Florida has a defined benefit plan (DB). In a defined benefit plan employees earn (accrue) a percent of their salaries each year that will be their pension once the retire. Most private companies have moved away from a defined benefit plan for a defined contribution plan (like a 401K). Most governments offer a DB plan. There is nothing wrong with a DB in general. As long as there is a healthy number of active employees that support the number of retirees, then a DB plan can go on forever. Florida does an actuarial study each year and that study, using a five year smoothing, tells the legislature how solvent the fund is and at what rate the employers must fund the plan per employee.
In Florida, 100% of the dollars to fund the DB plan is paid by the employers. The employers are the State, local fire departments, municipalities and law enforcement offices. Not all cities, counties, fire and police are on FRS, but all state workers are. Based on the 2011 actuarial study employers must contribute 9.96% for general employees (including teachers) and 22% for special risk (fire fighters and law enforcement). This study also identified a 16.7 billion dollar unfunded actuarial liability. If the State were to fund this unfunded actuarial liability the report requires a 496 million dollar expense to general revenue to the pension fund in the 11-12 budget. The report also found the FRS pension fund well funded at about 88%. Nationally, any pension fund funded at or above 80% is considered well funded. Our FRS pension is well funded and well managed.
Why reform: Even with a well funded pension system, we would still face a potential 496 million dollar hit to general revenue. When you consider that Florida faces a 4.6 billion dollar shortfall in this budget year, and considering well over a million Floridians out of work, the Legislature is facing a serious need to cut both the size and scope of our State government. The State simply cannot afford to raise taxes on the backs of unemployed citizens and struggling businesses. We must cut the budget in order to ensure it is balanced. That is a 17% cut to state dollars in the budget. A 17% cut would be the largest single cut in Florida’s history. A 17% cut equates to a cut in education, nursing homes, healthcare, criminal justice, roads and bridges and all aspects of core State services. With such a serious cut, it would be irresponsible to ignore a huge unfunded liability, even if it is a pension plan. Simply stated, the State cannot afford to continue to pay 100% of the pension liability for its workforce any longer. Florida is one of 3 states that continues to pay 100% of their employees pensions.
What Reform: So, knowing that cuts had to be made, I took the lead and sponsored the pension reform bill. After two months of committee meetings, amendments and hundreds of meetings with concerned citizens and groups, the final product is vastly different. In a minute I will lay out what the final reform bill consists of. The bill has passed the House and Senate and now awaits the Governor’s signature. However, first I wanted to explain what my goals were. I wanted to move the FRS system to a sustainable long-term pension system that was not punitive to our State Workers. So, after many changes and compromise with the Senate, here is the final product.
All State Workers will be required to contribute 3% of their salary to their pension.
The interest rate for the DROP program is reduced from 6.5% to 1.3% for all new entrants.
The accrual of additional COLA is paused for five years. All earned COLA is retained and current retirees continue to receive, however, the accrual is on hold for 5 years.
New hires, on or after July the 1st, will not vest until their 8th year (up from the current 6).
New hires, on or after July the 1st, will use their highest eight years to set their retirement pay (up from the current 5 years).
Lastly, the age and years of service is extended for all new hires (on or after July the 1st).
General employees goes to 35 years of service or 65 years of age.
Special Risk (police and fire) goes to 30 years of service or 60 years old. In both cases it is whichever comes first.
That is the end product. What do you think. Please leave your comments and have your voice heard.