As states like Illinois call for federal bailouts and funding to assist their struggling public pension systems, Sen. Rick Scott is boasting about the fiscal condition of the Florida Retirement System. Scott claims Florida is “well-positioned to address the coming shortfall in state revenue without a bailout” due to the “responsible budgetary decisions” made while he was in the governor’s office.
While it is true that Florida is in a better position to weather the current economic and market volitivity than the state-run pension plans with even more unfunded liabilities that Sen. Scott chose to compare Florida’s system to, like Illinois, New Jersey, and California, the state’s policymakers should not mistakenly view the Florida Retirement System’s (FRS) current financial status as strong or acceptable.
Florida’s pension system is $30 billion short of the money needed to provide the retirement benefits that have been promised to the state’s public employees. Using actuarially-adjusted values in the most recent FRS valuations, which were made prior to the current coronavirus pandemic and this year’s stock market losses, the state retirement system’s funded ratio was 84.2 percent, well below the 100 percent funded ratio target recommended by the American Academy of Actuaries’ Pension Practice Council and the Government Finance Officers Association. In other words, at that time, FRS only had 84 cents for every dollar it needs to pay for the retirement promises the state has made to its public workers and retirees.
Unfortunately, the pension system’s funding situation is likely to deteriorate further due to the current economic conditions. During the financial crisis of 2008, for example, the Florida Retirement System’s investment return was -19.71 percent. As a result of that bad year for investment returns, FRS’ funded ratio plummeted from 106.7 percent to 88.5 percent, pushing the system from having a surplus to reporting $23.6 billion in debt. The impact of the current COVID-19 pandemic and economic downturn could produce similar or even worse investment return results for FRS.
If FRS’ investment returns come in at -5 percent for this fiscal year—a number many experts think is an optimistic scenario given the stock market, the Pension Integrity Project at Reason Foundation finds FRS’ unfunded liabilities could grow to $47.7 billion. If the state’s investment returns come in at -15 percent this fiscal year, FRS’ unfunded pension liabilities could balloon to $63.7 billion.
So, rather than comparing FRS to some of the worst-off public pension plans across the county, as Scott did, Florida lawmakers should address the serious issues that were causing FRS to have multi-billion-dollar pension shortfalls well before the coronavirus pandemic and are likely to be significantly exacerbated by the economic downturn.
Similarly, the state should revisit its previous pension reforms. In 2000, the Florida legislature prudently decided to offer an additional retirement plan to new hires called the FRS Investment Plan, a portable, defined-contribution retirement plan similar to 401(k) retirement plans most private-sector workers are familiar with.
Unfortunately, the state’s Investment Plan has its own financial problems. Public employees contribute 3 percent of their annual salary into their retirement accounts and the employer, the state, contributes an additional 3.3 percent, for a combined contribution of 6.3 percent of an employee’s salary. This is well below the estimated 10 to 15 percent contribution rate needed to generate sufficient retirement income to supplement Social Security for most people. Although defined contribution plans generally do not add to state pension debt, dangerously inadequate contributions could leave thousands of Floridians financially vulnerable in their retirement years.
Considering these realities, Florida is in desperate need of structural public pension reforms. FRS never fully recovered from the 2008 financial crisis—despite the decade of stock market growth that followed. And now, amidst the coronavirus pandemic and decreased economic activity, FRS is arguably more financially vulnerable today than at any time in the last 25 years. Rather than congratulating themselves, the state’s leaders should pursue the reforms needed to ensure pension promises made to public workers are kept.