Without More Reforms, the Florida Retirement System’s Future Looks Bleak

While some laud Florida’s pension funding status for being above the national average for state-run public pension plans, looking beyond surface indicators reveals that the system needs thoughtful and directed reform to address several ongoing issues with the pension plan.

The Florida Retirement System (FRS), the pension fund that covers the bulk of the state’s public workers, has enough money saved up to cover 82 percent of its long-term pension liabilities. In other words, it has only 82 cents on hand for every dollar of pension benefits it has already promised to retirees. The pension plan went from a $13 billion funding surplus in 2001 to a $36 billion shortfall today.

So, what caused this precipitous fall in funding, and is FRS going to see this funding shortfall continue to grow?

To fully answer these questions, one can look at the recent history of the Florida Retirement System and apply historic trends to the fund’s future. As a common practice, pension plan actuaries forecast funding metrics forward multiple decades (usually 30 years), but their conclusions usually assume that each years’ market return will match a plan’s assumed rate exactly. However, as anyone who follows market patterns even peripherally could attest, investment returns don’t act that way.

Thus, it is also valuable to examine and apply more volatile, and less-optimistic, investment return scenarios that better resemble the previous two decades to a plan to see how well the pension system would hold up over the long-term future. A recent solvency analysis of this type by Reason Foundation’s Pension Integrity Project finds that FRS will likely continue to see a rise in unfunded pension liabilities if current problems within the system are left unaddressed.

Reason’s analysis shows that, under realistic economic scenarios, Florida’s pension debt could spike to $80 billion by the year 2050, and the annual costs of the pension system could more than double by 2040. This means that Florida taxpayers and government employers face a significant risk of rising costs, while FRS members would see their retirement plan’s funding continue to deteriorate.

Investment returns coming in below the rates predicted by FRS have been the main cause of the system’s pension debt in recent years and could prove to be so going forward. For quite some time, FRS’s own actuaries have recommended that the system lower its assumed rate of investment return to more realistic levels. While FRS did lower its assumed rates of return in 2019, from 7.4 percent to 7.2 percent, and then down to 7 percent last year, market forecasts suggest that the system’s investments are likely to still see results well below that over the next 10 to 15 years. Since 2001, the Florida Retirement System’s average rate of return has been 5.62 percent.

As FRS fails to meet its investment return assumptions and public pension debt grows, the state is required to make larger payments to fund FRS and its debt. As a result of growing pension costs, other public services like education, infrastructure, and public safety may be crowded out of Florida’s budget.

State policymakers need to address these challenges sooner rather than later to avoid unnecessary additions to long-term costs. The only way to protect FRS and its stakeholders from unpredictable and volatile market forces that lead to continually rising costs is to address the structural issues causing pension debt in the state. This includes adjusting the funding policy, adopting better risk assessment procedures and more accurate actuarial assumptions, and creating a plan to pay off the plan’s unfunded liabilities as soon as possible.

If Florida waits too long, even just a few more years to make needed policy changes to FRS, it could prove to be seriously costly to retirees, employees, and taxpayers.