Chairwoman Stargel, committee members, thank you for the opportunity to share our technical perspective on Senate Bill 84. My name is Vittorio Nastasi and I serve as a policy analyst at Reason Foundation, a national 501(c)(3) libertarian-leaning think tank. I am also a resident of Tallahassee. Today I’m here on behalf of our Pension Integrity Project which offers pro-bono technical assistance and policy research to help officials and other stakeholders design and implement policy solutions aimed at improving public pension plan resiliency, promoting retirement security for public employees, and lowering the long-term financial risk to taxpayers.
Despite several reform efforts over the past dozen years, the Florida Retirement System is $36 billion in debt and the situation is worsening, not improving. The system has had a net change in position of negative $50 billion in just 20 years, and the reforms to date have still not solved the underlying drivers of unfunded liabilities.
Hence, we commend the sponsor and Senate President for raising awareness about the need to finally solve the structural underfunding of FRS once and for all via SB 84. The legislation, under the amendments proposed today, would close the current system to new entrants except for those in public safety, or special risk members.
As written, SB 84 would definitely reduce risk to the state even further by limiting the flow of new entrants into a structurally underfunded pension system that still bears significant financial risk moving forward.
That said, if fully implemented, our actuarial analysis of SB 84 shows that while it may result in long-term cost savings, FRS will still be extremely vulnerable to very realistic market stresses. Under a Dodd-Frank style stress test analysis, the FRS fund will still be nearly $39 billion short on funding promised benefits in 2050, meaning no progress will have been made in closing the funding gap. We also find that the current concept would be more effective if paired with other changes to funding policy, amortization, and assumption-setting to effectively contain the risks that lead to $36 billion of currently unfunded pension benefits in the first place.
In the interest of suggesting some technical changes to SB84 that would allow you to achieve the goal of eliminating the FRS unfunded liability on a sustainable basis, we offer the following ideas:
- Lower the assumed rate of return on FRS pension investments gradually to 6.0 percent over a 10-year period;
- Pay down all new FRS unfunded liabilities much faster than today; and
- Improve the DC contributions in the default Florida Investment Plan to reach minimum industry-standard levels
Our actuarial modeling suggests that incorporating these features would still allow the state to save long-term tax dollars over time while ensuring that FRS’s unfunded liabilities are completely paid off over the next 30 years.
Despite past reforms to the FRS system, it is clear that more work must be done to de-risk and accurately price the FRS Pension Plan. Steps are also needed to better support contributions into the FRS Investment Plan to create a more competitive benefit offering relative to industry standards.
We commend legislators, members, and stakeholders willing to examine these important issues. We will continue to offer our technical perspective on any policy proposals stemming from today’s discussion or any others going forward. Thank you again for the opportunity to share our perspective, and we look forward to providing our modeling and technical expertise to help facilitate a productive exchange of ideas.
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