Testimony: Status of the Florida Retirement System

Chairman Rodrigues, committee members, thank you for the opportunity to share our project’s perspective on the current state of the Florida Retirement System (FRS) comprised of the FRS Pension Plan, colloquially known as the FRS defined benefit pension option, and the FRS Investment Plan, or what’s better known as the FRS defined contribution option.

My name is Vittorio Nastasi, I serve as a policy analyst at Reason Foundation, a national 501(c)(3) libertarian-leaning think tank, and 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 to 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. Our project has provided technical assistance to the policymakers and stakeholders leading some of the most significant pension reforms across the country the last several years, including major bipartisan, successful reforms in Arizona, Michigan, Colorado, New Mexico and South Carolina.

Using publicly available data and annual financial reports published by FRS, our quantitative team has built an actuarial model of the FRS system that has allowed our analysts to spotlight areas of systemic risk and inefficiencies that have resulted in not only the FRS defined benefit plan going from 118 percent funded and a surplus of $13.5 billion to 82 percent funded and holding over $36 billion in earned, yet unfunded, pension obligations that are implicitly protected by law, but also how the defined contribution Investment Plan, as currently built today, falls well short in providing adequate retirement security to public sector employees.

Regarding the current state of the FRS pension plan, underperforming investment returns have been the largest contributor to the unfunded liability, adding $17 billion in debt since 2008. Milliman Inc.—the actuaries hired by the system—warned for three straight years (2016, 2017, and 2018) that the system’s assumed rate of return was not reasonable, leading to its eventual reduction to 7.0 percent. Even with the reduced assumption, however, our analysis indicates that FRS still has a less than 40 percent probability of achieving or exceeding that rate over the next ten years. Market outcomes below FRS expectations will still likely be an issue generating unexpected costs for taxpayers, and the unfunded liabilities that exist today will continue to inhibit plan assets from compounding over decades, making paying down the $36 billion debt and honoring the state’s long-term obligations more di­fficult.

Regarding the current state of the FRS Investment Plan, members contribute 3 percent of their income to their individual account while the state contributes a total of 6.87 percent of payroll to support those Investment Plan members. However, of the 6.87 percent employer contribution, 3.56 percent is currently being used to pay down already accrued Pension Plan debt, with which Investment Plan members have no association.

The resulting aggregate 6.31 percent contribution into an employees’ Investment Plan account falls far below industry standards for retirement benefit adequacy, which call for 10 to 15 percent of annual income to provide adequate retirement income for those participating in Social Security.

Despite past reforms to the FRS system, it is clear, based on our actuarial models, 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 all stakeholders to help facilitate a productive exchange of ideas.