It appears we have a Final Agreement between the House and Senate on changes to the Florida Retirement System. The changes are substantial, but not nearly as dire as Governor Scott wanted. There will be NO changes for those already retired, or those already in the DROP, your benefits remain the same. Many of the more radical changes only affect those hired after July 1, 2011. Changes for new hires only are:
For members after July 1, AFC become the highest 8 fiscal years.
Increases retirement age for all new hires after July 1:
Regular Members normal retirement age will go from age 62 to age 65, or from 30 years of service up to 33 years of service.
For Special Risk Members the normal retirement age will jump from age 55 up to age 60, and the years of service to retire goes from 25 years up to 30 years.
Vesting requirements will go from 6 years of service up to 8 years (new hires)
Changes the will affect current members in FRS are as follows:
First, there is good news and bad news for the Deferred Retirement Option Program. The DROP program is maintained, but the interest rate paid on the DROP accounts will go from 6.5% to 1.3% for those who enroll after July 1, 2011.
While this is a significant rate decrease, for Regular Members it probably doesn’t eliminate DROP as a viable program. As an example, a Regular Member with an AFC of $50,000, the DROP amount at 6.5% would have been approximately $150,000. (Under the new rate, that benefit would have decreased to around $132,000if the COLA remained). If the COLA is eliminated on DROP ( but we believe it will not be eliminated for DROP payments, as you will be entitled to the pro-rated pension payments that are deposited into your DROP account) the DROP benefit will be reduced to about $124,000. While the loss of $26,000 is significant, it remains an option that will allow you to have a nice lump sum.
All members will be required to make a 3% Contribution for all members on gross compensation. There will be NO contribution for members who in the DROP.
In what we believe to be the most devastating change, members will no longer receive the Cost of Living Adjustment (COLA) on service after July 1, 2011. The initial language implies the COLA will return to 3% after July 1, 2016 (but we would be very leery of that actually occurring. This could well be a seemingly soft introduction of the benefit reduction). The formula for a members COLA will be – ( service years prior to July 1, divided by total service years, multiplied by 3%). For instance, if you have 25 years in as of July 1, and continue to work for another 5 years, your COLA calculation will be; 25/30 times 3%, or .83333 times 3%, or a COLA of 2.5% for your retirement.
COLA is a huge factor, not only in members ongoing Pension payments, but as it reduces the pension significantly over time, it will have a serious negative effect on the Lump Sum value that members could transfer to the Investment Plan. For a member retiring at age 60 (the FRS average) and living to 84, the COLA allows a members pension to double in that time frame.
It appears this is the final proposal, and has been agreed upon by both the House and the Senate. It will go to the Governor for his signature by May 31, which would make it officially become law and effective with the start of the fiscal year beginning July 1. The other option the Governor has would be to veto any or all of the proposals. Governor Scott has indicated if he doesn’t get the budget cuts he wants, he will veto the bill – so it will be interesting to see what happens. If he veto’s the changes, they will not become effective until the legislature can come to an agreement with the Governor. Last year you might remember the legislature wanted to cut the interest rate on DROP from 6.5% to 3%, and Governor Crist vetoed it, so no change took place.
We will be posting situations and scenarios over the next few weeks to assist FRS members in making choices as to which FRS Options would be the optimal choice for them. There is time to plan and implement any changes you may deem attractive before the law and changes take place.