Newly elected Governor Rick Scott has released his proposal for reform of the Florida Retirement System. As expected, the changes are far reaching and dramatic. The Governor’s Bill on Pension Reform (beginning of page 610) proposal is 213 pages long, so we have attempted to hit the highlights, as the details will unfold ad infinitum over the next several weeks.
This quote from Governor Governor Scott’s speech today in Eustis seems to sum his position on the Florida Retirement System up neatly, by lumping you in with “non-essential government programs”. Along with cutting your benefits, and taxing you to pay for future benefits, Governor Scott kicked off his self-proclaimed “job’s budget” by eliminating almost 9000 jobs in the state!
Points we believe pertinent are as follows;
Starting July 1, 2011 Investment Plan membership will be mandatory for all new employees (lines 684-689). The FRS Pension Plan will cease to be an option for employees hired after June 30, 2011. After July 1 the only retirement plan for all new hires is a defined contribution plan, similar to a 401k.
The Deferred Retirement Option Program (DROP) will be closed to new participants effective July 1, 2011. Member participating in the DROP prior to that date will be allowed to continue in the DROP for their full term. (lines 2459-2462)
ALL members will contribute 5% of their Gross Compensation to the Florida Retirement System. (lines 4932-4962)
The 3% cost of living adjustment (COLA) goes away for service after June 30, 2011. Current members within the Florida Retirement System will be given a “pro-rata” COLA based on the percentage of their service prior to June 30, 2011, divided by their total service at retirement. As we read this formula, a member who has completed 20 years of service prior to June 30, and works a total of 30 years, would get an annual cost of living increase of 67% of 3%, (20 yrs divided by 30 total yrs equal .67 times the 3% Cola factor), or a fraction over 2% per year. (lines 2490-2513). It appears those already collecting benefits will remain unchanged, and will continue to collect the 3% COLA they were promised.
Service Credit for Special Risk members shall decrease to 2% for all creditable service years after June 30, 2011. (lines 1908-1919) Credit will be given for each year of creditable service prior to that date on a pro-rata formula.
Special Risk Administrative Class will cease to exist on June 30, 2011, and beginning July 1, 2011 those members “shall participate in the Regular Class”. (lines 1146-1149)
Service Credit for Regular risk remains unchanged at 1.6% per service year. As we read it, the Elected Officers Class reduces to 1.6% after July 1 (lines 1934-1937, 1878-1880), as does the Senior Management Class (lines 1923-1926, 1878-1880).
The classifications within the Florida Retirement System would be re-defined, most notably for “Special Risk” members . As we read the proposal, it may not remove anyone from Special Risk that is already categorized as such, but it appears the criteria and process is a bit more stringent going forward. Hopefully, more details will follow to clarify this section. (lines 735-948). It is expected that Senator Ring’s upcoming proposal will further define the new specifications for Special Risk going forward.
The normal retirement ages appear to remain unchanged at age 62 or 30 (lines 3057-3063) years of service for Regular members, and age 55 or 25 years of service for Special Risk (3070-3075)
While there are other changes indicated, we are hesitant to offer our interpretations or opinions, as the language is confusing to our un-legally-trained minds. We are hopeful clarification will come in the near future, as the details seem pertinent to determining how the suggested changes will achieve the desired objectives as stated by Governor Scott.
According to the FRS Annual Report for 2009 (page 12, first line), the state’s contribution to FRS was $667.90 million. This would indicate a major math problem for the Governor to achieve the $1.4 billion per year savings he has announced, since the entire state contribution was less than half of Scott’s declared savings. While we are remiss to think facts would interfere with political rhetoric, this was beyond our comprehension. It seems maybe the difference might come from the local governments, which leads us to believe the taxpayer may not save anywhere near the amounts projected. The confusing language and the pertinent lines of the proposal can be found as follows:
Required Employer contributions effective July 1, 2011 are 5.23% for Regular Class, and 11.63% for Special Risk class. (lines 4961-4966), Employee contributions would be 5%. Total contributions to the member’s (Employee) Investment Plan Retirement account will be 9% for regular and 11.25% for special risk (lines 5037-5042). It appears the total contributions (employer plus employee) to FRS are 10.23% for Regular and 16.63% for Special risk, but only 9% and 11.5% respectively will be contributed to member’s accounts. Does this mean the employer/employee contributions are higher than the amounts actually allocated to the members Investment Plan? If we understand this correctly, the local governments would be collecting retirement funds that are not contributed to the retirement plan. Lines 5587 through Line 5624 seem to reallocate the “savings” recognized by the local governments and passed on to the states General Revenue Fund. We are hesitant to draw any conclusions on this point, and anticipate clarifying language to be forthcoming.
Section 35 (lines 5627-5637) would seem to be language that might accomplish the proverbial “CYA” for the legislators by stipulating that these changes are “a proper and legitimate state purpose … as required by s.14, Article X of the State Constitution and part VII of chapter 112, Florida Statutes. Therefore, the Legislature determines and declares that this act fulfills an important state interest.” Article X, section 14 of the Florida State Constitution reads as follows:
“State retirement systems benefit changes.—A governmental unit responsible for any retirement or pension system supported in whole or in part by public funds shall not after January 1, 1977, provide any increase in the benefits to the members or beneficiaries of such system unless such unit has made or concurrently makes provision for the funding of the increase in benefits on a sound actuarial basis”.
Both citations from the Constitution and Florida Statutes pertain to the actuarial soundness of the Pension Plan. Could it be the legislators are making changes to FRS Pension Benefits under the proviso that the plan is actuarially unsound, and therefore, the change “fulfills an important state interest”? This is certainly a legal question outside of our ability to determine.
Ironically, the Actuarial Report on pages 36 and 37 of the most recent FRS Annual Report stipulates that FRS “meet the requirements and intent of Part VII, Chapter 112, Florida Statutes, and Section 14, Article X of the State Constitution”. Furthermore, the State Board of Administration Releases 2010 Annual Investment Report further stipulates the financial soundness of the plan, and its “strong actuarial position and history of solid funding.” According to Ash Williams, director of the State Board of Administration recently discussed the Plan was near 2008 levels, when the plan was over-funded.
In a handout distributed to the Representatives on January 20 for the Pre-Session Information center, we would direct your attention to page 5. According to the legislature’s own information, as of July 1, 2010 the plan was 87.9% funded with total asset values of $109.5 billion. With a little simple math we can deduce that if $109.5 billion is 87.9% funded ($109,000,000,000 divided by .879 equals $124,500,000,000) then the plan would be fully funded at $124.5 billion. As of January 31, 2011, according to the MyFRS.com website, the FRS asset value was $125 billion!
FRS Options believes all members should contact their respective legislators by phone and mail. Emails may be sufficient, but they might be the easiest form to ignore. When placing the calls, we would recommend the emotional content be left behind, and your call should be a calm and logical look at the facts. We would also recommend you leave your party affiliation at home; this is a bi-partisan issue. We fully expect Democratic Senator Jeremy Ring to introduce his proposals to the Senate, and up to this point, Ring’s comments have sounded eerily like Scott’s. Consider questioning your Representative’s and Senators about the following;
1. It can be argued the plan is well funded and financially sound, ask why are cuts necessary.
2. The Florida State Budget is looking to have a shortfall of something close to $3.8 billion, out of a total budget of some $70 billion. That budget is almost $4 billion more than last year’s approved budget. Of that shortfall, Governor Scott is proposing Pension Reform to provide $1.4 billion of the shortfall. In addition to reducing your benefits, he wants to tax all FRS members 5% of their total compensation. Ask your legislator why FRS members should bear the burden of almost HALF of the total shortfall needed. According to the annual report, the State contributions to the system are only about $668 million, or ONLY about ONE percent of the entire budget!
3. Despite the propaganda in the press, FRS members are not retiring “high-on-the-hog”. The average benefit to FRS members (according to the Annual Report page 10) is about $16,845, and the average member receives benefits for only 9.53 years (Annual report page 56, second line from bottom of page). This is in stark contrast to the politicians that have painted a picture of retirement at age 45 and collecting benefits for the next 45 years! Less than 11% of total employees (Special Risk, Ann. Rep. page 43) are eligible to retire after 25 years, and over 50% of FRS members are teachers. Ask your legislator if this is an unfair retirement for employees who have dedicated themselves and in some cases their lives to the state of Florida and its taxpayers.
It has been demonstrated many times that your voice can be heard, and you can influence the way our legislators vote on the various proposals. BE HEARD!