Ask Why?

the FRS Pension Plan has enough assets to pay ALL of its retirement obligations for roughly the next 30 years! If that is the case, why should any benefits be cut? Why do the legislators feel it is so important to bolster a financially strong plan?

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Ask Why?

Governor Charlie Crist vetoed the impending cut in the DROP interest rate last Friday (See HB 5607) and stated his veto was because “the legislators unfairly popped the changes into the budget” (see tallahassee.com/article) .  We discussed that fact in our April 28th post Drop Rate Dropped.  It would seem the Governor has clamped down on the unfair process used by the legislators to cut benefits and increase funding for the Florida Retirement System.  Perhaps the important question for participants (and taxpayers) to have answered is Why is the legislature seeking random solutions before clearly defining the problem.  What is the motive for the legislature’s attempts to cut FRS benefits, and to increase employer and employee contributions to the plan?

The press has labeled Crist’s veto as a political move so he can identify himself as an independent.  If that is the case, so be it, it was still the right decision.  Your Florida Retirement System benefits should not be a pawn in some gambit in Tallahassee.

Starting early in the Legislative session, your benefits have been at risk.  Some of the proposed bills were pretty severe in their proposed cuts (A Call for action, HB 1319 and 1543).  All of the proposed bills were put on hold pending a “summer study” by the legislature.  From input and conversations with all of you, the question is What is the purpose of the study?  Is the legislature exploring whether changes should be made in FRS, or has the legislators already determined cuts should be made, and the study is simply to determine what changes?  I think it bears some exploration.

There have been two primary reasons presented for driving the changes: an underfunded pension plan and revenue shortfalls in the budget.

Concerns that the plan was underfunded began with the Financial Panic of 2008 and the resulting stock market crash.  A drop in value of the assets caused the Florida Retirement System Pension Plan to be underfunded for the first time in many years.  It dropped to a “funding” level of 88%.  Most of the shortfall has been made up as the market has rebounded, so it is no longer an issue.  According to the latest report (See Report) the FRS Pension Fund gained 34% last year, to put it back up to $118 billion dollars, from a low of $83 billion in March of 2009.  While that is great news, is it really pertinent, even at 88% funded, it was well within Federal guidelines for a well funded defined contributions plan.  At 100% funding, the FRS Pension Plan has enough assets to pay ALL of its retirement obligations for roughly the next 30 years!  If that is the case, why should any benefits be cut?  Why do the legislators feel it is so important to bolster a financially strong plan?

The other reason given has been the shortfall in tax revenues for the state, due to the real estate bubble and the magnitude of the recession that followed.   Since Florida is mandated to balance their budget each year, revenue shortfall is always a legitimate concern.  With revenues down, state and local governments cannot afford to spend any more money than they must.  But since the Pension Plan is funded appropriately, it should not be necessary to raise contribution rates in order to achieve the correct levels.  When HB 5607 was snuck through the legislature, it contained language that would have mandated a significant increase in employer contributions to the plan, and laid the groundwork for you the employee to contribute a portion of your earnings to your retirement also.  If the budget is balanced, and the Pension is funded, why is it necessary to increase contributions by state and local governments?  Hopefully, it wasn’t done to create a financial hardship on local government that would in turn cause the local governments to support cuts to the retirement benefits.  Is there a logical reason to increase funding for a plan that is already funded?

In the last legislative session, there were over 30 bills introduced that would have cut your benefits in some way.  30 different bills (Bills affecting FRS)!  We can acknowledge that the legislature has a fiduciary responsibility to keep tax rates and spending in control, and if there is a legitimate area to cut costs, then that is what they should do.  Is it a legitimate action for the legislature to break promises to some 650,000 employees?  When you hired on, did your benefits package stipulate that the interest paid on DROP would be 3%?  Did it mention that the legislature might arbitrarily reduce it to 3%?  Or, when you hired on, were you told that if you entered into the DROP you would get 6.5%?  Were you told, and did all of your hire documents state that you would get a “defined benefit” at retirement, and was the benefit clearly defined?  How can the legislature break those promises and renege on those agreements?

There is no doubt that taxpayers will always put pressure on the legislative body to cut costs.  It is the legislator’s duty to approach this responsibility with prudence and care.  Politics will always be a part of the equation whether the governor is switching parties or the parties are dueling over whom has more clout; these issues should not be allowed to get in the way of doing the right thing!

 Florida Tax Watch found over $60 million of expenses they have labeled Turkeys ($61 million dollars of budget turkeys)!  Has consideration been given to cutting some of those projects rather than breaking promises made to FRS members?   Senator JD Alexander has been very supportive of the retirement cuts, was instrumental in the proposed DROP interest rate cut, and he seems to have the support of many republicans.  Why not start raising your concerns with him directly, and those that support him on the ways and means committee (Committee members ).   Are there not areas of the budget that can be eliminated without cutting the benefits FRS participants have come to expect through their employment agreements?

You have demonstrated the effectiveness of communicating with your legislators.  The governor has vetoed an education bill and an insurance bill because of calls and letters from voters.  He vetoed a bill that would have cut the interest earned in DROP because he did not feel it was properly presented and discussed.  I urge each and every one of you to call your Representative and Senator tomorrow and ASK THEM WHY?

  • Jamba

    WHY? For the same reason that Jesse James robbed banks – because THAT'S WHERE
    THE MONEY IS. The difference between Jesse James and the legislature members who want to cut benefits is that James openly admitted that what he was ROBBING.

  • Vincent Lau

    I was wondering, if you are in the pension plan and dont drop, how long can you stay in the system.

  • http://www.floridaretirementsystem.info Mark Davy

    There are no limits outside of drop!

  • Anonymous

    One question you didn’t answer. Are changes on vested employees “legal?” It was my understanding that once you are vested the pension is considered a contract. If this is the case, can changes be passed on vested members arbitrarily, or must they be grandfathered and the change only affect new hires. You should answer this question.

  • Oalonso519

    Mark
    Very informative! As to why are they going after the pension plan, it seems to me, and I could be wrong, that many of these bills were introduced shortly after the Federal Medical Reform Act was passed by the President. Personally, I believe it is a way of the Republicans going after the Unions who supported the current White House administration. Their way of geting even. Unfortunately, they tend to forget that many Republicans will also be affected by the bills they are proposing.

  • http://www.floridaretirementsystem.info Mark Davy

    While that could be so, I would prefer to avoid political partisanship, and the
    potential reforms came from both sides. It could simply have been, in a time of
    deep budget cuts, both parties looked to the pension plans as being overripe and
    ready to pluck. It is a relatively easy political call to make, sacrificing the
    benefits of the relatively small numbers of FRS members, against making what
    seems to be deeper cuts to the general populace (read “voters”). Unfortunately,
    this year will be no better, as even deeper cuts are anticipated.
    Mark A. Davy

    SouthBay Investment Group, llc
    665 S. Orange Avenue, Suite 4
    Sarasota, Florida 34236

    941-951-1977
    941-952-1937 (fax)

    ________________________________

  • http://www.floridaretirementsystem.info Mark Davy

    The small print of the retirement system allows the legislature to change the benefits as they see fit. You are only grandfathered as to your entitlement to receive a benefit, and you are protected for the most part once you are receiving a benefit. Conversely, if you are vested in the Investment Plan, they can not change what is in your account, as vesting there means it is yours!

  • Anonymous

    Ok, is the time of retirement considered part of this? Can they arbitrarily change the time of retirement from 30 years to 33 years if you are vested?

  • http://www.floridaretirementsystem.info Mark Davy

    It appears they can. The legislators have the right to change the terms for those not yet retired as they see fit.

  • Garyrjas

    Well, I’m not so sure. Under Administrative law, a vested employee has certain rights. While you may be correct that they can change it, I’m not sure it is legal. If you are hired under a certain retirement system and become vested, many courts have ruled this makes your retirement a property right that cannot arbitrarily be changed. I think someone in your legal system should review this since it would be an important fact to report. Thanks for your earlier reply.

  • http://www.floridaretirementsystem.info Mark Davy

    It is my understanding ERISA laws do not apply to municipal and state government’s. They are dictated by the legislature and taxing authority.

  • Ken

    If the bill takes effect I will miss DROP by 4 years; don’t know how that cut date was established since I’ve been working here for 26 years and FRS has made the claim that I would be able (maybe now not entitled), to apply for DROP; is that the correct language, terminology? When you give people something, or an expectation, that something can be eliminated with a pen stroke. At least I wasn’t at 29 years; that would be hard to take. Wouldn’t it?

  • http://www.floridaretirementsystem.info FRS Options

    If it is any consolation, and I am sure it is not, DROP was not a benefit when you started, so they gave it to you, and then took it away, so at least you didn’t hire on with that expectation. In the 12 years it has been available, it has been a nice perq, but apparently has served its intended course.