The “New” FRS DROP

there is no magic to DROP, the bulk of the DROP benefit is simply your own pension being returned to you after the 5 years.

For those of you that were interested in entering the DROP, you might not want to give up so quickly because of the decrease in interest rates.  The rate reduction from 6.5% to 1.3% initiated by the Florida Legislature as of July 1 does not necessarily make the Deferred Retirement Option Program obsolete.  Certainly, it lowers the earnings, but, the biggest part of the DROP sum is not interest, but simply your pension payments accruing each month in the DROP account.  There seems to be some misunderstanding about these numbers.  It appears that those of you choosing to enter the DROP on or after July 1 will earn the lower 1.3% interest rate on your pension payments.  If you are already in the DROP, and once you begin the DROP, you will NOT have to make the 3% employee contributions!

Your DROP amount will not decrease by 70%, only the interest earned will.  As we discussed on our web page FRSOptions.info , there is no magic to DROP, the bulk of the DROP benefit is simply your own pension being returned to you after the 5 years.

When you enter the DROP, you technically retire and begin to receive your pension.  Since you are going to continue to work, instead of the pension checks coming to you each month, those checks are deposited in your “DROP account”, and interest is then added to it.  The monthly amount going into your DROP is determined by the same calculation as your pension, which is:  Years of service, multiplied by service credit (3% for special risk, or 1.6% for regular members.  The result is then multiplied by your Average Final Compensation, which is the 5 years of your highest earnings.  For example, you have worked 30 years, and average of your highest five years of compensation (your AFC) is $50,000.   Your calculation is 30 times 1.6%, times $50,000, or a pension of 48% of $50,000, or $24,000 per year – so you would receive $2,000 per month into your DROP account.  Each year, on July 1, you will receive an annual increase by whatever your Cost of Living Adjustment (COLA) is.

Continue reading “The “New” FRS DROP”

Amendments to SB 1130 FRS Reform

The biggest change as we see it would indicate the amended version will allow for up to 500 hours of overtime to be used in the computation of the Average Final Compensation

Today the Florida Senate returned a “Strike-All” Amendment to Senate Bill 1130 which is meant to reform the Florida Retirement System.  The purpose of the “Strike-All” was to amend the language and stipulations of the original bill, filed by Senator Jeremy Ring.  There were also 5 additional amendments proposed changing other aspects of the proposal.

  • The biggest change, as we read it, would indicate the amended version will allow for up to 500 hours of accumulated leave payments to be used in the computation of the Average Final Compensation.  (lines 208-248, and 274-308).  And further appears that for service prior to July 1, 2011 overtime is included.

This seems to be a significant compromise to the original proposal, but excludes overtime after July 1.  It does not mitigate the fact that overtime is time worked for compensation earned, and therefore, as compensation, should be used for the AFC calculation. Continue reading “Amendments to SB 1130 FRS Reform”

The Governor’s Proposal for FRS Reform.

Rick Scott has released his proposal for reform of the Florida Retirement System. As expected, the changes are far reaching and dramatic.

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.

“Floridians shouldn’t have to send more of their MONEY to Tallahassee to pay for non-essential government programs or solely fund the retirement programs of government employees.”

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!

Continue reading “The Governor’s Proposal for FRS Reform.”

Scott’s Proposals for FRS

It might be be premature to make any decisions until the details are known.

As you are no doubt aware, Governor Scott is slipping tidbits about his plan for FRS into the news.  Unfortunately, those tidbits are sparse in detail and his full plan is not scheduled to be released until February 7, so it is very difficult to get a grasp of how they will ultimately affect Florida Retirement System workers and retirees.  It is obvious the changes, IF ENACTED, will be significant.  It might be be premature to make any decisions until the details are known.  In the meantime, 1,000,000 strong FRS participants and retirees should be contacting their legislators and directing those representatives as to how they want to be represented in Tallahassee.

Crist Vetoes cut in DROP interest?

Governor Crist exercised his line item veto power to veto HB 5607 which would have cut the interest rate paid on DROP form 6.5% t0 3%

We have just heard that Governor Crist exercised his line item veto power to veto HB 5607 which would have cut the interest rate paid on DROP from 6.5% t0 3% for those entering the DROP after July 1 of this year.  According to our sources, Crist vetoed the cut because he didn’t like the way it was rushed into the legislation at the end of the term, without going through the normal process!  We will keep you informed.

Should FRS drop the D.R.O.P?

When the DROP was initiated, 6.5% was about 125% of the then 5.25% five year Treasury bond rate. With the yield on the five year T-bond down to 2.5%, the same 125% premium would put the DROP rate at 3%. If you survey other states with DROP plans, you will realize that 3% is a pretty common rate.

Since potential legislative cuts to your retirement benefits are nearly inevitable, we thought it might be educational to discuss your Florida Retirement System Options, and what changes might be made.  More importantly, we want you to understand how they might affect you!  We will begin this week with the scoop on the Deferred Retirement Option Program (DROP).   (For an overview of the DROP program, please see FRSOptions.com)

Back in 1998, when the Deferred Retirement Option Program was initiated by the Florida Retirement System, the world was a different place!  The Stock Market was on a roll; having just completed a 10 year run that averaged 19.21% per year.  The 5 year Treasury bond was paying about 5.25% and the coffers of the Florida Treasury were flush.   Skip ahead to the beginning of 2010 and the stock market has just completed its worst 10 year stint in history, and has a net minus 2% return over the last 10 years.   The 5 year treasury is only yielding 2.5%, and the Florida Treasury is facing a revenue shortfall of some $3 billion.  A shortfall that is growing, and expected to get even more dire in the foreseeable future.

The Florida Legislature is faced with the daunting task of cutting the budget to meet the shortfall in tax revenues due to the monster recession, and the Florida Retirement System is facing its first year of underfunding in over a decade.  The”Sunshine Review” of the State Budget has a succinct outline of the budget situation.  Suffice it to say the politicians see employee pension plans as a cherry ripe to be picked.  By focusing attention on the temporary underfunding of the FRS pension plan, it seems to have made your retirement benefits an easy target for spending cuts to help balance the state budget. Despite the fact that FRS is one of the most solid Pension funds in the US.  You can expect that the legislature will be looking harder and deeper next year, and will most certainly put your retirement benefits at greater risk.

Continue reading “Should FRS drop the D.R.O.P?”

DROP Rate Dropped!

the document states the interest rate paid on DROP will be reduced from the current 6.5% to a new rate of 3% for all participants who enter the DROP on or after July 1, of 2010. W

The fears we voiced on Monday have come true on Wednesday.   In a document we secured today, which was introduced this morning at 10:00 am, titled “State Budget Conference Chairs bump issues Senate offer Conforming and Implementing Language” (click on the title to be directed to the link) has some last minute introductions that were claimed to be tabled.

Line 1 of page 7 of the document states the interest rate paid on DROP will be reduced from the current 6.5% to a new rate of 3% for all participants who enter the DROP on or after July 1, of 2010. We have further confirmed that this is already in the budget, so it appears to be a done deal.  At 3% the Deferred Retirement Option Program loses its attractiveness as a viable retirement option.  We will address this in detail in a later post.

The following lines of the document spells out that the door will be open for EMPLOYEE contributions beginning in 2011!  This would indicate that your contributions are already in process, and it is simply a matter of how much you are to contribute.

Continue reading “DROP Rate Dropped!”

Florida Retirement System – Should I Drop? – Civilian Participants

With the Investment Plan, employees can opt out of the pension plan at retirement, and transfer the entire value of their retirement benefit into the Investment Plan. This is known as a “lump sum rollover”.

So … Should I Drop ????? for Civilian participants.

Before we decide, let’s take a look at why we even have a decision to make. FRS added the DROP program to the Pension in 1998 as a way to induce employees to work longer. Prior to 1998, an FRS participant had no options – they retired and received a monthly pension check.  End of story!  FRS further expanded the range of retirement options in 2002 with the addition of the FRS Investment Plan. This change was significant! Now a FRS Participant has several different retirement options to choose from.  There is still the basic Pension, there is a combination Pension and the DROP (Deferred Retirement Option Program), and after 2002, a third alternative whereby you can participate in the FRS Investment Plan, and take control of how your retirement money is invested.  You also have a fourth option, which is to “roll the current value of your retirement into a self-directed IRA account at retirement.

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The DROP basics for Civilian Participants

Since public sector employees may find it difficult to accumulate significant wealth on their often moderate salaries and have had little chance to accumulate wealth in a retirement plan (outside of IRAs or Deferred Comp), the DROP was initially very attractive. It was the only real way to get a decent pension, AND a nice lump sum of money.

The DROP basics for Civilian Participants

DROP is an acronym for Deferred Retirement Option Program. FRS added the DROP program to the Pension in 1998 as a way to induce employees to work longer, in an attempt to keep employees from retiring as soon as they are first eligible. Agencies realized that it cost far less to provide a DROP benefit for a current employee than it would cost to recruit and train a NEW employee. So, in 1998 the Florida Retirement System (FRS) instituted a program that could entice experienced employees to continue to work for up to five more years and at the same time allow them to accumulate a lump sum of money that would be available at retirement – the DROP.

Continue reading “The DROP basics for Civilian Participants”