Judging from the amount of media coverage the Florida Retirement System and your benefits are receiving, it isn’t a question of whether there will be changes made this legislative session, but a question of what change and how much.
“Change is inevitable”…
After last weeks run-in with HB 303, we might review the overall challenge to FRS Participants. Judging from the amount of media coverage the Florida Retirement System is receiving, it is not a question of whether there will be changes made, but a question of what change and how much. Our newly inaugurated governor, Rick Scott, has made it very clear that he believes FRS is a “ticking time bomb”. Last year’s legislative session included over 35 bills introduced to make changes at FRS, and we can speculate that those proposals might simply be foreplay for this session’s action. Governor Scott has announced he will make his recommendations known by February 4th.
Why is this such a major issue all of a sudden? As of the FRS Annual Report from June 30, 2008, the Pension Trust was slightly “overfunded”. When Lehman Brothers went bankrupt in September and created a financial panic, the assets in the plan dropped significantly, and the fund became “underfunded” for the first time in 11 years. As of the most recently published annual report, for the period ending June 30, 2009, the fund was only 87.5% “funded”, with some $96.5 billion. According to the MyFRS website, as of December 31, 2010, the FRS pension assets were up to almost $124 billion. That is putting the fund assets back on par with where they were in 2008 when it was fully funded, and is a gain of some $30 billion since the 87,5% funding report . According to the FRS and SBA Annual reports, the amounts are as follows:
The data indicates that public employees, both state and local, are NOT overpaid!
This article is a must read. It is a well presented, and thoroughly researched paper comparing the compensation and education of public vs. private employees by the noted think tank, the Economic Policy Institute.
As you will recall, Crist’s veto nullified a reduction in the interest rate paid to DROP participants from 6.5% down to 3% in House Bill 5607. It also would have established the basis for employer contributions into the pension plan.
While we don’t know if those line item vetoes will be a target of the special session, we can only imagine the legislators will be keen on overriding anything that Crist Vetoed. You will recall that these are the bills that passed without being discussed in committee where opposing views could be voiced. It is essential that all 685,000 members contact their Representatives and Senators and urge them to NOT override the FRS veto’s, as well as making sure your Legislators know that you do not want them reducing or changing the benefits that were promised to you at the time of employment. Numbers count, encourage your fellow workers and FRS members to call and share this information.
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?
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.
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.
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.
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.
Congratulations! , for being in a position to begin considering your retirement options within the Florida
Retirement System (FRS). The decision to retire requires considerations that will affect your
comfort and financial well being for the rest of your life.
… for being in a position to begin considering your retirement options within the Florida Retirement System (FRS). The decision to retire requires considerations that will affect your comfort and financial well being for the rest of your life. FRS requires that you make those decisions in a timely manner, and must be completed with in the “election period” allotted. You must consider your pension and what it provides; income to cover living expenses, earnings from other investments, how your FRS options might affect your personal net worth, the need for insurance, and any tax ramifications your choices may make.Many of the decisions you must make are irreversible, therefore it is important that you educate yourself. Some things we suggest:
§Research your options through the Division of Retirement
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 currentvalue of your retirement into a self-directed IRA account at retirement.
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 basicsfor 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.