There appears to be considerable interest in the recent decrease in contributions (MyFRS.com Contribution Changes) to the Florida Retirement System by HB 5005, and most notably the effect of that decrease to the members of the Investment Plan. We have been repeatedly asked to help educate our readers on the process, and to that effect, we have attempted to shed some light on the recent changes. Hopefully this will dispel rumor and false belief, and provide a background and some insight for members to understand what is happening, and what their FRS Options may be. Because the Pension Plan is a Defined Benefit Plan, the reduced contributions will have no effect on Pension Plan members. There were no changes to the Pension Plan benefits this year. On the other hand, the Investment Plan, as a Defined Contribution Plan, will see 30% less money going into their retirement plans as a result of the lowered contribution requirements. While Florida law may necessitate the changes, it seems counter-intuitive to see the Investment Plan members get punished, as the desired goal of the legislators is to have members move to the Investment Plan.
According to Florida Law, Statute 1121.71, Contributions to the Florida Retirement System are determined on an annual basis by a study of the FRS plan by the designated actuary. You may follow this link to the actual statute (Florida Statutes regarding annual retirement contributions). We have quoted the pertinent paragraph here:
1121.71 Uniform rates; process; calculations; levy.—(1) In conducting the system actuarial study required under s. 121.031, the actuary shall follow all requirements specified to determine, by Florida Retirement System employee membership class, the dollar contribution amounts necessary for the next fiscal year for the pension plan. In addition, the actuary shall determine, by Florida Retirement System membership class, based on an estimate for the next fiscal year of the gross compensation of employees participating in the investment plan, the dollar contribution amounts necessary to make the allocations required under ss. 121.72 and 121.73. For each employee membership class and subclass, the actuarial study must establish a uniform rate necessary to fund the benefit obligations under both Florida Retirement System retirement plans by dividing the sum of total dollars required by the estimated gross compensation of members in both plans.
2012/13 6.30 14.00
We can only surmise that the new rates are attributable to last year’s legislative action, whereby the Cost of Living Adjustment (COLA) was eliminated going forward, thus significantly reducing the actuarial commitments of FRS . That change will have a dramatic effect on the amount of money required to pay future Pension Benefits to members. For example, if the average (from the most recent annual report) benefit to an FRS Pension Plan member is as follows:
The average income for all Plan members is approximately $42,000, and the average pension benefit is $18,066. (A far cry from the implied “rich benefits paid for by the taxpayers” we constantly hear about in the media. They would have us believe that FRS members retire into the lap of luxury, but the real numbers tell quite a different story). If the member were to qualify for the 3% COLA, that $18,000 pension benefit would grow to approximately $37,700 at age 85 (Uniform Life Expectancy tables indicate a 60 year old person on average will live to age 85). That translates into a full 33% more benefit paid out to the member over their retirement. In the absence of COLA, the savings to FRS is considerable. Each year going forward (presuming the COLA is eliminated by 2011 legislative action, and not overturned by the Florida Supreme Court), the Florida Retirement System will save more and more money each year, as those with COLA are decreased. That alone will enable considerable reductions in the annual contributions made by employers and employees.
While we have received literally thousands of calls and comments in regard to the 3% contribution (which would have no effect of funding levels), we have received very few in regard to the loss of future COLA. We at FRS Options have long argued that the loss of COLA is a much more grievous loss than the 3% contribution members are now required to pay into their retirement. While neither change is favorable, the COLA loss is much more financially crippling. For instance:
Assume again the member is making the average $42,000 in income. The 3% contribution to FRS would be $1,260 per year. Assume 30 years of employment and the total contribution might be $37,800. Uncomfortable yes, but the change in your Pension by the loss of Cola is almost $226,000 over your expected lifetime. We believe it is better to pay $37,800 over a 30 year career, than to lose a quarter of a million dollars in pension payments over 25 years in retirement.
We suspect the damage this year is minimal, as it is an election year, and FRS members did a pretty good job of demonstrating their dissatisfaction with the legislators and the changes made, and it appears the Governor took his hits also. We fear that next year, with no election come November, could mean more benefit cuts are back on the table, especially the ruling negating the 3% employee contribution and the loss of future COLA are rescinded. It will be especially interesting if the Florida Supreme Court orders a repayment of the funds with interest, as the employers will most likely have some serious scrambling to do to come up with those funds. We suspect the legislators will make every attempt to make other cuts if they are unsuccessful in the courts. It may also wreak havoc on the funding levels of FRS, in no small part due to the reduced contributions going in to the plan after July 1. All told, it could be a perfect storm of calamity if the 3% employee contributions must be refunded, and the COLA is restored, in conjunction with radically reduced contributions to the plan. While the plan may be well funded currently, it is foreseeable that it will be grossly underfunded next year – and we hold the short sighted efforts of the legislature to blame. Stay tuned, we shall see how it all unfolds.