Saturday, February 23, 2013

My, my...look what the Republican legislature in FL is planning for their state pensions?

From John Curry, February 23, 2013
Of course, Ohio Republican legislators wouldn't do anything like that, would they?
Big state pension change analyzed by actuaries
Photo: House Speaker Will Weatherford, left, and Senate President Don Gaetz want to move the Florida Retirement System away from a defined benefit plan to a solely 401(k)-style defined contribution plan. File photo by Bill Cotterell. (Click to enlarge)
House Speaker Will Weatherford, left, and Senate President Don Gaetz want to move the Florida Retirement System away from a defined benefit plan to a solely 401(k)-style defined contribution plan. File photo by Bill Cotterell. The Republican legislative leadership's plan to "soft freeze" the Florida Retirement System -- making new public employees join a market-based investment pool similar to the 401(k) plans popular in the private sector -- will leave public agencies with dwindling numbers of employees contributing money to pay pensions for growing ranks of retirees, an actuarial study released Friday says.
"We are reviewing the study received from the actuary and will derive from it the fiscal impact of our plan to reform Florida's outdated pension system," House Speaker Will Weatherford, R-Wesley Chapel, said in a prepared statement. "Ultimately, we believe that reducing the taxpayer exposure to Florida's pension liability and creating greater fiscal predictability in our budget is in the best interest of all Floridians."
Weatherford requested the financial analysis from the Department of Management Services, which contracted with the Milliman consulting group of Vienna, Va., to assess the likely results. Weatherford and Senate President Don Gaetz, R-Niceville, are intent on making employees hired after Dec. 31 of this year join the "defined contribution" pension plan, rather than the "defined benefit" plan now covering most employees and retirees.
The switch is called a "soft freeze" because, instead of making all FRS members take their chances in the market, it would close the defined benefit plan to new hires as of Jan. 1, 2014. Current employees could still opt into the defined contribution system if they wanted to but -- based on current data -- not many are likely to switch.
A study by Florida TaxWatch, endorsing the switchover plan on Thursday, said 84 percent of public employees are in the "DB" plan, which has an unfunded actuarial liability of about 13 percent.
In a defined benefit plan, pensions are calculated with an established accrual rate -- 1.6 percent for state Career Service employees -- multiplied by average peak earnings and years of service. In a defined contribution plan, the employer and employee contributions are put in an investment pot that the employee can direct, and which is "portable" when leaving government service.
Legislative Democrats and labor lobbyists have argued that the defined contribution system will put employees at risk of losing retirement income. The defined benefit plan has a locked-in monthly payment, which may or may not be greater than the yield of the 401(k)-style defined contribution pension.
Gov. Rick Scott got the 2011 Legislature to impose a 3 percent payroll tax on FRS members, which was upheld by the Florida Supreme Court. Since the mid-1970s, the FRS had been entirely employer-paid but Scott -- who initially sought a 5 percent payroll fee -- and GOP legislative leaders argued that most taxpayers in the private sector don't have paid-up pensions or guaranteed monthly benefits.
"A soft freeze does not impute the current amount of the unfunded actuarial liability," the Milliman report said. "It reduces the normal cost component of defined benefit funding in future years."
That's what Weatherford and Gaetz like about the defined contribution system. They have warned that future Legislatures could be on the hook for massive tax increases, to fund a defined-benefit plan perpetually, if defined benefits are not phased out.
But over the next 30 years or so, Milliman said that could mean more retirees collecting benefits as current employees retire -- and fewer active employees remaining to support the defined benefit plan with their 3 percent and the employer contributions. Those rates range from 3.3 percent for regular-class members to 11 percent of salary for the "special risk" employees such as police, firefighters, prison officers and others in dangerous jobs.
"If future members (of FRS) cannot join the DB plan, the result is a declining DB payroll base on which contributions to fund the DB plan are traditionally made," Milliman said. "This would produce increasing contribution rates as a percentage of payroll, as the payroll over which the (unfunded actuarial liability) is spread declines."
The TaxWatch report on Thursday said there are 540,701 FRS members in the defined benefit plan and 103,045 in the defined contribution system, which has been available to employees since 2002. It said the FRS has 643,746 active employees and 319,689 retirees collecting benefits -- mostly from the defined benefit plan.
About 20 percent of FRS members are state workers. The rest are spread among county governments, school boards, universities, municipal governments and various regional agencies.
Related Research: Feb. 15, 2013 Actuarial study regarding Florida's pension plan requested by Speaker Will Weatherford
Reporter Bill Cotterell can be reached at
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