A final annual investment report on the health of Florida’s Retirement System is due before the end of the year, but state officials responsible for overseeing the retirement savings of tens of thousands of state workers say the plan remains financially stronger than most other states.
But that isn’t saying much.
A preliminary report posted just two months ago included a slide claiming that the Florida Retirement System’s (FRS’s) “funded status remains strong,” but the very same slide contains a graph showing that FRS continues to suffer from an ongoing decline in its funded ratio, meaning that the fund has more financial obligations to current and future retirees than it can actually pay.
“The FRS Pension Plan’s funded status continues to be in actuarial deficit,” reads the bottom of the slide, in sharp contrast with the headline at the top.
The included graph also reveals that in 2008, Florida’s Pension System was fully funded at 107 percent of its obligations before suffering a significant drop off from which it has not recovered. Financial experts say that large pension funds like Florida’s should traditionally fluctuate right around 100 percent, with some years being slightly overfunded and other years slightly under the mark. But immediately after the financial crisis that hit in late 2008, the value of the Florida Pension System portfolio plummeted 18.6 percentage points, from 107.1 percent down to just 88.5% the next year.
Almost 15 years later, the situation has gotten worse, not better. This year, FRS hit its lowest point in more than a quarter-century, at just 83.4 percent funded. That figure is reached by taking the current value of all funds in the pension system, $179.2 billion, and subtracting out the $214.8 billion that the state actually owes its workers and retirees. The end result is a negative number, or an unfunded actuarial liability of $35.6 billion.
Compounding the issue, pension fund managers are warning that Florida’s retirement system faces an uphill battle in the years ahead, including fewer participants joining the plan who would bring in new money that can be invested, combined with a fundamental cash flow problem: more retirees collecting pensions than active employees paying in. And with more workers set to retire in the near future, most of whom won’t be replaced for a variety of reasons, the problem will only get worse unless steps are taken to alter the trajectory of the current system.
Outside experts who have studied Florida’s pension plan for years, agree. Every dollar needed to shore up the state’s pension obligations is a dollar that can’t be spent elsewhere.
“The state has made a financial commitment to its workers, and they are legally obligated to ensure promised benefits are paid in full,” said Leonard Gilroy, managing director of the Pension Integrity Project at the Reason Foundation. “If the system is underfunded, the money has to come from somewhere, and the larger the pension debt grows the more that pension costs crowd out public services like safety, corrections and healthcare.”
Gilroy and his team conducted a solvency analysis of the Florida Retirement System and published the results last year. The report noted that while reform efforts were made in 2011 and 2017 and those changes did reduce some costs, the moves did not fundamentally address the growing structural problems within the system:
Two decades ago the retirement system held a surplus of over $13 billion in assets and stood at 118 percent funded. Today, FRS finds itself $36 billion in debt with only 82 percent of the assets on hand needed to pay out benefits over the long-term, which represents a net change in position of almost $50 billion in just 20 years.
In short, the reforms helped slow FRS’s backward slide, but it’s still losing ground, and pension managers at the State Board of Administration know it. They are required to conduct actuarial studies in order to determine the amount of money required from both state workers and state taxpayers to ensure the system is financially solvent.
Part of that process involves predicting the state’s assumed rate of return from investments, and even near-misses can result in a shift to Florida’s bottom line of hundreds of millions of dollars. Experts say that part of Florida’s pension problem stems from the fact that the state gambles too much when it comes to the returns they can expect.
In other words, rather than pump more money into the system from the state budget, pension managers instead try to make up the gap by seeking riskier investments with higher rates of return. It hasn’t helped. For the past several years, state officials have planned on investment returns adding gains of around 7 percent. This year’s expected rate is 6.8 percent, but the stock and bond markets where those funds are invested haven’t been kind this year. As of mid-June, when actuarial assessments were completed, the Florida Retirement System had lost 6.3 percent on the year.
The loss hurts, but the state has also had some good years that, averaged over time, show that Florida has done very well over the last two decades investing its pension dollars. Over the last 20 years, the state has gained an average of 7.5 percent on its portfolio, according to an executive summary presented at a planning conference this year.
But despite those gains, as Gilroy’s team noted last year, the pension fund simply hasn’t made up any ground on the unfunded liabilities. And so state managers have started to heed the advice of actuarial experts who have warned not to chase outsized returns because the volatility and risk in the stock market could make the problem worse.
Having studied Florida’s pension situation for years, Gilroy says that a more realistic and safer rate of return would be in the 5.5 to 6 percent range, and he notes that pension managers have made some effort to set more realistic goals for investment returns.
“Florida recently started lowering their investment return expectations after even their own actuary flagged their expected rate of return as being not professionally credible for several years in a row,” Gilroy noted.
But he also acknowledges that while reducing the reliance on aggressive investments would create a much more financially sound retirement system, it would take a substantial chunk out of the state budget to make up the difference.
“If Florida lowers the expected rate of return down to more conservative levels,” Gilroy says, “current unfunded liabilities are likely to increase by a couple of billion dollars, all things being equal.”
That price tag might be a bit too steep for state lawmakers and other officials, who’ve got other budgetary things to worry about, too.
Even so, the state’s Chief Financial Officer, Jimmy Patronis acknowledged that he, along with Governor DeSantis, and Attorney General Ashley Moody, may need to do more to resolve the pension fund’s growing financial challenges. As the state’s highest ranking elected officials, they are the sole Trustees of the State Board of Administration, which oversees the FRS.
“Florida’s pension system is in a much better spot than other states,” Patronis said, noting the previous reform efforts. “We’ve prioritized strategies that are fiscally sound to ensure beneficiaries can actually get what they earned. Prospectively, the Trustees may have to play a more active role protecting the FRS from losses.”
The state’s final report for Fiscal Year 2022 is due December 31st.
Republicans can never manage money as we’ve seen with all the recessions they’ve caused and the Great Depression. DeSantis’ loss investing in Russia certainly didn’t help with the pension fund, either. This is completely irresponsible but, of course, Republicans only care about giving tax cuts to their donors.
Maybe Brandon can do better. Ha
C’mon Lou. That’s your most intelligent response? Stop throwing stones. Brandon, really? You have to admit that Republicans seem quote lost on both their plans and their message. Not thanks to DT, but our Republican elected officials are lost like sheep right now. Will they ever be found? Besides throwing stones, what’ve they got to say?
Agree with you, Republicans only seem to worry about tax cuts instead of other issues. By the way what’s the funding % for the progressive New Deal ponzi scheme known as Social Security? The Florida pension system is probably sounder.
The Wall Street Journal stated that investments have lost about 30% since the Progressive Democrats have been in power! In addition, participating governments are hiring fewer people, which means smaller contributions. The poor economy dictates that the government has had to cut back. Last, the reforms in FRS made it a less desirable pension plan for newer members. The reforms should have created a deferred savings program to supplement the standard retirement structure. It would have drawn in money rather than what has happened.
Progressive Democrats are NOT in power. Also learned this morning that 70% of ALL America’s wealth is in states that Joe Biden won. So much for “owning the libs….”
Florida’s pension fund is facing serious “structural challenges” as it struggles to maintain its current level of payouts to retirees. According to a recent report, the fund’s investments fell short of their target returns last year, leaving a $1.6 billion shortfall. This comes as the state’s population ages and the cost of health care continues to rise. As investors look for ways to navigate these challenges, technical indicators like the stochastic oscillator can provide valuable insights. For a guide on how to use this popular indicator and the best settings to use, check out this article: https://www.litefinance.org/blog/for-beginners/best-technical-indicators/stochastic-oscillator/.