- A report to Gov. Ron DeSantis and the Florida Cabinet showed the Florida Retirement System (FRS) is already trailing its investment goals this year by 1.83 percentage points
- DeSantis and the Cabinet approved a rule banning ideological concerns, such as environmental, social and governmental (ESG) factors, from consideration as part of the state’s investment strategy
- Despite seeing solid investment performance over the past two decades, FRS has an unfunded liability of $35 billion, which has only grown over that same time span
- Experts warn that investment strategies won’t save the retirement system from insolvency, even if Florida can exceed its investment return goals
- Tuesday’s Cabinet meeting focused solely on investment strategy, but experts warn that investment returns won’t be enough to save FRS from insolvency without major structural changes
At a Cabinet meeting Tuesday morning, Governor Ron DeSantis and the Florida Cabinet received a report from the State Board of Administration (SBA) in which Interim Executive Director Lamar Taylor provided the grim news that through last week, the Florida Retirement System (FRS) was still well behind its investment target for the year, even though it was up 3.8 percent on the year. That is, despite eeking out a positive return on investment, the state is 183 basis points, or 1.83 percentage points behind its own goal for the year.
Already on creaky footing due to significant structural challenges, the Florida Retirement System faces unprecedented challenges in the years ahead, with more people taking money out of the system than new employees are putting in. That wouldn’t be a problem if FRS had enough cash to cover all the expected withdrawals. But at around 80 percent of the cash needed, the FRS has an unfunded liability – money it owes to retirees – of around $35 billion.
Without major structural changes to the system, the unfunded liability is expected to get worse, not better. For decades, the state has relied on aggressive investment strategies to make up the difference, but it hasn’t worked. Under Governors Rick Scott and DeSantis, some small structural changes were put in place, but despite those changes, the unfunded liability has only gotten worse, even though over the last decade FRS has usually exceeded its annual investment goals.
That isn’t likely to be the case over the next few years, however, as the economy softens, investments plummet and the bond market remains unpredictable.
Still, at Tuesday’s Cabinet Meeting, it was almost impossible to tell there was any problem at all. Taylor didn’t mention the underlying structural issues, and he didn’t let the bad investment news hang in the air for long, either.
“The fund is currently up 3.8 percent, which is 183 basis points behind target,” he said, barely pausing before delivering the next line. “That’s a function of the lags in the market values of private market investments. We believe those reverse course later in the year and we’ll get that performance back in line.”
With Taylor in the hot seat, DeSantis immediately threw him a lifeline, but it wasn’t much, noting that 2022 was one of the worst investment years since the financial crisis.
With the conversation now firmly centered around FRS’s investment strategy, Taylor stayed there, explaining that the state’s diversified investments, which include stocks, bonds, real estate and private equity investments, “did really well during that time.”
In reality, not well enough, though. The state pension system lost more than 6 percent last year, and experts say no amount of robust investment returns (let alone losses), will fix the problem.
That was not the focus of yesterday’s meeting, however.
As the sole Trustees of the State Board of Administration, DeSantis and the Cabinet members – Attorney General Ashley Moody, Chief Financial Officer Jimmy Patronis, and Agriculture Commissioner Wilton Simpson voted to accept Taylor’s report.
They then turned their attention to FRS’s investment strategy, voting to adopt language require the FRS’s investment managers to focus solely on pecuniary – that is, purely financial – factors, rather than on ideological factors, such as environmental, social, or governmental (ESG) considerations.
While the move was an important one to put pressure on the state’s investment managers – firms like Blackrock which manages billions of dollars for the state – to avoid investment strategies that aren’t focused solely on returns, history has shown that it still won’t be enough to salvage the state’s retirement system.
The state has actually managed its money very well when averaged over time. 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. Despite two decades of steady gains, the pension fund simply hasn’t made up any ground on the unfunded liabilities, which just keeps getting worse.
As interim director of the SBA, Taylor, may yet get to keep his job. While DeSantis and the Cabinet voted unanimously to open an executive search process for 30 days to seek a replacement for the SBA’s previous director, Ash Williams, Lamar told reporters after the meeting he intends to apply for the position.