Weatherford's pension reform could cost more, report says
He’s called Florida’s pension system a “ticking time bomb” that will require a costly taxpayer bailout in the future.
But Florida House Speaker Will Weatherford’s aim to reform Florida’s current $136 billion pension plan, which has 145,000 member accounts, hinges on one key question. If you reform it, how much will it cost?
Plenty, says a 50-page study that was released late Friday. The study was done by Milliman, a Vienna, VA firm that is among the world’s largest providers of actuarial services. Weatherford asked the Department of Management Services to study the financial impact of closing the pension plan to new members effective Jan. 1, 2014.
The study looked at what happens when new employees working for the state, school districts, counties, cities and community colleges would be required to enroll in a 401-k plan rather than the current pension that provides guaranteed benefits. Members who are currently enrolled in the state pension plan would be allowed to remain.
But the findings seem to undercut Weatherford’s assertion that reform doesn’t threaten the benefits of those currently enrolled in the system.
Earlier in the week, Weatherford said those in the pension plan will be protected from having to pay higher contribution rates.
“I think that we can protect the current benefits that people have,” Weatherford said. “This is not going to change any teacher, state employee’s pension that is in the system today. In fact, it will preserve it.”
The report states, however, that because future members couldn’t join the pension plan, that plan would rely on a shrinking payroll base on which contributions to retirees are made. This would require the contribution rates to increase as a share of payroll.
The Florida Supreme Court recently upheld that workers had to contribute 3 percent, but the report suggests lawmakers would need to raise that contribution level, or find money elsewhere, to mitigate this gap.
In addition, the report stated that over time, the State Board of Administration may lose the ability to invest with a long-term perspective as annual cash flow becomes more and more negative in the closed pension plan. This is because as the working population shrinks and the number of retirees grow, benefit payments will surpass contributions made. This could increase costs as it becomes harder for the plan to meet its goal of a 7.75 percent return.
The report also stated that after the reform, the amount that is unfunded in Florida’s retirement system would actually increase for at least the next 20 years before it would decline.
Most of the report is actuarial tables based on various scenarios. Oddly, comparisons are difficult because the study doesn’t include projections for keeping the pension plan as is.
Asked for a reaction to the Milliman study, Weatherford’s office issued a two-sentence statement.
"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. 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."
It’s not perhaps the most opportune time to be calling for pension reform. Florida’s pension is about 87 percent funded. Industry experts say 80 percent is considered good. And Florida’s system is considered one of the best in the nation. That leaves Weatherford having to point to other states – New York, Illinois, California – who have pensions with bigger liabilities as reasons for reform.
Despite a market that is getting stronger, Weatherford maintains that Florida’s pension system’s unfunded liability will continue to grow and action is needed now.
“The longer you wait, the more unfunded the liability wil become,” Weatherford said earlier in the week. “If it becomes too underfunded, becomes almost impossible to transfer away from a defined benefit to a 401-k.”