Florida officials proudly noted for years that the state's public pension plan ran a surplus. But the fat days are over. Losses in 2009, combined with increased benefits in the past decade and longer-living retirees, have left the Florida Retirement System with more than $15 billion in unfunded liabilities. Some have suggested Florida can gamble its way out of the problem with riskier investments. The more prudent course is quick action by the Legislature and concessions by pension beneficiaries before the deficit grows larger.
Florida's pension plan is unsustainable as retirees live longer and state and local governments face declining property tax revenues and slowing sales tax growth. Contributions by member agencies — from school districts and the courts to police and prisons — will grow to equal about 10 percent of salaries this year for most employees and 22 percent for police, corrections officers, firefighters and other "special risk" employees. Yet by July, the pension fund is expected to have just 87 cents for every dollar in promises the state has made to members.
Reform won't be easy. The last time the Legislature attempted to modernize the retirement system — by establishing an alternative 401(k)-style option — it also made concessions to pension members. The Republican-led Legislature in the past decade has repeatedly lowered employers' contribution rates and enhanced benefits for the politically powerful police and fire unions. Now those same unions, whose members, along with elected officials, receive the most generous payouts, are helping put a lid on real reform.
The only reform expected to survive this election year? A modest plan by Republican Senate leaders to join more than 40 other states and the federal government in requiring employees to contribute to their pensions. The plan starts small, a paltry one-quarter of 1 percent of an employee's salary, and would raise roughly $70 million a year. That won't be nearly enough to address the pension fund's deficit, but it is politically realistic since many government workers are headed into another year without a pay increase.
Some reform ideas should fail. For example, a bill that would change the payout formula for all future retirees so it is based on their average salary over their career, rather than on the highest five years, would leave near-retirement workers with far smaller nest eggs than expected through no fault of their own.
But the pension plan must change. Among the worthy ideas: The state could raise the vesting period from six years to 10 years. That's where it was before 2001. The state also should consider tweaking accrual rates going forward for individual classes of employees, particularly outside the regular class. It could lower maximum pension benefits for the most generous plans. For example, police, corrections officers and firefighters can now earn 90 percent of their salary at age 55 after working 30 years.
The question for retirement system members — and their unions — is what they're willing to give up. Without concessions, they risk losing a pension plan altogether in favor of the 401(k)-style accounts embraced by the private sector, where employees shoulder all the risk of investments. Pension surpluses have allowed them to stave off change for years. Now that string has run out.