A decade into the new century, it's refreshing to finally have a governor serious about modernizing Florida's expensive and outdated public pension plan. Gov. Rick Scott is right when he says the Florida Retirement System — the fourth-largest public pension plan in the country — is a "ticking fiscal time bomb." Rich benefits combined with slowing investment gains means annual costs for taxpayers will only continue to grow, diverting money from other local and state priorities.
Scott, in an interview with the St. Petersburg Times late last month, was clear that he understands the state's obligation to provide the benefits already earned by pension members and retirees, who number nearly 1 million and include everyone from schoolteachers to elected officials. Indeed, the state's taxpayers are legally obligated to fulfill those contracts, no matter the cost.
But he proposes reducing the pension fund's liabilities in the future by requiring employees to contribute toward their retirement — as already happens in other states and at many private employers. He is open to raising the retirement age or collapsing the retirement classes into less generous tiers. Not all such reforms may be needed, but legislators should seriously consider them.
Another encouraging sign: Scott is skeptical of the State Board of Administration's ill-advised plan to pursue riskier investments in hopes of achieving an average 7.75 percent return for the pension fund, thereby lessening government contributions. That's more hopeful wishing than a rational plan toward fiscal security.
Florida's pension benefits have long been defended by public employee unions as compensation for below-private-sector wages or the high-risk roles of police and firefighters. But they are no longer sustainable or justifiable in an economy where nearly 12 percent of Floridians are unemployed and countless others have suffered wage cuts or lost retirement benefits altogether.
What's more: Retirees are living longer, investment gains are falling and property tax cuts and slowing sales tax revenue means Florida's governments will be far less flush for the foreseeable future. A recent study by Boston College's Center for Retirement Research estimates that by 2014, pension costs for Florida's local and state governments could rise nearly 50 percent to 4.6 percent of their budgets, even after assuming an optimistic 8 percent gain on investments. But if investment gains are just 5 percent, pension costs as a percentage of government budgets are 8.7 percent.
Such harsh fiscal reality prompted many private businesses long ago to halt enrollment in traditional pension plans and embrace 401(k)-style defined contribution plans. Indeed, as governor, Jeb Bush persuaded lawmakers to introduce an optional 401(k)-type plan for new employees. But it fell far short of significant reform, as Republicans caved to public employee unions in the process and made the traditional plan even more generous.
Those increased costs, combined with the market downturn, led the pension plan to post a $16.7 billion shortfall last year. And while Florida remains in better shape than many states and local governments, its status will quickly plummet if it doesn't realize its anticipated investment gains of 7.75 percent annually. Scott won't find this battle easy, but it is necessary, as retirees of Prichard, Ark., recently learned. After government officials there failed for years to shore up the city's pension plan, the checks stopped coming.