Florida’s retirement system is not sustainable or modern, House Speaker Will Weatherford warned on the opening day of the annual legislative session.
"This session, we will spend $500 million of general revenue just to shore up our pension fund," he said on March 5, 2013. "That’s above and beyond what we contribute to state employees’ retirement. And it’s just the down payment. We’re going to have to keep writing that check of a half a billion dollars for the next 28 years to keep our so called ‘great pension system’ afloat."
Weatherford is proposing an overhaul of the state’s retirement system during the 2013 legislative session. He wants the only option for new public employees to be the 401(k)-like investment plan, which is less popular than the pension plan. Doing so will keep the fund, recently valued at $132 billion, in good health for the long-term without burdening taxpayers, he says.
We thought it prudent to check out his claim about how much the Legislature needs to spend to "shore up" the pension fund. Is it really about to capsize?
The pension fund ain’t what it used to be
Fast facts about the pension plan: It’s the fifth largest in the country, with about 1 million current and retired participants. State government workers comprise only about 20 percent of active members, trailing school district employees (48 percent) and county employees (22 percent). About 1,000 different public agencies and groups participate.
The pension fund was in the black from 1998 to 2008, earning billions more in investment returns than what was needed to pay out retirement benefits to workers. Then the stock market went thud, and the fund’s surplus disappeared.
For the past four years, the pension fund assets have not been enough to cover what it would owe current and future beneficiaries if all retired at once. The gap between assets and liabilities has grown to $19.3 billion as of July 2012. (Nerd alert: the $19.3 billion shortfall is called the unfunded actuarial liability, or UAL.) The pension fund is 86.9 percent funded.
Advocates of public workers, such as Democrats and labor unions, have honed in on that point to counter Weatherford’s argument that the fund is in financial jeopardy. They say it’s not realistic to think all current and future beneficiaries will somehow require retirement benefits at once.
They say Florida’s underfunded status is still above the national average of 75 percent and above the funding level widely considered healthy at 80 percent. Only Wisconsin’s retirement system is 100 percent funded, our friends at PolitiFact Wisconsin found.
Still, the Legislature’s fiscal conservatives are focused on pension reform. In 2011, they passed a sweeping law requiring employees to contribute 3 percent of their pay for retirement benefits.
Fill the gap?
State lawmakers expect a small budget surplus this year, but it’s not going to be nearly enough to close the pension fund’s liability gap in one fell swoop.
To close the gap, actuaries and state economists have prescribed a payment plan that works kind of like a 30-year mortgage.
Experts have recommended the state spend $537 million in the 2013-14 budget on the unfunded liability. Of that, $448 million would come from general revenue, according to a three-year financial outlook prepared by the Legislative Office of Economic and Demographic Research. (The House revised the general revenue estimate to $497 million in December.) This is what Weatherford is talking about when he says the state needs to pay this much to "shore up" the fund.
So if the Legislature chooses to include the recommended amount to start plugging the pension hole in the budget -- and for the past three years, they did not -- it would be about $500 million this year.
Weatherford mentioned this was "above and beyond" what the state pays to the retirement fund for its employees. According to the Florida House, that is expected to be $296.5 million based on current contribution rates. Universities, state colleges and school boards will add another $650 million.
Preparing for the future
Will the state fork over a half-billion dollars for the next 28 years, as Weatherford says? The simple answer: We don’t really know.
The value of the pension fund shifts with market volatility. In 2007, it was valued at $136.3 billion. In 2009, it was $99.6 billion. At the end of 2012, it was $122.7 billion. In theory, the market could rebound and Florida could pay off its unfunded liability with extra earnings, as it did in the past.
As the market changes, the liability could shrink or inflate.
David Draine, a senior research analyst at the Pew Center for the States, said while it’s reasonable to tout projections for financing the unfunded liability, it’s helpful to also point out how much those projections could shift with the market.
Alan Stonecipher, director of Florida Retirement Security Coalition, which is comprised of union groups, said, "To make an assumption 29 years out based on a snapshot of today doesn’t really hold water."
Union representatives criticized Weatherford’s statement for leaving out a few key points about the pension’s growing unfunded liability. For one, Weatherford didn’t include how the Republican-led Legislature did little to address the unfunded liability over the last three years by not making full payments on it.
He also didn’t mention that when the pension was overfunded, lawmakers spent the surplus by reducing employer contribution rates and increasing benefits for special-risk employees. The pension fund would have been in a better position to weather the economic downturn had they not made those choices, Stonecipher said.
Stonecipher also took issue with Weatherford’s choice of words in describing the pension fund as needing to be kept "afloat." That makes it sound like the pension fund is on the brink of going under without this payment.
Putting off full payments on the pension fund's liability gap is a bit like people who pay only the minimum due on a credit card bill. "It doesn’t immediately put you into insolvency or bankruptcy, but it does push that bill off into the future and ensures that when it does come due, the eventual payment will be even larger," Draine said.
Weatherford uses an accurate number to describe the cost of addressing the pension fund’s unfunded actuarial liability -- based on current estimates. But he loses points for holding this figure up as how much the state will affirmatively pay each year for the next 28 years. That’s based on predictions that could shift, for better or worse, depending in large part due to market performance. On that note, Weatherford’s comments on the need for big reform make no mention of the fact that the pension fund was in a surplus for the better part of the 21st century.
The statement is partially accurate but leaves out important details or takes things out of context. That’s our definition of Half True.