Gov. Rick Scott says public pensions would have required taxes to climb

Gov. Rick Scott's Independence Day e-mail message to state employees offered thanks to servicemen and women for defending our freedom, a reminder to use care with fireworks over the drought-parched weekend — then support for pension reform.

"I also want to share with you information I came across in a New York Times  article last week. A recent study revealed that, across the nation, taxes would have to be increased by an average of $1,300 a year just to support the currently unsustainable public employee pension systems. In Florida, that dollar figure translates to $813 a year.

"That means if we did nothing, every household in Florida would have to contribute more than $800 of their hard-earned money every year, for the next thirty years, just to meet our pension obligations for state and local government retirees.

"As I’ve said all along, raising taxes is not an option. The pension reform we accomplished this year prevents tax hikes, and also protects the retirement of government workers."

A state employee asked us: Did a recent study in the New York Times actually say taxes would have to be increased by an average of $1,300 a year nationally — $813 a year for Floridians — to support public employee pensions? 

We should mention the pension reform Scott recently signed was a law requiring state workers to put 3 percent of their salaries toward retirement and eliminating cost-of-living increases on benefits earned after July 1.

We checked out the New York Times article, which focused primarily on pension challenges in Costa Mesa, Calif. A related graphic told the national story. Headlined "Tax Increases for Government Pensions," it said that "even if pensions are funded today, costs are expected to rise as promises come due. Though many pension funds dispute their findings, two economists, Robert Novy-Marx and Joshua D. Rauh, have calculated: How much each state needs to increase taxes per household per year to eventually fund its pensions 100 percent ... or the returns that state pension funds need to earn every year for the next 30 years to be fully funded."

A list of states followed.

In Florida that annual tax increase was estimated at $813 — just what Scott wrote. Meanwhile, the abstract of the complete study — also linked to from the story — said it would take a tax increase of $1,398 per U.S. household per year to fully fund state and local pension systems over the next 30 years. So Scott's message actually used a slightly more conservative number. He could have rounded up to $1,400.

So Scott accurately quoted both the state and national estimates for tax increases it would take to fully fund pensions, according to Novy-Marx and Rauh. 

But he also said taxes "would have to be increased."

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Even a quick look at the New York Times graphic shows that's not the case. The economists had in fact offered an either/or scenario. Either Florida would need to increase taxes each year by $813, or it would need to average a 12.1 percent return on its pension fund investments. 

We asked Joshua Rauh to clarify this for us. Hang with us for just a few moments of economist-speak. He said the baseline scenario for the tax increase calculation was an asset return of inflation plus today's long-run real Treasury bond yields — under today's conditions, an annual return of just under 5 percent.

"If returns are more than that, required tax increases for Florida will be less than $813," he said. "If returns are less than that, required tax increases will be more than $813. To eliminate the need for tax increases entirely, returns would need to be 12.1 percent a year."

A footnote to the New York Times graphic pointed out that historical returns nationally averaged about 8.8 percent a year. In other words, if over 30 years Florida pulled in the average historical return on its investments, it would still need to raise taxes. But it wouldn't need to raise taxes by a full $813 a year.

Meanwhile, "Tax Increases for Government Pensions" wasn't the only graphic that accompanied the New York Times article. The story also included a handy map headlined "A $176 Billion Gap for Public Pensions." Sounds like it would support Scott's description of "currently unsustainable public employee pension systems," doesn't it? Under the headline, the graphic reads, "In general, many experts say pension funds should hold 80 percent of the funds needed for future obligations. Many states, however, have failed to put enough aside." The map showed which states fall short of the 80 percent goal, and by how much — and which states exceed the 80 percent goal, and by how much.

Given Scott's message to state employees, which category would you assume Florida is in?

Well, it turns out that by this measure, Florida's fund is among the nation's most healthy. Its pension funds hold $5.9 billion over the traditional 80 percent benchmark, the graphic shows.

And that's the story supported by a Pew Center study last year and the most recent annual state report on Florida's pension funds. While other states' funds entered the recession underfunded, Florida's was fully funded. And while it took a hit during the recent economic tsunami, in 2010 it gained more than 14 percent, ahead of the state's target. That added $9.8 billion to the bottom line.

Ash Williams, executive director and chief investment officer for the State Board of Administration of Florida, which oversees the state's pension investments, declared in November, "We are healthy."

He called Florida's plan "a very positive exception to the rule" that "remains one of the best-funded, and therefore strongest, public plans in the country.

Still, there have been plenty of voices saying Florida would need to raise taxes, increase returns or trim benefits to keep that plan strong. And Scott has made it clear he doesn't share Williams' sunny take. For example, he thinks the state's expected return of 7.75 percent requires too risky an asset mix for contributions that should be cautiously invested. So there's legitimate disagreement about the long-term health of even comparatively healthy public pension systems like Florida's. But we can still weigh in on the accuracy of Scott's characterization of the New York Times report to state employees.

Scott told them that "a recent study revealed that, across the nation, taxes would have to be increased by an average of $1,300 a year just to support the currently unsustainable public employee pension systems. In Florida, that dollar figure translates to $813 a year." But he left out that investment returns could also offset this need. He also failed to distinguish between states that have long struggled to meet their pension goals, and Florida's comparatively strong performance. We think those are important details, and rate Scott's statement Half True.