Pensions In The Sunshine State: Avoiding Unintended Dark Clouds

Florida lawmakers are considering legislation that would eliminate retirement plan choice for state employees. The proposed measure would do away with defined benefit pensions for newly-hired employees, offering only a 401(k)-style defined contribution plan.

Other states and localities that have implemented dramatic shifts to their public employee retirement plans have experienced unfortunate, unintended consequences – from skyrocketing costs to losing experienced employees who deliver essential public services. In some cases, governments have actually re-instated their pension plans after the experiment proved a fiscal failure.

As part of the legislative process, Florida lawmakers are pursuing an actuarial analysis of the proposed retirement plan changes. But it will be critically important to ensure the analysis asks the right questions. For example, one key issue is the legacy costs of the current pension plan if it is closed to new hires. Because pensions largely are funded by regular employee contributions and investment returns, cutting off a key source of revenue likely will drive up taxpayer costs substantially and trigger an investment strategy that generates lower returns.  

Another key consideration is the workforce impacts. Pensions serve as employee magnets for state and local governments that continuously struggle to recruit and retain experienced and qualified employees. This includes first responders who save lives during hurricanes, public health professionals helping citizens through a pandemic, and teachers who are preparing the next generation of Florida’s workers. 

In fact, a 2019 national poll of public employees found that retirement and healthcare benefits are critically important job features, more so than salary. Nearly all state and local workers (93 percent) said that pensions are incentives for long public service careers, and 94 percent agreed that a pension is a good tool for attracting and retaining employees. More than half of state and local employees (58 percent) said that switching them out of a pension into an individual 401(k)-style plan would make them more likely to leave their job.

More recently, the Center for State and Local Government Excellence found that the COVID-19 pandemic and economic crisis are taking a heavy toll on the state and local workforce. Negative job sentiment is on the rise and many are considering leaving their jobs. For example, 38 percent of K-12 employees say that working during the pandemic has them considering a job change. This is particularly concerning because the teacher pipeline is drying up. Fewer Floridians are going to school to become educators, with enrollment plummeting by 32 percent since the Great Recession. The combination of fewer people entering the profession and high turnover could have long-lasting negative impacts on education in Florida.

Most states have found that keeping and making any needed changes to their pension plan design has enabled them to meet three key goals: ensuring fiscal responsibility, providing taxpayers with a qualified public workforce, and delivering a modest, secure retirement after a public service career. As Florida lawmakers consider any retirement plan modifications, a prudent move would be to carefully examine the ill-fated experiences of other jurisdictions in Florida and across the nation.

Palm Beach Closes, Then Reopens Pension

In 2012, the Town of Palm Beach closed its existing defined benefit pension systems for its employees, including police officers and firefighters. The new retirement plan offered dramatically lower pension benefits and new individual 401(k)-style defined contribution retirement accounts.

Shortly thereafter, the town experienced a high rate of retirements and unprecedented early departures of experienced police officers and firefighters to neighboring jurisdictions with better benefits. Understaffed, the town faced increased costs to pay overtime hours and train replacements for more than 100 public safety workers who departed during a four-year period after the pension changes.

Following this large and swift exodus of public safety employees, the town reconsidered the changes. In 2016, policymakers voted to abandon the 401(k) plan and improve the pension plan for police officers and firefighters. The council offset the cost of the police and fire pension improvements by increasing employee contributions and eliminating the 401(k) plan with its employer match.

Four States Provide Cautionary Tales on Retirement Plan Changes

In West Virginia, the Teachers’ Retirement System (TRS) pension plan was closed in 1991, placing new teachers in a defined contribution plan. With teachers facing low retirement account balances, the state re-opened the pension after calculating that it could provide equivalent benefits at half the cost of the defined contribution plan. When West Virginia reopened the pension plan in 2005, the funded status of the plan was at 25 percent. The state has made steady progress improving the funded status with disciplined contributions. By 2008, the plan improved its funded status to 50 percent. In 2020, the plan was 71 percent funded.

In Michigan, the State Employees’ Retirement System (SERS) pension plan has been closed for more than 24 years with all new-hires participating in a defined contribution plan. When the SERS pension plan closed in 1997, the plan was overfunded with 109 percent of assets. As of September 30, 2019, the plan was only 65.4 percent funded and had an unfunded liability of $6.5 billion. 

In Alaska, closing the pension plans has not helped the state manage an existing unfunded liability. Despite a $3 billion infusion of the state’s financial resources, the combined unfunded liability for pension benefits was higher in 2017 than it was in 2005 when the plans were closed. And, many workers face a retirement with no Social Security or pension benefit.

In Kentucky, the legislature enacted a new tier of benefits for plans in the Kentucky Retirement Systems (KRS). Public employees hired since January 1, 2014, participate in a cash balance hybrid plan instead of the pension plan. This move was positioned as a way to improve KRS funding. One of the KRS plans (KERS Non-Hazardous) was funded in fiscal year 2004 at 85.1 percent, but had declined to 23.15 percent by fiscal year 2014. Despite the switch to a cash balance plan, the funded status of KERS Non-Hazardous has continued to decline since 2014 to a low of 12.88 percent as of June 30, 2018.

The Sunshine State Knows How to Effectively, Efficiently Run a Pension

The Florida Retirement System (FRS) has a long history as one of the best managed retirement systems in the country. The state pre-funds retirement benefits, with employees making contributions each pay period.

Between 1993 and 2018, the bulk of Florida’s public pension benefits were covered by employee contributions (3.5 percent) and investment earnings (71.3 percent). Some 25.2 percent of Florida’s pension fund receipts are derived from employer/taxpayer contributions. This is a highly efficient way to provide modest but stable retirement benefits to public workers in the state, with employees and investments covering nearly three-fourths of the costs. 

Importantly, the system was actually over-funded until the Great Recession. The recent funding shortfalls largely can be attributed to adopting more conservative assumptions, the market downturns that all investors experienced, and because lawmakers diverted their required pension contributions to Florida’s General Fund. Even so, FRS is 82 percent funded to pay benefits that are due decades into the future. A recent Moody’s Investors Service survey gave Florida strong marks for its pension liabilities, ranking the state 48th for pension liabilities per capita and 46th as a percentage of revenues generated in-state. By those measures, it is clear that Florida is a leader when it comes to managing its pension liabilities. 

Indeed, lawmakers have important retirement plan considerations in the closing weeks of the legislative session. Decisions regarding pensions are complex, and any changes certainly will have long-lasting impacts on Florida’s public employees and for citizens who rely on the essential services delivered by these workers.

As elected officials analyze the experiences from other states and forthcoming actuarial data, another factor to consider is their constituents’ views. Both nationally and in Florida, there is strong support for public employee pensions. At a time when the electorate is deeply divided on many issues, it’s encouraging to see unity about retirement security, including for the public workforce that serves local communities.

Hopefully, the Sunshine State will take all these factors into account and continue on a responsible path. Bad weather is hard to control in Florida, but it is possible to avoid the dark clouds other states have run into when it comes to retirement plans.