Caveat Lectores on Tax Watch: Florida Report

This is not a typical Caveat Lectores Rant. This is a breaking news report.

The Government Cost Savings Task Force, organized by Florida Tax Watch, released a 125-page report during a news conference on Thursday, March 4, 2010. This report identifies productivity and efficiency improvements and other cost savings measures to change the way Florida government works, much of it in operational and administrative spending. Without trying to add editorial comment, I have included a verbatim copy of portions of the Tax Watch Proposals that affect Florida FRS pensions.
http://www.floridataxwatch.org/resources/pdf/03042010FullReport.pdf

What follows is tedious and grim for Florida public employees. You can expect to see some of this in your future.

Reduce Florida Retirement System (FRS) employer contribution for new hires.

In FY 2007-08, contributions to the FRS pension fund by state and local governments totaled nearly $3.2 billion with $672 million from the state and $2.52 billion from local governments, which ranges from 9.99% - 22.54% of the annual salaries of FRS participants depending on employee class. These contributions represent the estimated cost to fund projected benefits of employees hired during the current year. Currently, the FRS does not require any matching contributions by employees.

Modifying the FRS pension fund to require that newly hired employees contribute to their defined benefit or defined contribution plans would dramatically reduce state and local government contribution requirements.

Most other state sponsored defined benefit programs require an employee match, with the average amount being 5% of the employee’s average salary. If all new employees were required to make a match on the state’s contribution to their retirement fund equivalent of 5% of their annual salary, significant savings could be realized by the state.

Based on annual salaries of FRS defined benefit employees, as of June 30, 2008, total contributions for FY 2007-08 were $3,289,467,438 with an overall contribution rate of 13.74%. A 5% new employee contribution would result in a reduction to employer contributions of nearly $1.2 billion, of which $245 million would be realized by the state and the remaining $952 million by local governments.

New employees selecting the defined contribution plan should also be required to remit 5% of their salary as a condition of membership. Assuming the employee composition in the defined contribution plan mirrors that of the defined benefit plan, additional savings of $50 million would be realized of which $10 million would be attributable to the state and the remaining $40 million to local governments. For both plans, employee contributions should be reimbursed upon termination if the employee does not meet the associated vesting requirements.

Combining the $245 million in FRS contribution savings from the defined benefit plan with the $10 million from the defined contribution plan, the total annual savings to the state beginning in FY 2010-11 are estimated to be $255 million. Total annual savings to local governments are estimated to be $992 million.

Using 2009 figures, the Florida Senate Committee on Government Oversight and Accountability estimated a $316 million savings for every percent of participants’ salaries shifted towards contribution into the FRS pension fund ($1.58 billion for 5 percent). This number, however, was not broken down to show the share of savings incurred between state and local government.

Recommendation: Amend Chapter 121, Florida Statutes to require employees hired after July 1, 2010, to contribute 5% of their salary as a condition of participation in the FRS.

Tie automatic COLA increase for public pension recipients to inflation with a 3 percent Ceiling.

In 1980, the automatic increase in the annual Cost of Living Allowance (COLA) provided to all beneficiaries in the FRS was limited to 3% of current benefits, but not more than annual increase in the Consumer Price Index (CPI). In 1987, the COLA was established at 3% regardless of the CPI.

Unlike Florida, most public pension plans tie post-retirement increases in pension benefits to CPI. Likewise, Federal Social Security is based on CPI-W - Urban Wage Earners and Clerical Workers. For the period August 2008 - August 2009, the national CPI was -1.9% and the CPI-W for Miami-Ft. Lauderdale was -2.5%. Capping the automatic annual COLA increase to the lesser of CPI or 3% would produce significant long-term savings while bringing Florida into line with other state pension plans and public benefits. The purpose of COLAs is to keep pace with inflation, not exceed it.

As of June 30, 2008, there were 276,252 annuitants receiving benefits payments. The average pension benefit in FY 2007-08 was $16,248.31

Modifying the pension benefit COLA formula to the methodology used prior to 1987 would reduce the amount of benefits paid to retirees by state and local governments by $150 million in FY 2010-11 and would improve the pension plans’ actuarial valuation by reducing the calculated present value of future benefits, which would save the state significantly because a reduction in the present value of future benefits calculations would allow state and local governments to reduce future contributions to the pension plan.

However, it may not be possible to modify the COLA formula for current annuitants because of contract laws, which would reduce the immediate savings estimation. Similarly, it might not be possible to modify the formula for state employees whose retirement benefits have already vested, which would have less effect on immediate savings. On the other hand, it is like possible to modify the formula for employees whose benefits have not yet vested, and certainly possible to modify it for new employees not yet hired, which will have some effect on the actuarial valuation of the immediate contribution and will be ensure that future generations of Floridians are facing the same difficult times with impossible choices.

Recommendation: The Legislature should seek an expert legal opinion on the possibility of modifying Chapter 121, Florida Statutes, to limit automatic annual COLA formula to the lower of 3% or CPI, and should modify the law according to the opinion.

Increase vesting period for FRS Pension Plan from six to 10 years

Since July 1, 2001, employees participating in the FRS Pension Plan (a.k.a. Defined Benefit plan) retirement plan may become vested owners of the contribution made by their employers into their FRS retirement fund after six years of credited service. As of June 30, 2008 there were 476,031 vested FRS members (nearly 70% of total employees with FRS membership) entitled to benefits upon termination.32 If the vesting period was increased from six to 10 years, significant savings could be realized by the state of Florida.

Many other states, such as Georgia33 and Alabama,34 have 10-year vesting periods, thus increasing this period to 10 years would not be out of line with already existing policies in neighboring states.

In FY 2008-09, approximately 5,322 vested employees were terminated from state employment alone. Of these terminated employees, approximately 1,315 employees would not have been eligible to keep their FRS retirement benefits had the vesting period been at least 10 years.

Assuming these figures are applicable for FY 2010-11 and beyond, the state would save an estimated $16 million annually.

Recommendation: The Legislature should amend current statutes to increase the length of the vesting period for current members of the FRS Pension Plan from six to 10 years.

Reevaluate who is considered "special risk" for pension benefits.

Florida law recognizes a special category of employees, known as “special risk” employees, who are entitled to accelerated benefits within the FRS due to the extraordinary demands of the services they perform on behalf of the state. Specifically, s. 121.0515, Florida Statutes, states that “the legislative intent of establishment of a special risk class is to limit membership to employees where one of the essential functions of their positions to perform work is physically demanding or arduous, or work that requires extraordinary agility and mental acuity, and that such persons, because of diminishing physical and mental faculties, may find that they are not able, without risk to the health and safety of themselves, the public, or their coworkers, to continue performing such duties and thus enjoy the full career and retirement benefits enjoyed by persons employed in other positions and that, if they find it necessary, due to the physical and mental limitations of their age, to retire at an earlier age and usually with less service, they will suffer an economic deprivation there from.”

The statute makes clear that the accelerated benefits afforded to special risk employees are associated with the corresponding increased and exceptional strain of the particular service provided; however, the number of employees that qualify for special risk class has increased 12 percent from 2004 to 2008 (from 66,861 in 2004 to 74,939 in 2008) while the regular class employees has grown by 6 percent during the same period. Employer contributions for special risk employees represent approximately 20 represent of their salary, which is about twice the percentage as for regular class employees, thus the increase in qualified employees represents a significant cost increase for state and local governments.

In 2009, contributions for special risk class employees were approximately $780 million dollars or $10,400 for each employee. A review of special risk eligibility based on criteria meeting legislative intent could result in a significant reduction in the number of special risk class employees and reduce pension contribution costs. For example, a reclassification of 10% of employees from the special risk to the regular class (7,500 employees) would result in an estimated savings of over $40 million per year to state and local governments in FY 2010-2011.

Based on total contributions by state and local governments to the FRS defined benefits pension plan, savings to the state are estimated to be $8 million with the remaining $32 million in savings to local governments.

Recommendation: The legislature should direct DMS to review the position requirements for each employee designated as special risk to determine if they meet the legislative intent for designation of this retirement classification.

Reduce the retirement credit for Senior Management System employees from 2% to
1.6% and for Special Risk from 3% to 2%.

In FY 2007-08, the FRS paid nearly 276,252 annuitants over $5.2 billion in pension benefits, which represented a 6% increase from the previous year. Contributions to the pension fund by state and local governments totaled nearly $3.2 billion with $672 million (21%) from the state and $2,520 million from local governments.

The retirement credit for Senior Management System (SMS) employees is 2%, which is 0.4% higher than the 1.6% retirement credit for CS employees. In 2008, the average compensation for SMS employees was $87,018. The average pension benefit for SMS annuitants in 2008 was $40,267. The number of SMS employees increased by 21% from 6,312 on July 1, 2004, to 7,666 on June 30, 2008.

Special risk retirement credit was increased from 2% to 3%, phased in over a 5-year period (1989-1993) in 1989. Required contributions could be significantly reduced by reducing the SMS match from 2% to 1.6% and special risk from 3% to 2%. Special risk retirement credit was increased from 2% to 3%, phased in over a 5-year period (1989-1993).

A reduction in the retirement credit for SMS employees from 2% to 1.6% would result in an $18.9 million reduction in annual contribution to the FRS defined benefit program.

Approximately $4 million of the $18.9 million would be attributable to the required contribution for state employees, with the remaining $15 million associated with contributions made by local governments.

A reduction in the retirement credit for Special Risk employees from 3% to 2% would result in an annual reduction of $290 million in required contributions by state and local governments to the FRS defined benefit plan. Approximately $60 million would be attributable to the contributions for state employees, with the remaining $230 million associated with contribution made by local governments.

Thus, reducing the retirement credit for both SMS and special risk employees would save $64 million for the state in FY 10-11 (and recurring in out years) and $245 million for local governments. If the change is made immediately, the state will have saved approximately $200 million by FY 2012-13 and the local governments around Florida would have saved approximately $1.3 billion.

Recommendation: The Legislature should amend Chapter 121, Florida Statutes to reduce retirement credits for the SMS retirement credit from 2% to 1.6% and the special risk retirement credit from 3% to 2%.

The future is now.

And oh yes, have a Nice Day?

wjc

Caveat Lectores by Jeff Carnes

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