On March 1, the state agency that invests public pension money issued a news release bragging about a 16.3 percent rebound in its portfolio in the second half of 2009.
Two days later, the State Board of Administration sat down with its advisory council and revealed the rest of the story:
Even with those gains, Florida's public pension fund slipped into the red in 2009 for the first time in a dozen years. And the fund's shortfall is projected to be even bigger this year. That news has not been as widely publicized.
While past surpluses in the pension fund kept a lid on local contributions during boom times, now the bill is coming due. And plugging the multibillion-dollar deficit will require about a 40 percent hike in contributions from local governments stretched by declining revenues.
Though checks will still be in the mail for Florida's public retirees, by July the fund is expected to have just 87 cents for every dollar in pension promises made. Like a tiny leak, this unfunded liability can grow into a gusher if not addressed quickly. But none of the fixes will be too palatable with either the nearly 1 million public employees and retirees covered by the plan or taxpayers who foot the bill.
The options include:
• Raising more money from local governments.
• Trimming benefits for retirees.
• Making public employees, who now pay nothing toward their pensions, chip in.
Variations on these themes are already bubbling through the Legislature, with limited success. Under one proposal, the state's pension plan would be closed to new employees; another would make new hires pay 1 percent toward their pensions. A less-ambitious proposal by Republican Sen. Mike Bennett of Bradenton, which would affect benefits of employees with less than 10 years' service, was watered down in committee Tuesday. It's the first pension reform proposal to get a hearing this year.
Miami Republican Rep. Juan Zapata has put forth the most far-reaching changes, including limiting payouts to higher-paid "special-risk" employees like firefighters.
Zapata, who is not running for re-election, knows tinkering with benefits is unpopular.
"I took it upon myself to kind of take one for the team to, at the very least, have a conversation about it," he said. "Because nobody's talking about it, and it's an incumbent problem."
State law requires government contributions be set at a rate that covers a year's benefits, but the state doesn't have to fully eliminate the long-term deficit. Last week, a House committee proposed taking this route, which still translates into a $460.8 million bump in local contributions.
But, barring a meteoric rise in investment returns, ignoring the pension deficit means watching it grow. To adequately address the gap, the fund's actuary said, governments will have to pony up even more money — more than doubling the contribution for some elected positions.
The House is proposing to postpone the full increase until after the fall elections.
• • •
While lawmakers tinker with the funding side of the equation, the SBA is exploring ways to increase investment returns on the $116 billion fund. The strategy? Put more money into higher-risk but potentially higher reward alternatives like hedge funds, private real estate and even timber land.
Dennis MacKee, SBA spokesman, denies that the move into riskier investments is anything new. "We started looking into hedge funds when we were well overfunded," he said.
And he says that by diversifying its portfolio, the SBA is actually decreasing risk.
But even if the SBA upped its risk profile considerably, the payoff is debatable. The board's consultants said earlier this month that by sticking with its current asset mix of mostly stocks and bonds, there's only about a 50-50 chance the fund is going to reach its assumed rate of return of 7.75 percent.
Jack up the risk? Probability of making that return ticks up slightly, to 55.4 percent.
"It's a joke," said Leo Kolivakis, a former senior investment analyst at two of Canada's largest pension funds and publisher of the blog, Pensionpulse. "They're deluding themselves if they think they can get that kind of return. And they're taking big risks with pensioners' money."
But the alternative is even less attractive. Lower the projected rate of return to a more conservative number and the state's pension gap grows, triggering even harsher demands on the funding side.
"Pension funds that are experiencing downturns are turning to a 'Hail Mary' pass to save them," said former SEC attorney and South Florida accountant Edward Siedle about the move to riskier investments. "But they'd better have a really good arm, because it's a stretch."
Nor are the SBA's trustees — Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink — particularly eager to tackle the unfunded liability issue. As beneficiaries of the plan, they're not anxious to talk about paring back benefits. As politicians, all running for higher office, they see no upside in demanding more money from taxpayers or telling them they'll lose services because the dollars are going to government retirees. Voters will be mad enough to find out their library is closing. Tell them the money is going to the retired librarian and they'll be even madder.
Andrew Biggs, former principal deputy commissioner of the Social Security Administration, has strongly criticized public pensions for using what he calls "bogus accounting" and believes the unfunded liability in all states, including Florida, is worse than projected.
"There's no incentive for anybody to be honest about this stuff because the taxpayers are going to be upset," said Biggs, now resident scholar at American Enterprise Institute. "That produces lower contribution rates today but passes off the risk to future taxpayers."
• • •
When experts talk about the recently opened gash in Florida's pension fund, they quickly add this caveat: We're in a whole lot better shape than most states.
Florida was one of only four state pension funds to go into the current recession fully funded. And based on its performance in fiscal 2008 — before the market meltdown — Florida was touted as a nationwide model in a report on public pension funds by the Pew Center on the States.
Kil Huh, director of research at Pew, said it's not surprising that Florida's pension fund should slip into a deficit, given market conditions.
"You're going to see a drop in assets, as well as an increase in unfunded liabilities until the actuarially required contributions catch up," he said. "But that's provided states fully fund these things, which is a big 'if' in this fiscal environment."
States that procrastinate find the tab quickly snowballs. New Jersey was fully funded in 2002 when it began to shortchange its contributions. By 2008 the New Jersey plan was one of the worst in the nation, about 73 percent funded. Catching up now would cost an estimated $3 billion; the state's new governor has recommended simply skipping this year's payment.
Richard Keevey, a professor at Princeton University and consultant on a Pew pension report in 2007, has watched the New Jersey debacle unfold in his back yard.
"When economic times are bad, legislatures are torn by priorities and underfund the pension a little bit till things get better, but they never do," he said. "Florida shouldn't go down that path."
Eric Johnson, assistant county administrator in Hillsborough County, knows exactly what it would take for his municipality to fulfill its pension obligations to about 5,000 public employees this year: $44.5 million, an increase of 18 percent.
To meet that obligation during a year when tax revenues continue to plummet, Johnson said the county was considering cutting benefits or replacing workers with private contractors.
While he's relieved to hear the Legislature is proposing a somewhat smaller increase in contributions, Johnson is troubled by what that means long term. He worries that Hillsborough's triple A credit rating, which translates into lower borrowing costs, could be jeopardized by the move.
"If you have a pension plan, it ought to be fully funded," Johnson said. "Part of the creditworthiness of a government is based on its unfunded liabilities. And the challenge is, when you punt one time, how confident should anyone be that you won't punt a second time?''
Times/Herald staff writer Mary Ellen Klas and Times researcher Caryn Baird contributed to this report. Kris Hundley can be reached at khundley@sptimes.com.
$15.4 billion Florida's public pension fund deficit in fiscal year 2009, compared with a surplus
of $8.2 billion at the end of the previous year.
1997 Last time the fund had a deficit.
1 million Number of fund members in 2009, with roughly two active workers for every retiree.
0 Amount state employees in Florida contribute to pension fund. In 44 states, public employees are required to contribute a median of 5 percent of their salaries.
[Last modified: Mar 23, 2010 10:44 PM]
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