Bob Sparks: Is overhauling FRS a greater risk than doing nothing?

As most of Tallahassee and those enrolled in the Florida Retirement System (FRS) throughout the state know, the Legislature is again taking up what is called public pension overhaul.  

Both House Speaker Will Weatherford and Senate President Don Gaetz seek to change a system that is not broken. In fact, more than 86 percent of state pension liabilities are funded.  The scenario was even rosier before the recession began in 2009.

The idea is to require new public employees to enroll in a “defined contribution” 401(k)-type plan instead of the existing “defined benefit” plan.  Special risk personnel, such as law enforcement and firefighters, are exempted in the House and Senate bills.

With a well-functioning system in operation, opponents of such change might be tempted to quote Slim Pickens from the movie “Blazing Saddles” when he bellowed, “What in the wide, wide world of sports is a goin’ on here?”

Why would a system that might be the envy of several states be a candidate for legislative tinkering?  The state Fraternal Order of Police asked and answered that very question by coming out loudly against the idea.

Weatherford and Gaetz are far more articulate, but this is what’s “a goin’ on.” A 14 percent unfunded pension liability translates to $21.6 billion.  This is not chump change.

Each year, the Legislature takes $500 million off the top to pay down the liability.  The savings from moving to a defined contribution retirement system would eventually pay off the debt.  This would allow budget writers to direct the $500 million toward education, health care and other important needs.

Still, why do proponents believe this is necessary?  Because of concern that downturns and lean budget years could lead to increases in the amount of unfunded liabilities.  This could lead to substantial, long-term fiscal problems that other states face today.

So, how does Florida match up fiscally with other states and what is the outlook for the future?  A study done by Sarah Arnett at George Mason University is telling.

Arnett looked at five categories affecting the states’ financial health in both the short and long term: cash solvency, budget solvency, service-level solvency, overall fiscal condition, and long-run solvency.  All computations used data from all 50 states through fiscal year 2012.

Florida ranks in the top 10 in cash solvency, service-level solvency and overall fiscal condition.  We are number 13 in budget solvency.  Some of the states with tax-and-spend philosophies such as the northeastern states, Illinois and California, rank near the bottom in most categories.  There is something to be said for perennial spending discipline.

That leaves long-run solvency, where Florida falls into 37^th place.  This category “measures a state’s ability to use incoming revenue to cover its expenditures, including long-term obligations such as guarantee pension benefits and infrastructure maintenance.”

Long term debts for worthy projects such as Florida Forever are included in this category.  Erasing a $21.5 billion debt would vastly improve Florida’s standing in this category.

New Jersey sits at the bottom due to its $85 billion in unfunded pension and health-care liabilities for retired teachers, police, firefighters and other government workers.  Illinois, standing next-to-last, stares at unfunded pension liabilities amounting to almost $100 billion.

Look at what is happening to pensioners in the struggling states.  The prospects are real that they will not receive what was promised because the states do not, and will not, have the money.  Detroit has all but officially told recipients that their collectively bargained retirements will be slashed.

Elected officials monstrously failed their employees and constituents.  Proponents of changing FRS ask whether Florida wishes to run the risk of seeing unfunded liabilities grow in future years where they might become a real problem.

Look at our nation’s entitlement programs.  They were begun in either 1935 or 1965.  They are slowly but steadily heading toward insolvency under the weight of 21^st century demands and political paralysis in Washington.

Those who fear the words “investments,” “bonds,” “stocks,” or “securities” should understand that two-thirds of the benefits from FRS come from investments.  In voicing disapproval of overhaul, State FOP President James Preston said investments are precisely what make the current system a “great deal for taxpayers.”

While keeping in mind the trepidation of a number of state employees to risk, the benefits of investments and employee retirement through a 401(k) should get a fair hearing.  The question is which system holds the greater risk in future years?

This is most certainly not a matter of Republicans ramming this through the Legislature.   A number of Senate Republicans blocked the FRS proposals from going forward last year and, despite tweaks, may do so again.  Sen. Greg Evers, R-Baker, recently offered a forecast for this pension overhaul unless it contained a 50 percent pay raise for state employees.

“When it passes, it will be snowing in Miami,” said Evers.

Tough odds, but proponents can take heart.  Last week similar weather phenomena might have accompanied the possibility of Congresswoman Corrine Brown, D-Jacksonville, and the NRA’s Marion Hammer standing on the same side of a bill involving Stand Your Ground.  Not that we should invest in a South Beach ski lodge, but the Brown/Hammer side prevailed.

Just sayin’.

Bob Sparks is a Tallahassee-based business and political consultant and a state employee from 1999-2011. Column courtesy of Context Florida.