His misunderstanding of pension funding is nothing short of staggering and he falls prey to several tropes about the financial risks of public pensions.
Where to begin?
For starters, we would like to correct the record about unfunded liabilities. An unfunded liability is not the same as an underfunded plan. An unfunded liability represents the portion of money that will be needed to pay retirement benefits to every employee in the plan when they retire. Unless every worker in Florida retires at the same time — tomorrow — the unfunded liability represents only the money that will need to be earned or collected by the time they do.
An underfunded plan, on the other hand, is one that has not met or made its annual required contribution (ARC), creating instability in the fund’s ability to earn the money required to pay those benefits.
And while a pension fund can achieve 100% funded status, it is not the only, or even the most important measure of the plan’s health. For this reason, it has been a standard actuarial practice to use the 80% funded benchmark as one important measure of the plan’s financial health and an acceptable guideline. FRS is 82% funded.
Actuaries review the pension fund annually to determine what the ARC should be for the upcoming year and to project what it might be over the next 10-20 years. This allows the plan sponsor to adjust, in real-time, to market shifts. Moreover, the ARC is calculated to achieve those returns even when confronted with negative return years. If the plan sponsor faithfully makes the required contributions, only economic Armageddon will result in underfunding.
No state worker has to worry that taxpayers will have to pay for their pension every time the stock market has a bad year or there is a recession. Taxpayers do not pay for an employee’s pension in any instance. Taxpayer contributions are limited to paying for government services, a small percentage of which are allocated to support the pension fund. On average, just 3-5% of the total budget is used for the pension fund, while employees contribute with every paycheck for the duration of their careers. In fact, about 60% of revenue for public pensions come from earnings on the fund, not taxpayer dollars.
FRS has lowered its assumed rate of return from 7.4% to 7.0% to satisfy recessionary pressures and long-term earnings projections, and that of course results in a temporarily higher contribution requirement. Lowering the anticipated returns will prevent the fund from compounding negative returns. If the pension fund is expected to earn less, the contributions must rise.
But one should remember, as a long-term investment vehicle, the stock market has returned 13.9% over the past 10-years; 10.7% over the past 30-years; and 10.9% over the past 50-years. The average annualized return of the S&P 500 Index, between 2000-2019, was 8.7%.
The past 20-years have seen two significant recessions, resulting in a short-term average of 5.6% returns for FRS over that period, but pensions operate in perpetuity and their long-term earnings are more important than the short 20-year cycle Dr. Moore cites.
Florida is indeed a model for state pension plans. FRS has been operated with discipline and measured expectations and should be rewarded with our confidence that it will continue to be operated with a steady hand to deliver promised retirement benefits to thousands of faithful state employees.
Kimberlie Prior is CEO of the Florida Public Pension Trustees Association. The Association was established in 1984 as a nonpartisan, nonprofit educational association. More than half of Florida’s public pension boards are FPPTA members.