(March 4, 2013) – The 2013 legislative session commences tomorrow in Florida, when lawmakers will take up, among other proposals, a bill to close the state’s $131.9 billion defined benefit (DB) pension plan.
House Bill 7011, if passed in its current form, would close the DB plan to new members effective January 1, 2014, and prohibit current members of the state’s defined contribution (DC) plan from switching into the pension system.
Legislators will soon receive copies of an auctorial study comparing cost projections of continuing the DB plan versus switching to DC, according to a staff member from the Florida Retirement System. The study was commissioned by House Speaker Will Weatherford—who lists pension reform as one of his five goals for the 2013 session—and prepared by actuarial firm Milliman.
The Florida Retirement System’s unfunded pension liabilities sit at $19.3 billion as of July 1, 2012—a figure which Milliman foresees rising over time due to longevity increases if the DB plan remains open. However, the study also found that closing the DB plan alone would not be an effective way to deal with that shortfall. “If the plan is closed,” Milliman’s researchers stated, the unfunded liability “is not expected to be lower than the current amount until 25 years later. If the plan is kept open, it is not expected to be lower during the projection period. The growth in the unfunded liability is a function of the funding policy,” which, the study asserts, would lead to a rise in unfunded liabilities over the medium-term.
Over the long term, Milliman concluded that closing the DB plan would in fact cut Florida’s unfunded pension obligations. The study estimated the figure would fall to $16.1 billion by 2041, whereas the state would face a $74.5 billion shortfall that year with an open DB plan.
A closed plan, or “soft freeze” in Milliman’s terms, would likely force the fund’s CIO (currently Ash Williams) and investment team to change their tact: “Over time, the State Board of Administration may lose the ability to invest with a long-term perspective as annual cash flow becomes more and more negative … This will possibly necessitate future changes in asset allocation in order to provide sufficient sources of cash for benefit payments, which in turn could impact the rates of return earned by the fund’s assets.”
In a pre-session meeting on February 7, the Government Operations Subcommittee approved the bill by a vote of nine to three, with one abstainer. The bill has been sent on to the Appropriations and State Affairs committees for review, which can commence when the legislative session opens tomorrow.