Original post date: October 05, 2012
Article by: Anonymous
Florida public pension programs have become a cause for concern in recent years, and the debate just ramped up with the publication of a new report by Florida State University’s Leroy Collins Institute. Florida cities are facing a fiscal cliff on municipal pension funding, and much of it appears to be of their own doing.
The Service Employees International Union claims that the stock market crash in 2008 and the subsequent economic crisis were the events that sent municipal pension funds over the edge. But, the Collins Institute report begs to differ. In Years in the Making: Florida’s Underfunded Municipal Pension Plans, the Institute points out that Florida pensions were underfunded before the stock market fell and the recent decline only exacerbated an existing problem. The main issue facing Florida’s public pension programs is not a decline in assets, which fund the pensions, but an increase in liabilities—the promised increases in benefits to retirees.
Since the pension programs in Florida operate like a “pay as you go” system in which current contributions fund outgoing benefit payments, incoming pension contributions must be of greater or equal value to the current retiree benefits paid out. Over the last two decades, the amount paid out to retirees has increased, and the age at which they may begin collecting benefits has been lowered. This has led to an overall increase in the amount of funds necessary to cover the municipal pension programs. Unfortunately by 2010, for the first time, total contributions were lower than the total amount paid to retirees.
Florida has been until recently one of the few states that did not require public employees to contribute to their pension plans. So, Florida Governor Rick Scott presented a plan to fill the gap by requiring public employees to begin paying 3% of their paychecks towards their pensions (in addition to lowered benefits and a higher retirement age requirement). The news was met with clamorous opposition, especially by unions which filed a legal challenge to stop the governor’s plan, arguing that changing the terms of their contracts was unconstitutional. A final decision has not yet been reached,but these judicial delays are not helping to alleviate the state’s financial woes.
The bottom line? The major determinants of the efficiency of Florida’s public pension programs are controllable variables, and this is the point of the Collins Institute study. One can conclude from this information that regardless of the performance of the stock market, the basic funding equation must be balanced for the pension system to work efficiently, and the income from investments is only part of that equation. Ultimately, liabilities (the promises made to retired public employees) also have to be addressed. In essence, the solution will come down to a trade-off between higher taxes to fund the pension promises, lower benefits to bring spending in line with revenues, or some combination of the two.