Articles, Research & Spotlights 

• Analysis Shows Debt Drives the Rise in Pension Costs
• Ohio Bill Would Advance Shared Pension Responsibility
• California Pensions Rank High on Investment Risk, But Low on Returns
• Florida Still Has Decades to Go Before Fully Funding Pension Benefits

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Reason Foundation in the News

Articles, Research & Spotlights

Most Pension Contributions Go Toward Paying Off Debt, Not Funding Benefits

Pension benefits promised to public workers have become increasingly expensive, squeezing state and local budgets nationwide. A new analysis from Mariana Trujillo uses Reason Foundation’s Annual Pension Solvency and Performance Report to dive into the growth of public pension costs over the last decade. Since 2014, annual pension costs have risen by 26% nationwide, with some states, like New Jersey and Alaska, seeing their pension costs rise more rapidly than others. With employee contributions remaining relatively stable, taxpayers have had to bear the bulk of this growing burden. Trujillo’s analysis finds that public pension debt, not new retirement benefits, is the primary driver behind these trends. In fact, more than half of employer pension contributions (55%) are now allocated to address the estimated $1.5 trillion aggregate state and local public pension funding shortfall.

Ohio House Bill 473 Could Balance Public Pension Plan Contributions

New legislation under consideration in Ohio aims to improve transparency and balance the burden of pension costs between employees and employers. House Bill 473 would restrict state and local government employers from paying all or a portion of an employee’s contribution obligation, a practice commonly known as a “pickup.” While governments use pickups to attract quality workers, this practice masks the true cost of a retirement benefit and distorts market signals that are important for informed policymaking. In comments submitted to the Ohio legislature, Reason Foundation’s Zachary Christensen explained the value of collaboration between employees and the taxpayer (represented by lawmakers) in a retirement plan and the importance of transparency in that partnership. 

California’s Pensions Are Relying on Riskier Investment Strategies

Facing more than $265 billion in unfunded pension liabilities and ever-increasing costs on local governments, California’s pension systems are turning toward high-risk investment strategies they hope will offer high rewards. As Reason Foundation’s Zachary Christensen explains in a recent op-ed, every resident in the Golden State is on the hook for about $6,000 in pension debt, so there is real pressure for the state’s pensions to catch up with above-average investment returns. The California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) aim to achieve higher returns by increasing their investments in alternatives, such as private equity and hedge funds. However, this strategy also carries significant downside risk, which will ultimately be borne by increased costs on taxpayers.  

Florida Must Stay the Course to Pay for Promised Pension Benefits

New estimates indicate that the Florida Retirement System (FRS) will need at least 17 more years before reaching full funding, but lawmakers are considering adding to these already underfunded pension benefits with proposals to bring back cost-of-living adjustments (COLA) for retirees. Zachary Christensen and Steve Vu from the Reason Foundation provide analysis applicable to this discussion, finding that even without granting a new COLA, a single year of bad returns (0%) could still undo years of progress in the system’s funding. A major recession could extend the full funding date beyond 30 years and would require significant increases in annual costs on taxpayers. With these remaining risks in mind, lawmakers need to avoid diverting from the state’s current path through more risky promises to public workers.

News in Brief

Market Volatility Poses a Bigger Threat to Pension Stability Than Long-Term Averages Suggest

A new pair of whitepapers from Sage Advisory and First Actuarial Consulting shows that many public pension boards assume the same return every year—typically around 7%—even though markets rarely behave that way. These fixed-return models make plans appear stable and fully funded, but they hide the real risks facing systems that pay out far more in benefits than they take in. When a plan has a large negative cash flow, early market losses matter much more than average returns. In these cases, trustees may be forced to sell assets during downturns, locking in losses and creating a long-term funding problem that the “smoothed” projections never reveal.

The second paper focuses specifically on this timing problem—known as sequence-of-returns risk—and explains why it is a structural issue for mature pension systems. When contributions are too small relative to benefit payments, the plan depends heavily on investment gains to maintain its funded status. But if significant losses occur early, the plan must liquidate assets at low prices to keep paying retirees. This shrinks the asset base, reduces future compounding, and can drive down the funded ratio even if markets recover later. Data from the largest plans illustrate this clearly: systems with the most negative cash flow experienced the most significant funding declines over time. The papers are available here and here.

Quotable Pension Quotes 

“Any time you give a benefit, and you don’t pay for it today, it’s like buying it on a credit card. You’re eventually going to have to pay the bill. And those decisions in the ‘90s have left us a large bill in 2026.”
–Mississippi State Sen. Daniel Sparks (R-District 5), quoted in “Mississippi’s PERS faces $26 billion debt,” WJTV, Nov. 6, 2025.

“In the late ‘90s and early 2000, there were some additional benefits placed into law without additional funding at the time. Also, in the two subsequent decades, we had a declining active to retiree ratio, meaning there were fewer active PERS covered members paying into the system and more retirees coming onto the system and retirees living longer.”
–Ray Higgins, executive director of Mississippi PERS, quoted in “Mississippi’s PERS faces $26 billion debt,” WJTV, Nov. 6, 2025.

“If the state fails Safe Harbor, then we would have to enroll everybody into Social Security. So that would more than double what we’re paying right now, […] Almost half our budget would have to go to pensions and Social Security. … So the cost of doing nothing is extreme.”
–Illinois state Rep. Stephanie Kifowit (D-Oswego), quoted in “Tier 2 pension reform bill moves forward, but Pritzker says there’s ‘a lot more work’ to do,” Capitol News Illinois, Oct. 30, 2025.

Data Highlight

Reason Foundation’s Mariana Trujillo explains why most state and local government pension contributions no longer fund current employee benefits. More than half of every dollar contributed to public pension plans now goes toward amortizing legacy pension debt—driven by decades of underfunding and overly optimistic return assumptions—rather than paying for benefits earned each year. Read the full analysis here.

Reason Foundation in the News

“Most plans are taking a lot more risk in their investment portfolio than they used to, and so there’s a lot more volatility than there ever was in pension plan returns.”
—Reason’s Ryan Frost quoted in “Illinois is tops in unfunded state and local pension liabilities per capita,” The Bond Buyer, Oct. 31, 2025.

“Over 40 percent of state and local government debt consists of unfunded pension and healthcare benefits promised to public workers. State and local pension debt amounts to $1.5 trillion, with an additional $1 trillion in healthcare benefits promised to retirees.”
—Reason’s Mariana Trujillo and Jordan Campbell writing in “State and Local Governments Are Drowning in Debt,” Inside Sources, Nov. 19, 2025.

“Yet few governments have set aside money to pay for their retirees’ future healthcare costs. The Reason Foundation reports that state and local governments faced $958 billion in retiree medical obligations in 2023, about $2,900 per American. The liabilities are largest in blue states like New York ($15,017 per capita), New Jersey ($10,599) and Connecticut ($6,657), which let workers retire early with generous health benefits.”
—Alyssia Finley writing, “The ObamaCare Blue-City Bailout,” in The Wall Street Journal, Nov. 7, 2025.

“The saying in the pension world is that most pension funds have been 20 years away from paying off their unfunded liabilities for the past 20 years.”
—Reason’s Mariana Trujillo quoted in “Unfunded pensions make up a large portion of California’s $1 trillion debt,” State Affairs, Oct. 31, 2025.

The post Pension Reform News: Reason analysis shows debt drives the rise in pension costs appeared first on Reason Foundation.

A new analysis by Aon Investments USA Inc. (a market consulting company), commissioned by the Florida State Board of Administrators (SBA), predicts that the Florida Retirement System, FRS, is on track to eliminate all unfunded pension liabilities by 2042. Lawmakers reformed the system in 2011 by introducing a defined contribution (DC) option called the Investment Plan, and subsequently made it the default retirement plan for most new hires in 2018. These reforms have helped FRS make progress in closing what was a nearly $40 billion funding shortfall after the Great Recession.  

The latest reporting from FRS now gives the system an 83.7% funded ratio (up from 70% in 2009), indicating that the state has made progress but still needs to stay the course to return to its pre-recession, full funding status. According to Reason Foudnation’s recently released Annual Pension Solvency and Performance Report, one bad year in the market (0% returns in 2026) would essentially undo that progress, bringing the system’s unfunded liabilities back to an estimated $40 billion overnight. 

Florida has a long way to go before catching up with its public pension promises 

If market outcomes over the next two decades resemble those of the last 20 years, FRS won’t achieve full funding anytime soon. The pension system’s 24-year average return since 2001 is 6.4%, falling short of the plan’s 6.7% assumption. According to Reason Foundation’s actuarial modeling of FRS, this seemingly small 0.3% shortfall would push the date for reaching full funding out by another three years. 

Another major recession would also significantly derail the system. Reason Foundation’s modeling indicates that an investment loss in 2026 similar to that of 2009 (a 20% loss) would result in a funding ratio of 62%, and it would take 15 years just to climb back to today’s funding levels. The full funding date would extend well beyond 2055 in that scenario. 

Lower market returns would also drive up the annual costs of FRS, which taxpayers and lawmakers should be wary of. In 2024, employers contributing to the FRS pension paid an amount equal to around 12.7% of payroll (totaling $5.6 billion statewide annually). If everything goes as planned, with returns matching the system’s assumptions, this cost will remain relatively stable and drop significantly once the system is free from pension debt. Under the scenario of a major recession, annual costs will need to rise to as high as 22.9% of payroll to maintain full pension benefit payments. 

A recession would necessitate much larger government contributions 

When it comes to public pensions, policymakers can hope for the best, but they need to prepare for the worst. At a minimum, they should structure pension systems to withstand the same market pressures and funding challenges that created today’s costly pension debt.

Florida lawmakers should consider these risks as they weigh proposals to expand benefits. During the 2025 legislative session, lawmakers saw (and rejected) a proposal to unroll the state’s crucial 2011 reform by again granting cost-of-living adjustments (COLAs) to all FRS members.

Reason Foundation’s analysis of the proposal warned that even under a best-case scenario, the move would add $36 billion in new costs over the next 30 years. A scenario in which the system sees multiple recessions over the next 30 years would have driven the estimated costs of the proposed COLA to $47 billion.

For a pension fund that is still many years away from having the assets to fulfill existing retirement promises, the last thing it needs is to double down on more costs and liabilities. 

Current proposals to cut taxes in the Sunshine State should also factor into any consideration of granting additional pension benefits to public workers. A new group of bills introduced in the state’s House of Representatives signals that lawmakers intend to offer several property tax-cutting measures to voters on the 2026 ballot. It is safe to say that the idea of increasing pension costs on Florida’s local governments while simultaneously facing the prospect of reduced tax revenue is ill-advised.  

Through prudent reforms, Florida has made some laudable progress in improving the funding of its public pension system. However, the state is still several years away from achieving the end goal of all these efforts, and any level of market turbulence would push the finish line out by decades. Policymakers need to be aware of Florida’s long-term pension funding strategy and avoid any proposals to add to the costs and risks imposed on taxpayers through new pension benefits. 

The post Florida must stay the course to pay for promised pension benefits  appeared first on Reason Foundation.

Since then, Florida has made some progress but is still on a long path to achieve this goal. A new proposal, House Bill 945, aims to reinstate the costly COLA feature, which could once again expose the state and taxpayers to unpredictable expenses.

COLA Could Cost Florida Taxpayers Over $47 Billion Over 30 Years

• The cost of the proposed cost-of-living on the state budget can be estimated, but Florida’s actual costs would depend on the pension system’s market returns and demographic outcomes (retirements, life expectancy, etc).
• Policymakers should look beyond best-case scenarios when evaluating a COLA. Any economic recessions or market downturns in the coming decades could lock Florida’s taxpayers into paying for this proposal for longer than planned and at much higher costs.
• Pension Integrity Project modeling of the Florida Retirement System shows the additional cost of bringing back cost-of-living adjustments, as proposed in House Bill 945, could rise above $47 billion over 30 years.
• It is crucial for policymakers to examine this proposal’s potential costs and risks before hindering the state’s pension funding progress.

Florida Needs to Let Previous Pension Reforms Work

• Florida lawmakers, public employees, and taxpayers have all made sacrifices to try to ensure the long-term viability of FRS. Some of these public pension reforms, which have passed recently, take time, however, and must be maintained to reach the eventual full-funding goal.
• The Florida Retirement System is still nearly $46 billion in debt. It is decades away from being able to fulfill the pension promises made to teachers, police, firefighters, and other public workers. Now is not the time to add more promises with unpredictable and potentially costly price tags.

Major Costs, Risks Associated with Restoring FRS COLA

The post The Florida Retirement System’s proposed cost-of-living adjustment comes with major costs and risks appeared first on Reason Foundation.

This cost-saving measure was a major part of the state’s strategy to manage exploding public pension costs and try to get FRS back on track toward full funding. Since then, Florida has made some progress but is still on a long path to achieving this goal.

Now, a new proposal, Florida House Bill 151, seeks to reinstate the costly COLA feature, which could again expose the state and taxpayers to unpredictable costs. It is crucial that policymakers explore this proposal’s potential costs and risks before setting the state’s pension funding progress back.

The Proposed COLA Cost Could Exceed $32 Billion

• The cost of a COLA on state budgets can be estimated, but Florida’s actual costs would depend on market returns and demographic outcomes.
• Policymakers who look beyond best-case scenarios when evaluating a COLA should see that potential economic recessions and market variances could lock Florida’s taxpayers into paying for this benefit for longer than planned and at higher costs.
• Pension Integrity Project modeling of FRS indicates that even with cost-saving measures in HB 151, the additional cost of bringing back COLAs could rise above $32 billion over 30 years.

Florida Needs to Stay the Course

• State lawmakers, public employees, and taxpayers have all made sacrifices to ensure the long-term viability of FRS. These reforms, some passed recently, take time, however, and must be maintained to reach the eventual full-funding goal.
• FRS is still short of funding already promised pension benefits by $42 billion. It is decades away from being able to fulfill the promises made to teachers, police, firefighters, and other public workers.
• Now is not the time to add more promises with unpredictable and potentially costly price tags.

Major costs and risks associated with restoring the Florida Retirement System’s cost-of-living adjustment

The post Major costs and risks associated with restoring the Florida Retirement System’s cost-of-living adjustment appeared first on Reason Foundation.

The good: A change to improve the long-term viability of the state’s defined contribution plan. The bad: More risks and costs to an already strained public pension system.

Most Sarasota city and county and school district employees are in the Florida Retirement System. Indeed, only a minority of government workers getting their retirement benefits from FRS are state employees: about 48% are employed by school districts, 24% are employed by counties, 14% by the state, 8% by universities and colleges, and 6% by cities.

This year’s reforms roll back several cost-saving pension reforms implemented in 2011 for public safety workers, an unfortunate move considering the pension system is still on a long path to becoming consistently fully funded. 

Florida’s pension plan has about $38 billion in unfunded liabilities and still relies too much on generating higher-than-realistic investment returns, even after taking a $14 billion loss in fiscal year 2022. 

Instead of adding more benefits with unpredictable costs, lawmakers should focus on eliminating the public pension debt that has loomed over state budgets and taxpayers for decades.

Alongside this potentially costly change comes a positive development for Florida employees and taxpayers. Florida government employers will increase their contributions to the state’s defined contribution plan— similar to a 401(k) plan — dubbed the Investment Plan. 

While this contribution increase comes with a cost increase for those governments, it’s crucial for the benefit adequacy of the defined contribution plan, a key component in the state’s effort to reduce long-term pension risks and costs for taxpayers.

Florida’s Investment Plan has been a valuable retirement savings option for public workers since 2002. After years of wrestling with unpredictable runaway costs associated with FRS’ traditional defined-benefit pension plan, state legislators voted to make the existing defined contribution plan the default option for new hires— excluding police and firefighters —beginning in 2018. Now, the majority of newly hired teachers and government workers participate in the Investment Plan, making it the state’s primary retirement plan and a keystone of the Florida Retirement System for the foreseeable future.

With its increasingly prominent role in providing retirement security for the state’s government workers, many began taking a closer look at the Investment Plan’s long-term viability.

Unfortunately, the state set up the Investment Plan with the lowest employer contribution rate among all states with similar retirement plans. This meant that even if state and local government workers put in the maximum amount allowed out of their own salaries, they would likely not have enough money in their retirement plan when they reached retirement age. This puts the employee’s retirement security at extreme risk and taxpayers at risk to bail the system out years from now when it is much more expensive to do so. 

Reason Foundation warned the state in legislative testimony and reports in 2021 that this was a problem in urgent need of repair. In 2022, the state took the first step by increasing employer contributions—the amount governments, via taxpayers, contribute by—3% for all members participating in the Investment Plan. 

This contribution rate increase raised Florida up to at least compete with the lowest contributors among other states offering similar defined contribution plans, but it remained the lowest on this list. That brought total contributions per year per employee up to a max of 9.3%, which was still well below industry guidelines of 12% to 15% of pay going toward retirement.

This year’s reforms increased employer/taxpayer contributions to the retirement plan by another 2%, bringing total employer/taxpayer contributions to 8.3%, with employees still contributing 3%, for total contributions of 11.3%. This is closer to the industry standard. As the table shows, Florida is now in the middle of the range offered by states with comparable retirement plans. 

However, Florida policymakers should not surmise that their work is done. The next round of reforms should look to increase employee contribution rates to their retirement plans, which have remained at 3% for decades.

Florida policymakers should also be wary of more calls to undo previous cost-saving reforms. Despite Florida’s still-growing $38.3 billion shortfall in assets needed to cover pension promises already made to FRS members, some have taken the state’s recent budget surpluses and renewed calls from public unions about recruitment and retention challenges to justify costly boosts to retirement benefits. Adding more pension liabilities while the state is having trouble paying for the ones already promised is bad practice and exacerbates a costly problem for Florida taxpayers.

At the same time, Sarasota area school districts, the city of Sarasota, and Sarasota County will see increased costs from these changes because they must make higher contributions to both the Investment Plan and the pension plan for their workers. But that is far better than allowing the retirement plan to continue on its previous unsustainable path with rapidly mounting costs for future taxpayers. It is far more efficient to pay the costs now, and each year, than to let these retirement plans build into a kind of massive balloon payment. 

Florida policymakers’ contribution improvements to the Investment Plan are prudent steps toward achieving the difficult task of providing adequate retirement benefits for public workers at a responsible level of risk and costs to taxpayers. By improving the state’s defined contribution plan, they are bolstering its long-term plan of reducing runaway costs, which will be instrumental in reducing and preventing more expensive public pension debt for future generations.

Florida policymakers should continue to seek reforms that strengthen the Investment Plan and reduce the risks of public pension debt. It is important to vigilantly guide the Florida Retirement System all the way back to full funding without adding more risks of runaway costs.

A version of this column first appeared in the Sarasota Observer.

The post Florida strengthens retirement plan but also increases taxpayers’ burden and rolls back pension reforms appeared first on Reason Foundation.

Articles, Research & Spotlights 

• Montana takes steps to improve its pension funding
• Teachers are concerned with salaries more than retirement benefits
• The good and bad of Florida’s recent pension reform

News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Montana Legislature Makes Pension Progress; Major Opportunities Remain

Lawmakers in Montana made two major improvements to the funding and security of the pensions offered to the state’s public employees this past legislative session. First, Montana House Bill 228 protected public funds from growing pressures to insert political goals into investment decisions. The public pension reform strengthens the rules surrounding these decisions and ensures that pension plan administrators make crucial investment choices based solely on their fiduciary responsibility. The reform has fund managers consider only the risk and returns of the assets they manage on behalf of public workers and taxpayers. Second, House Bill 569 improved the contribution policy used to pay for benefits to public safety workers. Reason’s Steven Gassenberger highlights these reforms and identifies the challenges that still need to be addressed for Montana’s retirement system for public workers.

Studies Suggest Teachers Value Salary Increases More than Pension Benefit Increases

Two studies by Yale University’s School of Management economist Barbara Biasi explore the impact of major reforms on teacher retirement and compensation enacted by Wisconsin lawmakers in 2011. The reforms granted public school districts much more flexibility in collective bargaining and the compensation they could offer, as well as increasing employee pension contributions. As Reason Foundation’s Jen Sidorova explained, Biasi’s results suggest that salary increases encouraged teachers to stick around longer, improving retention rates among this group. In fact, educators’ response to salary changes far outweighed how they reacted to changes to their retirement benefits. These findings are valuable context for policymakers evaluating options for improving the recruitment and retention of teachers and other public workers.

Good and Bad News on Florida’s Latest Reform of its Public Retirement System

Florida made several changes to its retirement system earlier this year with Senate Bill 7024. Some changes made important improvements to the state’s defined contribution (DC) plan while others added more risk and debt to its already underfunded public pension plan. In a recent commentary in The Observer, Reason’s Zachary Christensen and Adrian Moore detailed these adjustments and explained what the changes mean for the Sarasota government and taxpayers. With most of the city’s county and school district employees enrolled in the state-run system, the improvements to the DC plan will require more contributions from local budgets. But local taxpayers and policymakers should be more concerned with the rolling back of crucial cost-saving pension reforms for public safety workers. These rollbacks will likely contribute to ongoing challenges with unpredictable cost increases.

News in Brief

Analysis Projects Private Equity Drag on Public Pension Returns in 2023

Markov Processes International (MPI), an investment research firm, has published its 2023 investment return projections for state-run pension plans. It provides a valuable preview of the reports due soon after the end of the June fiscal year. Applying quarterly asset class returns to the reported allocation of public pensions, MPI has predictions for several major state plans. The authors expect a significant reversal from last year, with private equity funds—major sources of gains in 2022—playing a major role in bringing investment return rates down in 2023. MPI predicts plans with large percentages of their assets in private equity are going to experience lower returns this year compared to plans with a larger focus on global equities. These preliminary findings support some concerns about the higher levels of volatility that public pension systems are likely to experience if they continue to dive deeper into private equity and other alternative investments. The full analysis is available here.

Quotable Quotes on Pension Reform 

“There are few political benefits to maintaining a well-funded pension system, and so few pension systems have been well funded. There always seems to be a more pressing use of funds to elected officials than to bolster pension fund savings.”

 — Director of Fiscal Policy at the Mackinac Center for Public Policy James Hohman in “Michigan Governments Struggling to Fully Fund Pension Obligations,” The Center Square, July 10, 2023.

“There’s no common definition of environmental, social and governance factors… It’s being weaponized.”
— Marcie Frost, CEO of the California Public Employees’ Retirement System, in “CalPERS CEO Bracing for Return of California Fossil Fuel Divestment Bill,” Pensions & Investments, July 14, 2023.

The post Pension Reform News: Examining Montana and Florida pension changes, teacher compensation, and more appeared first on Reason Foundation.

The first change in the law rolls back several cost-saving reforms that were implemented in 2011 for public safety workers, an unfortunate move considering the pension system is still on a long path to consistently being fully funded.

Alongside this potentially costly change, however, comes a positive development for Florida employees and taxpayers. With the passage of Senate Bill 7024, public employers will now increase their contributions to the state’s defined contribution (DC) plan, dubbed the Investment Plan. While this contribution increase comes with a cost increase for taxpayers, it’s crucial for the benefit adequacy of the defined contribution plan, which is a key component in the state’s effort to reduce long-term pension risks and costs for taxpayers.

Florida’s Investment Plan has been a valuable retirement savings option for public workers since 2002. After years of wrestling with unpredictable runaway costs associated with the FRS pension plan, state legislators voted to make the existing DC plan the default option for new hires—excluding police and firefighters—beginning in 2018. Now, the majority of newly hired teachers and government workers participate in the Investment Plan, making it the state’s primary retirement plan and a keystone of the Florida Retirement System for the foreseeable future.

With its increasingly prominent role in providing retirement security for the state’s government workers, many began taking a closer look at the Investment Plan’s long-term viability. Experts familiar with the retirement plan warned that contribution rates below industry standards could result in inadequate savings for retirees, presenting a major hazard for policymakers. If the state’s now-default DC plan was not receiving adequate contributions, it would be unable to achieve its primary purpose of providing a valuable retirement to its members. This meant the strategy of using the Investment Plan to reduce long-term costs and risks was in peril.

Under the guidance of policy experts, including my colleagues at Reason Foundation’s Pension Integrity Project, lawmakers began to address this in 2022 with a 3% increase in employer contributions for all members participating in the defined contribution plan. Prior to this increase, with employees contributing 3% of their paychecks and public employers contributing 3.3% for “Regular Class” employees, most Investment Plan members were seeing a total of only 6.3% of their pay going to their retirement. This was well below the industry guidelines of 12% to 15% of pay going toward retirement.

This inadequate retirement contribution rate also put Florida well below other states that provide DC plans to public workers. With the additional 3% mandated by the 2022 reform, employers’ contributions, paid by taxpayers, increased to 6%. So employees were now seeing a total of 9.3% of their pay going to retirement savings, closing the gap between the contribution amount prescribed by financial experts and seen in other states like Oklahoma and Pennsylvania.

Updates to Florida Investment Plan Contributions by Employment Class

With the passing and signing of SB 7024 into law, Florida lawmakers have taken a crucial second step to address the Investment Plan contribution challenge. The 2% taxpayer-funded contribution increase in SB 7024, on top of the previous 3% increase, brings employer contributions for the state’s Regular Class employees—by far the largest subgroup that covers teachers and most other non-public safety employees—to 8.3% and total contributions to 11.3%. The change pulls Florida’s Investment Plan up from having the lowest contributions among other states with defined contribution retirement plans to being closer to, and even above, some of its peer states.

Contribution Rates for State-run DC Plans (FRS updated)

These successive contribution increases indicate the state’s commitment to providing adequate retirement benefits that do not impose expensive and unpredictable costs on future taxpayers. Florida’s defined benefit pension plan has yet to fully recover from its financial losses during the 2007-2009 Great Recession, which helped generate costs that are nearly double what was previously required (Regular Class government employers have gone from paying 6.18% of their payroll for their employees’ pensions in 2003 to more than 11.91% in 2022).

The defined contribution plan, on the other hand, poses no risk of unexpected costs to the state’s taxpayers. As more incoming workers enter into the DC plan and more DB participants age out, Florida will inch closer to its goal of eliminating costly pension debt. This—along with evolving needs for an increasingly mobile workforce—is why state legislators made the defined contribution plan the default option for new hires beginning in 2018. This move alone significantly slows the accrual of future unfunded public pension liabilities and greatly reduces the long-term costs that come with expensive pension debt.

However, Florida policymakers should not surmise that their work is done now that these changes have been applied to the Investment Plan. Contributions for the Regular Class remain near the bottom ranges of the 12% to 15% standards commonly given by industry experts. Both recent contribution increases have been born solely by employers and, therefore, taxpayers. The next round of reforms should look to increase employee contribution rates, which have remained at 3% for decades.

Florida policymakers should also be wary of more calls to undo previous cost-saving reforms. Despite a still-growing $38.3 billion shortfall in assets needed to cover pension promises already made to FRS members, some have taken the state’s recent budget surpluses and renewed calls from public unions about recruitment and retention challenges to justify costly boosts to retirement benefits. Adding more pension liabilities while the state is having trouble paying for the ones already promised is bad practice and exacerbates a costly problem for Florida taxpayers.

While it did make prudent improvements to the defined contribution plan, Senate Bill 7024 also added new liabilities by restoring pre-2011 features for law enforcement and firefighters’ pensions. The bill drops the retirement age for this group back down from 60 to 55, reduces years of service requirements to 25 years, and eases requirements for members to enter the Deferred Retirement Option Program (DROP). These changes are direct reversals of significant cost-saving measures the state made in 2011. Not only will rolling back these previous pension reforms add annual costs, but they also expose taxpayers to the same risks of unexpected costs that contributed to Florida’s current $38 billion in pension debt.

Giving at least some consolation, lawmakers did partially respond to warnings by removing a provision in the original version of the bill that would have restored a pre-2011 cost of living adjustment (COLA) for retired police and firefighters, which would have added significant costs—around $2 billion annually according to early estimates—and risks to an already underfunded pension system.

The recent actions of Florida policymakers—at least the contribution improvements to the DC plan—are prudent steps toward achieving the difficult task of providing adequate retirement benefits for public workers at a responsible level of risk and cost to the taxpayer. By improving the state’s defined contribution plan, they are bolstering its long-term plan of reducing runaway costs, which will be instrumental in reducing and preventing expensive pension debts for future generations.

Florida policymakers should continue to seek reforms that strengthen the Investment Plan and reduce the risks of public pension debt. It is important to vigilantly guide FRS all the way back to full funding without adding more risks of runaway costs.

The post Increases to contribution rate improve the long-term viability of Florida’s defined contribution plan  appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Montana’s plan to improve pension funding and governance
• Efforts to undo Alaska’s pension reforms could cost close to $1 billion
• North Dakota’s potential pension reform
• State pension plans’ poor investment results in 2022
• Reason’s PRO Plan offers a modern approach to public retirement

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Two Bills in Montana Could Improve Pension Plan Design and Funding

Montana’s Public Employee Retirement System has $2.2 billion in unfunded liabilities, and if left unaddressed, funding issues are likely to continue. A new reform proposed in the state’s legislature would address some of Montana’s ongoing pension challenges, first by committing employers to make adequate annual contributions and second by setting the existing defined contribution retirement plan as the default benefit for new employees. In recent comments to the House Committee on State Administration, Reason Foundation’s Steven Gassenberger explained how House Bill 226 would reduce long-term costs by locking the state into eliminating its pension debt and reshaping its retirement offerings to fit the modern workforce better. Gassenberger also testified on House Bill 228, which would improve governance by setting stronger boundaries on what pension plan administrators can consider when making investment decisions.

Alaska Pension Bills Could Undo Previous Reform and Cost $800 Million

Following an effort to reopen a pension plan for public workers during last year’s legislative session, Alaska policymakers are again deliberating on several bills that could undo the state’s decision to close its defined benefit pension plans in 2006. Two identical proposals—House Bill 22 and Senate Bill 35—would allow public safety workers to retroactively switch from the existing defined contribution plan to a newly opened defined benefit plan. A Pension Integrity Project evaluation of these bills and an actuarial analysis of potential long-term costs find that this change would add more expensive debt to the plan’s already $5 billion in existing unfunded liabilities and could cost the state an additional $800 million over the next 30 years. Since public safety employees only make up around 10% of the system’s members, this proposal would be a costly move that would benefit a relatively small group.

Updates to North Dakota’s Pension Reform Effort

North Dakota lawmakers continue to discuss House Bill 1040, which would commit participating employers to make required annual payments in full and make the state’s defined contribution plan the only option for new hires. This backgrounder from the Pension Integrity Project responds to a recent statement from the North Dakota Public Employees Retirement System (NDPERS) that claims the adoption of proposed House Bill 1040 would require a drastic reduction to the plan’s discount rate. The system’s claim is inconsistent with other state plans that have undergone similar reforms, and there is no legal or financial requirement to change discounting like this when a pension plan is closed.

Updated 2022 Fiscal Year Investment Results for State Pension Plans

Investment returns are a crucial part of a pension plan’s funding of promised retirement benefits. While the ultimate success and cost of a public pension do not hinge on a single year of market results, each year that a pension plan falls below investment expectations adds to the growing—over $1 trillion nationally by the latest estimates—unfunded liabilities of state-run pension plans. An update to our October 2022 analysis compiles the investment returns reported by state pensions from the 2022 fiscal year. As expected, the research shows 2022 was a notably poor year of investment returns. All state-run pensions saw results that fell short of expectations, leading to significant growth in unfunded liabilities. Reason Foundation finds the median investment return achieved by the listed pension plans was -5.2% in 2022, well below the national average expected rate of return of 7.0%. Following an exceptional 2021, the latest investment results demonstrate that public pensions still have a steep hill to climb to get back to full funding.

PRO Plan: A Better Public Sector Retirement Plan for the Modern Workforce

Beyond the crippling growth of expensive unfunded liabilities, public defined benefit (DB) plans have failed to adjust to the evolving needs of today’s increasingly mobile workforce. Defined contribution (DC) plans aren’t without their shortcomings either, a common concern being that retirees can outlive their retirement savings. Both types of plans suffer from a lack of flexibility and personalization. The Pension Integrity Project’s Personalized Retirement Optimization Plan (PRO Plan) addresses these issues by structuring a guaranteed lifetime income on the foundation of an enhanced DC plan. In this commentary, the developers of the PRO Plan, Richard Hiller and Rod Crane, summarize the advantages of this approach to retirement for public employees.

News in Brief

Paper Proposes a Novel Discounting Method for Public Pensions

Discounting is how pensions calculate the future value of liabilities they have promised, and the rate used for this calculation has a massive impact on their funding. A new paper by Florida International University researchers identifies the problems with current discounting norms, namely their tendency to understate required contributions. They also acknowledge that discounting at a zero-risk rate—a method promoted by some to reflect the guaranteed nature of government pensions—likely overstates funding shortfalls and is too disconnected from financial reality. To strike a more appropriate balance between these two approaches, the researchers propose a new discounting method that applies a lower limit based on the lowest expected return among risky assets. A historical back-testing using this new discounting method going back to 2001 saw most plans (94%) exceeding these investment return expectations, resulting in funding improvements. The full paper is available here.

Quotable Quotes on Pension Reform 

“Divestment of these holdings would do nothing to stop climate change. The companies in question can easily replace CalPERS with new investors.”

—Marcie Frost, CEO of the California Public Employees’ Retirement System, on proposed legislation to force divestment from fossil fuel companies, in “Keep Politics Out of CalPERS, Reject Senate Bill 252,” Whittier Daily News, Feb. 8, 2023.

“Each year I’ve been in office, we have reduced the assumed rate of return…If we had the more rosy assumptions, we’d probably be 86, 87% funded…So the fact that we’ve had all this turmoil, had some market turmoil, and we’re basically where we were and probably much better if you had that, I think that’s a good sign. I think we’re going to be able to build from here…At the end of the day, we really want honest accounting. And we can fudge the numbers a little bit, but you know, so we’ve been reducing that assumed rate of return. I think that’s the conservative approach. I think that’s something that makes the most sense.”

—Florida Gov. Ron DeSantis, in “Gov. DeSantis Pushes for More Pension Spending in New Budget,” Florida Politics, Feb. 1, 2023.

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by our team of Pension Integrity Project analysts. This month, analysts Jordan Campbell and Steve Vu show the distribution of investment returns for state pension plans in 2022. You can access the graph and find more information here.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides technical assistance for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform News: Montana’s proposed reforms, poor 2022 investment results, and more appeared first on Reason Foundation.

The interactive map below shows the funded ratios for state-managed public pension systems from 2001 to 2022. A funded ratio is calculated by dividing the value of a pension plan’s assets by the projected amount needed to cover the retirement benefits already promised to workers. The funded ratio values for 2022 are projections based on a -6% investment return. 

Year-to-year changes in investment returns and funded ratios tend to grab attention, but longer-range trends give a better perspective of the overall health of public pension systems.

In 2001, only one state, West Virginia, had an aggregated funded ratio of less than 60%. By the end of 2021, four states—Illinois, Kentucky, New Jersey, and Connecticut—had aggregate funded ratios below 60%.

If investment returns are -6% or worse in the 2022 fiscal year, Reason Foundation’s analysis shows South Carolina would be the fifth state with a funded ratio below 60%. 

Over the same period, 2001 to 2021, the number of states with state-managed pensions with funded ratios above 90% fell from 33 to 20. If all plans return a -6% investment return assumption for 2022, Reason Foundation projects the number of states that have funded levels above 90% would shrink from 20 to six.  The six states with funded levels that would still be above 90% after -6% returns for 2022: Delaware, Nebraska, New York, South Dakota, Washington, and Wisconsin. 

Importantly, the -6% investment return assumption for the 2022 fiscal year used in this map may be too optimistic for some public pension plans. The S&P 500 lost 12% of its value over the 2022 fiscal year from July 1, 2021, to June 30, 2022. Vanguard’s VBIAX, which mimics a typical 60/40 stock-bond portfolio, was down 15% for the fiscal 2022 year ending in June 30, 2022. Thus, given the condition of financial markets this year, the public pension plans with fiscal years that ended in June 2022 are likely to report negative returns for the 2022 fiscal year.  

Another useful long-term trend to look at are the unfunded liabilities of state-run pension plans. Whereas a pension system’s funded ratio takes the ratio of assets to liabilities, unfunded liabilities are the actual difference between the pension plan’s assets and liabilities. Unfunded liabilities can be conceptualized as the pension benefits already promised to workers that are not currently funded by the plan. Again, the values for the 2022 unfunded liabilities map are a projection using an investment return of -6%. 

The five states with the largest unfunded liabilities are California, Illinois, New Jersey, Pennsylvania, and Texas. In fiscal year 2021, the unfunded liabilities of those states totaled $434 billion and would jump to $620 billion in 2022 with a -6% return.  

For more information on the unfunded liabilities and funded ratios of state-run pensions, please visit Reason’s 2022 Public Pension Forecaster.

Notes

ⁱ The state-funded ratios in this map were generated by aggregating (for state-managed plans) the market value of plan assets and actuarially accrued liabilities. Prior to 2002, Montana and North Carolina reported data every two years, therefore for 2001 figures from 2002 are used. Figures for Washington state do not include Plan 1, an older plan that is not as well funded.

ⁱⁱ The discount rate applied to plan liabilities will impact the funded ratio of a plan. Therefore, the map above can be best thought of as a snapshot of state-funded ratios based on plan assumptions by year. Overly optimistic assumptions about a pension plan’s investment returns will result in artificially high-funded states. Conversely, pulling assumptions downward, while prudent, will result in a worse-looking funded ratio over the short term.

ⁱⁱⁱ In addition to projections for fiscal 2022, some public pension plans in 29 states have yet to report their complete fiscal 2021 figures and therefore include a projection estimate for 2021 as well. Thus, 2021 projections were used for at least one plan in the following states: Alabama, Alaska, Arkansas, California, Colorado, Georgia, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Tennessee, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

The post Projecting the funded ratios of state-managed pension plans appeared first on Reason Foundation.

Based on a -6% return for fiscal 2022, the aggregate unfunded liability of state-run public pension plans will be $1.3 trillion, up from $783 billion in 2021, the Pension Integrity Project finds. With a -6% return in 2022, the aggregate funded ratio for these state pension plans would fall from 85% funded in 2021 to 75% funded in 2022. 

The 2022 Public Pension Forecaster below allows you to preview changes in public pension system funding measurements for major state-run pension plans. It allows you to select any potential 2022 investment return rate to see how the returns would impact the unfunded liabilities and funded status of these state pension plans on a market value of assets basis.

The nation’s largest public pension system, the California Public Employees’ Retirement System (CalPERS), provides a good example of how much one bad year of investment returns can significantly impact unfunded liabilities, public employees, and taxpayers.

If CalPERS’ investment returns come in at -6% for 2022, the system’s unfunded liabilities will increase from $101 billion in 2021 to $159 billion in 2022, a debt that would equal $4,057 for every Californian. Its funded ratio will drop from 82.5% in 2021 to 73.6% in 2022, meaning state employers will have less than three-quarters of the assets needed to pay for pensions already promised to workers. 

Similarly, the Teacher Retirement System of Texas (TRS) reported $26 billion in unfunded liabilities in 2021. If TRS posts annual returns of -6% for the fiscal year 2022, its unfunded liabilities will jump to $40 billion, and its funded ratio will drop to 83.4%. The unfunded liability per capita is estimated to be $1,338. 

The table below displays the estimated unfunded liabilities and the funded ratios for each state if their public pension systems report -6% or -12% returns for 2022. 

Estimated Changes to State Pension Unfunded Liabilties, Funded Ratios

The first three quarters of the 2022 fiscal year clocked in at 0%, 3.2%, and -3.4% for public pensions, according to Milliman. The S&P 500 is down more than 20% since January, suggesting that the fourth quarter results will be more bad news for pension investments.

Considering the average pension plan bases its ability to fund promised benefits on averaging 7% annual investment returns over the long term, plan managers are preparing for significant growth in unfunded liabilities, and a major step back in funding from 2021. 

The significant levels of volatility and funding challenges pension plans are experiencing right now support the Pension Integrity Project’s position last year that most state and local government pensions are still in need of reform, despite the strong investment returns and funding improvements in 2021. Unfortunately, many observers mistook a single good year of returns—granted a historic one—as a sign of stabilization in what was a bumpy couple of decades for public pension funding. On the contrary, this year’s returns, as well as the growing signs of a possible recession, lend credence to the belief that public pension systems should lower their return expectations and view investment markets as less predictable and more volatile. 

State pension plans, in aggregate, have struggled to reduce unfunded liabilities to below $1 trillion ever since the Great Recession, seeing this number climb to nearly $1.4 trillion in 2020. Great results from 2021 seemed to finally break this barrier, with the year’s historically positive investment returns reducing state pension debt to about $783 billion. Now, state-run pension plans will again see unfunded liabilities jump back over $1 trillion, assuming final 2022 results end up at or below 0%. 

It is important not to read too much into one year of investment results when it comes to long-term investing. But during this time of economic volatility, policymakers and stakeholders should recognize that many of the problems that kept public pension systems significantly underfunded for multiple decades still exist. And many pension plans are nearly as vulnerable to financial shocks as they were in the past.

Going forward, state and local leaders should continue to seek out ways to address and minimize these risks, making their public retirement systems more resilient to an uncertain future. 

Webinar on using the 2022 Public Pension Forecaster:

The post Unfunded public pension liabilities are forecast to rise to $1.3 trillion in 2022 appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Florida Law to Improve State DC Plan
• Alaska Avoids Attempt to Unwind Pension Reform
• Examining NIRS’ Cost Efficiency Report
• Jacksonville’s Successful Reform Leads to Credit Rating Boost
• Proxy Voting May Be a Distraction to Pension Investors
• Lack of Focus on Lifetime Income Among Retirement Plans

News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Major Florida Legislation Improves the State’s Default Defined Contribution Plan 

Adopting the long-time recommendation of the Pension Integrity Project, Florida lawmakers have now made much-needed improvements to the state’s defined contribution plan that serves the majority of new teachers and public employees. House Bill 5007—recently signed by Gov. Ron DeSantis and proposed as an element of his 2022 budget —will increase government contributions into public employees’ individual defined contribution accounts by 3%. This increase brings the state’s flagship vehicle for retirement benefits up to general standards for adequate savings, reinforcing the Sunshine State’s dedication to providing competitive retirement options. Now with this success solidified, Florida policymakers should continue to seek out ways to improve both defined contribution and defined benefit components of its retirement system.

Alaska Avoids Attempt to Roll Back 2005 Pension Reform 

Alaska was an early adopter of the defined contribution plan, which has been an effective plan design for providing valuable retirement benefits to public employees while not taking on additional unpredictable costs and risks. This last legislative session, two bills to replace the state’s defined contribution plan with poorly structured pension plans made it through the state House of Representatives, but eventually failed in the state Senate. The failed legislation was ostensibly introduced to help the state with its challenges with recruiting and retaining public workers, but little actual research was done to explore the fiscal effect this reform would have had, and it is unlikely that the change would actually improve the state’s ability to attract and keep employees. Seeing the need for informed analysis on these proposals, the Pension Integrity Project at Reason Foundation stepped in to educate key stakeholders of the potential risks and costs that could arise from the proposed changes. 

NIRS’ Assessment of the Retirement Efficiency Gap Leaves Out Some Key Details

Research from the National Institute on Retirement Security (NIRS) claims that an “efficiency gap” exists when comparing defined benefit (DB) and defined contribution (DC) plans. Theoretically, this gap suggests that, for the same amount of money, DB plans are able to generate more in retirement benefits. This analysis takes too narrow of a view, however, argues Reason’s Swaroop Bhagavatula. First, by only applying scenarios in which plans accurately predict actuarial outcomes–most notably returns–NIRS’ analysis seems to overlook the significant funding challenges that have plagued public pensions. Second, the analysis applies too much importance on cost efficiency, while not addressing other important factors in retirement policy, like what is optimal to the modern workforce. Devoting one’s entire attention on cost efficiency is missing the bigger picture when the majority of new workers will not remain long enough to enjoy the benefits of a DB plan.

Jacksonville’s Public Pension Reform Helps the City Get an Improved Credit Rating

Citing a package of pension reforms from 2017, Moody’s Investors Service just improved the credit rating for the city of Jacksonville, Florida. Five years ago, Jacksonville’s city council directed a major shift in retirement policy, electing to use a defined contribution plan for all new hires to slow the growth of costly and unpredictable pension debts. This, along with prudent payments to accelerate the elimination of legacy pension debt, has greatly improved the city’s financial standing. Reason’s Jen Sidorova explains the benefits that Jacksonville will enjoy thanks to its retirement reform and the improved credit rating that came about from these efforts.

Proxy Battles Are Usually an Inefficient Use of Public Pension Systems’ Resources

As major institutional investors, public pension plans can influence the companies they invest in. This influence is formally realized in the way a pension engages in what is called proxy voting, which is when a corporation allows its investors to vote on board membership decisions and other resolutions. Reason’s Marc Joffe examines some trends in how pensions have participated in this process, finding 81 recorded instances of funds formally making a case to their fellow shareholders to vote a particular way. California’s main pension for public workers, CalPERS, was the source of more than half of these, and they used their shareholder status to advance official positions ranging from climate change to board diversity. Joffe questions the purpose and effectiveness of this practice, and notes that public pensions usually have more pressing matters related to risk and funding that should take priority.

The Case for In-Plan Lifetime Income Solutions for DC Plans Is Clear, So Why the Reluctance to Implement? 

Annuity options offer an excellent solution to the largest critique of defined contribution plans, a lack of guaranteed lifetime income. But there is still a stark reluctance among retirement plans to offer these options to their members. Reason’s Rod Crane explores some of the barriers to providing annuities, namely the complexity of these options and a misaligned focus on wealth accrual over retirement income.

News in Brief

Proposed Funding Policies for Legacy Pension Debt

Jean-Pierre Aubry at the Center for Retirement Research at Boston College has published follow-up research on his previously introduced concept of legacy debt in public pensions. A number of pension plans began without policies to prefund promised benefits. As nearly all plans eventually changed this practice, a good deal of debt was generated that—as the author of this brief postulates—should not be under the same expectation of payment by the current generation. Aubry advises plans change the way they account for and pay down both legacy and new debt. For legacy debt, plans should adopt amortization policies that pay down the liability over multiple generations. For new debt they should adopt lower risk return assumptions and maintain amortization that ensures payment within the current generation. These changes would decrease annual contributions required for legacy debt, but would also reduce future funding risks with higher required contributions for new debt. The full brief is available here.

State Unfunded Liabilities Over $8 Billion When Discounting at Risk-Free Rates

The American Legislative Exchange Council (ALEC) releases an annual report that recalculates unfunded pension liabilities using a discounting method that accounts for the guaranteed nature of benefits backed by state governments. Using a risk-free rate, unfunded liabilities held by states have now exceeded $8.2 billion by 2021, which is a significant increase from the previous year. Much of this jump is attributed to declines in the risk-free rate. The report also examines the states that have enacted reforms, naming Alaska, Michigan, and Oklahoma as standouts for adopting effective changes that have significantly reduced taxpayer and budget risk. The analysis finds that 25 states have yet to adopt major contribution or plan design reforms. The full brief is available here.

Quotable Quotes on Pension Reform 

“Market volatility is the prevailing headwind for public pension funding, and over the first three months of 2022 we saw the majority of the plans in our study decline in asset values, ranging from losses of 5.52% to a mild gain of 0.50%…Given the continued fixed income and equity volatility in April and May, we expect this downward funding trend to continue in the near-term” 

– Author of Milliman’s Public Pension Funding Index Becky Sielman, cited in “Milliman Analysis: Rocky Markets Cause $167 Billion Drop in Public Pension Funded Status During Q1,” PR Newswire, May 20, 2022

“If you look at reasonable expectations going forward, it’s going to be very hard to maintain current asset/liability funded ratios in public pensions without making significant changes…Pensions have had a good decade-long run of strong investment returns, recently combined with higher liability discount rates. But those trends will eventually reverse, placing renewed downward pressure on funded ratios. If you combine that with boards that aren’t willing to make structural changes to their business model, it’s a Catch-22.”

– Co-founder of CEM Benchmarking and CEO of KPA Advisory Services Keith Ambachtsheer, cited in “Governance Issues Loom Over US Pension Funds,” Chief Investment Officer, June 2, 2022

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform News: Florida improves defined contribution plan, Alaska pension reform roll back blocked, and more appeared first on Reason Foundation.

It is generally recognized that a defined contribution structured retirement plan needs a contribution rate of between 12% and 15% of a worker’s salary (where employees participate in Social Security) to produce an income that is likely to maintain the employee’s standard of living once they are in retirement. For teachers and most other non-safety public workers in Florida, the contribution rate in the Florida Retirement System’s Investment Plan has been 3% by the employees and 3.3% by the employer, for a total of 6.3%. Unfortunately, this is effectively half of the total contribution necessary to effectively fund an appropriate retirement income. 

In House Bill 5007, the Florida legislature increased the state’s contribution to the FRS IP by 3% to a total employer contribution of 6.3%. This brings the contribution rate of government employers, i.e. taxpayers, to 6.3% and the total contribution rate up to 9.3%, certainly a substantial improvement. The increase is expected to cost $249 million next year. Ideally, workers would’ve also upped their contributions to FRIS IP but the state legislature is to be applauded for recognizing this shortcoming and for acting to improve lifetime financial security for state employees. This change may also aid in recruiting and retaining quality employees into state service as taxpayers put more money toward workers’ retirements and the plan better meets employees’ long-term needs. 

The FRS IP has been a plan that effectively meets most other best practices for defined contribution (DC) plan design. It provides a robust communication and education package for employees and has an appropriate investment menu that includes target-date funds for workers who may be less financially active or sophisticated.  There is also a broad selection of distribution options for employees to choose from, including lifetime income options. With all these positive design elements, the insufficient contribution rate has kept the plan from being a truly effective retirement vehicle. While the government’s 3% contribution increase goes a long way toward making the plan more effective, the total contribution rate remains insufficient. 

The Florida Retirement System Investment Plan should now examine how it can increase the required employee contribution by 3% to 6%, so the total contribution rate would rise to 12.3%. Legislative action will likely be needed, but increasing the employee contributions would create no additional cost to the state’s taxpayers. This increased contribution from workers would bring the FRS IP contribution total from 9.3% to 12.3%, a rate just above recognized standards so that workers could then expect to have the appropriate amount of money set aside for retirement.  

An employee contribution rate of 6% is quite comparable to other states with defined contribution retirement plans and could be an appropriate reciprocal response considering not only the state’s increase in its contribution but also the recent 5.4% across the board increase in salaries for all state employees, with some workers also getting additional raises. If workers express concerns about increasing their contribution rate all at once, state policymakers could examine the possibility of implementing the 3% contribution increase gradually over several years. Again, this would likely need to be spelled out legislatively. 

The momentum initiated by the important and laudable state action to increase the government’s contribution rate to the FRS IP should not be lost. But to be a truly effective retirement plan for state employees, and best aid employer workplace objectives, including recruitment and retention of employees, the total contribution rate still needs to rise into the accepted range of 12% to 15%.  

With the passage of House Bill 5007, the Florida Retirement System’s Investment Plan is much closer to being a model of effective public retirement plan design. Florida policymakers should now seize the opportunity to take the necessary step—increasing employee contributions to 6%, thereby having a total contribution rate into the plan of over 12%, putting the contribution rate in line with best practices.  

The post Florida improves FRS Investment Plan, but more needs to be done appeared first on Reason Foundation.

With this move, Florida continues to demonstrate its commitment to maintaining a retirement system that works for both taxpayers and public workers. It will align the state’s default defined contribution retirement option offered to most newly hired public workers with private-sector retirement contribution best practices. This will have the long-term effect of mitigating financial risk to taxpayers while improving employees’ ability to contribute to a secure, future retirement no matter how long they work in public service. 

In combination with previous reforms, the Florida Retirement System Investment Plan (FRS IP) rate changes in House Bill 5007 make Florida a leader in providing attractive, choice-based, and affordable benefits to an increasingly flexible and diverse workforce. The change also improves the footing of the state’s defined contribution plan, which plays a critical role in addressing the financial risks borne by public employers and taxpayers. 

The Pension Integrity Project at Reason Foundation played an integral role in thought leadership related to this landmark reform, educating policymakers on the issue for years. After reporting on the needs of the Florida Retirement System (FRS) in 2019, the Pension Integrity Project began communicating the importance of ensuring the benefit offered in the FRS Investment Plan—the state’s default defined contribution plan—meets best practices typical of private sector corporate retirement offerings. From there, we engaged in educational outreach with policymakers, detailing the problem and proposing potential solutions to help bring the FRS Investment Plan up to industry standards. 

With the help of several key stakeholders in the state, including Gov. DeSantis’ office, legislative leaders such as State Sen. Jeff Brandes and State Rep. Jay Trumbull, and local groups like Americans for Prosperity-Florida, we were able to raise awareness of the issue in preparation for the 2022 regular session. We most recently testified on the subject before the Florida Senate Committee on Governmental Oversight and Accountability in October 2021. The collaborative effort was rewarded when Gov. DeSantis released his administration’s 2022 budget proposal, which included the recommended policy proposal that ultimately became law with the recent signing of HB 5007.

The Problem

Originally adopted during the 2000 legislative session as an alternative option to the state’s traditional defined benefit pension, the Florida Retirement System Investment Plan (FRS IP) has taken on increasing importance in Florida state and local government administration and now serves as the state’s primary vehicle for providing retirement security to most public workers. 

Seeing that most public employees weren’t staying in the system long enough to maximize their pension benefits, Florida lawmakers appropriately switched the FRS IP to be the default choice for most new workers (excluding first responders in the “Special Risk” class) in 2016. Today, over a quarter of the FRS membership has either selected or defaulted into the Investment Plan, and its share continues to grow rapidly. 

With so many teachers and public employees dependent on the FRS IP as a means to support a dignified retirement, it is crucial that the default retirement plan provide sufficient contributions to allow workers to make continuous progress toward saving for a healthy and comfortable post-employment lifestyle. Financial advisors and industry experts typically recommend total contributions into a plan like the FRS IP should total at least 10% of an employee’s pay—with many even preferring 12% to 15% percent to ensure benefit adequacy—for the eventual accrued benefits to be sufficient for retirement. 

For over two decades, Florida’s public employers at the state and local levels were required to contribute 3.3% of an employee’s salary to their FRS IP account for the largest grouping of employees (the “Regular Class”), which includes teachers and most civilian government employees. Employees in turn contributed a fixed 3% of their pay to their FRS IP account to bring the historic savings rate of FRS IP members to 6.3%,  far below industry standards. This contribution combination placed Florida well below other states who offer defined contribution plans, further highlighting the unique need to address the funding flowing into the IP (see Table 1).

Table 1. Contribution Rates for State-Run Primary Defined Contribution Retirement Plans

Insufficient contributions to a public retirement plan should be a major concern for employees, policymakers, and taxpayers alike. A generation of retirees inadequately prepared for retirement creates a risk of increased reliance on the state’s social safety net. This shortcoming also creates more immediate challenges that can impact many stakeholders. Benefits below industry standards and below those available in the private sector can significantly hinder the state’s ability to compete for talent—especially in areas like information technology and data security—to ensure the continued delivery of quality public services to Floridians. Before the governor’s recommendation and the subsequent policy enactment, public employers were at risk of falling behind in attracting qualified employees and creating a generation of retirees with benefits insufficient to outlast them.

The Reform: Summary and Evaluation of HB 5007

For FRS Investment Plan members, HB 5007 increases the employer contribution to employee IP accounts by 3% of payroll over current levels, covering all membership classes, meaning all present and future members of the FRS IP will see an equal increase. The largest grouping of employees—the Regular Class, which includes teachers and most non-public safety workers—will see the employer rates into their IP accounts rise from 3.3% of pay to 6.3%. In combination with their own 3% contribution, which will remain unchanged, the total contribution into the IP plan for Regular Class members will now be 9.3%. Those in the Special Risk class, which includes public safety officers—will see their total contributions rise from 14% to 17%.

According to the House’s fiscal analysis of the House Bill 5007, the 3% increase in employer contributions to the FRS IP is estimated to require an additional $249 million in the first year from all state and local government employers in aggregate.

With the passage of HB 5007, lawmakers have moved the state into a more competitive position by providing employees with more resources to meet their retirement needs. The increased amount employers will contribute to their employees’ FRS IP accounts comes on the heels of lawmakers also agreeing to a 5.38% across-the-board pay increase for public employees. For those participating in the FRS Investment Plan, this will bring the total increase in compensation to more than 8%.

As states around the country scramble to recruit qualified employees, HB 5007 and the FRS Investment Plan will make Florida a more competitive employment option for new workers, especially those highly skilled technical professionals the state expects it will need in the future. 

This notable step also improves the long-term viability of the Florida Retirement System. The more the FRS IP membership continues to increase, the less the inherent risk of cost overruns associated with the alternative FRS Pension Plan, which remains $7.6 billion underfunded today. By bringing contributions up closer to industry best practices, HB 5007 ensures that the defined contribution plan will continue to be an attractive option for future public workers. This, in turn, will result in more members joining a retirement plan that, unlike the pension, has a steady and predictable price tag with no risk of runaway costs and debt.

House Bill 5007 also included an unrelated policy provision that expanded law enforcement officers’ access to an existing Deferred Retirement Option Program (DROP) for those participating in the traditional FRS pension system. Reason has not performed an in-depth analysis of this particular aspect of the bill, but there are many risks involved in DROPs that are frequently overlooked, and there are likely more efficient ways to improve the retention of public workers.

Conclusions and Next Pension Reform Steps

Through a collaborative effort grounded in Reason Foundation’s experience with best practices of retirement policy, House Bill 5007 changes the FRS IP in a way that is undeniably important for the long-term future of Florida’s taxpayers and retirees. While the 3% increase appears simple at face value, this reform marks a significant improvement in the retirement security of most incoming workers. It will also improve the ability to attract and keep quality employees at a time when this is a growing concern for state and local employers. 

Another important, and quite possibly longest-lasting impact of the reform is that it bolsters the FRS IP so it can continue to be a valuable retirement option for employees while also working for employers—or taxpayers—by managing risks and runaway costs.

Florida policymakers and those involved in this reform process deserve credit for achieving meaningful and lasting change. This should not be the end of thoughtful improvements to the state’s retirement system, however. To build on this session’s success and remain competitive with the private sector, stakeholders should continue searching for ways the FRS IP can better serve public employees. 

In the fall of 2021, the Pension Integrity Project testified before the Florida Senate Committee on Governmental Oversight and Accountability that, in addition to addressing the below standard contribution rates, there were a few other opportunities for the FRS IP to better serve its members:

• The first opportunity to expand on HB 5007 lies in the stated objectives of the FRS IP, or lack thereof. Currently, the Florida Retirement System as a whole is governed by a set of objectives, but the unique nature of its two retirement options presents an opportunity for additional mission clarity and transparency. Framing explicit language delineating the specific objectives of the Investment Plan—such as lifetime income and retirement security—could help communicate the goals of the plan to new and existing public workers. 

• The second area of opportunity lies in the types of investments offered to those participating in the Investment Plan. Well-designed plans like the FRS IP should also offer the correct age-appropriate investment mix. This is generally accomplished by using target date funds that adjust investment risk to the employee’s retirement horizon. Given the serious role these funds play in the lives of public workers and their families, protecting the value of a member’s FRS IP account from market fluctuations as the worker nears retirement should be a high priority.

• Providing annuities to improve members’ retirement security has long been an established practice in the FRS IP, but it could still be improved. Offering annuitization at retirement allows retirees to use their accrued retirement funds to buy a stream of guaranteed lifetime income. Despite a lifetime annuity option being available to members already, distribution choices offered by the FRS IP are limited. Expanding those offerings to include deferred annuities could present an opportunity to further improve this offering to retirees. 

• Lastly, the increases in HB 5007 brought total contributions nearly, but not quite, to the 10% minimum standard set by industry experts. Despite the prudent dedication of funds to address this pressing issue, Florida will still be below all other states in total contributions for most members of the FRS IP. There is still room for improvement in this regard, and it may be prudent to consider ways to increase the fixed employee contribution toward their own retirement. Lawmakers should recognize that with future efforts they can build upon the benefits that will come from this latest legislation.

Although there are still potential improvements to be made to the Florida Retirement System Investment Plan, there is no denying lawmakers took the most important step in HB 5007 by raising total contributions to be closer to the levels needed to provide for an adequate retirement. Gov. Ron DeSantis and members of the state legislature deserve recognition for their work to bring the Florida Retirement System one step closer to becoming a model for public retirement systems around the country. 

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Five years ago, the Jacksonville City Council approved a pension reform package while enacting innovative changes, reducing debt by more than $585 million and adding over $155 million to pension reserves. A key element of the pension reform that led to reduced debt was closing the city’s three pension plans to new public employees in 2017. Since that change was put in place, over $715 million has been used to grow Jacksonville’s economy and invest in public services for its population. In addition, credit rating agencies, such as Moody’s, assign “grades” to governments’ ability and willingness to service their bond obligations, taking into consideration the jurisdiction’s economic situation and fiscal management. Since the pension reform reduced budgetary pressure, it improved the chances of the city getting a credit upgrade. 

The Jacksonville Daily Record reports:

Moody’s cited the closing of three pension plans to new employees as a factor for the rating improvement along with others:

• Material improvement in the city’s cash and liquidity position (issuer and non-ad valorem ratings.) 

• Significant reduction in the growth of the city’s pension obligations (issuer and non-ad valorem ratings).

• Material economic improvement reflected in tax base growth, lower unemployment and increased median family income (issuer and non-ad valorem ratings).

• Improved coverage from pledged revenues (special tax ratings).

Facing billions in unfunded public pension liabilities and increasingly expensive debt service payments, city leadership decided to stop adding risk to the budget by making the defined contribution plan the primary vehicle of a secure retirement for new hires beginning in 2017.

In addition, Jacksonville prioritized paying down the $2.86 billion in unfunded retirement benefit liability owed to current employees and retirees over the coming decades. While the city does not accumulate any pension debt from new hires, existing pension promises previously made to workers with defined benefit retirement accounts must be fulfilled. Overall, the pension reforms reduced the city’s risk, brought long-term costs under control, and improved pension funding policy overall.  

The 2017 pension reform is expected to lower unfunded pension liabilities and get the city’s pension plan closer to 100% funded in the coming years. Since getting existing liabilities under control makes the city more likely to honor its future debts, it inevitably has a positive effect on the city’s credit rating.  

When a city like Jacksonville receives a credit rating upgrade, it can issue bonds at a lower interest rate. This process is similar to an individual becoming eligible for lower interest rates as their credit scores improve. With lower interest rates available, the city can lower long-term costs and has more flexibility to invest in infrastructure projects and other public services.

“Roads and bridges and programs, parks, libraries, public health, and safety. All of that impacts our community and our citizens as they go about their daily lives. These things that we just sometimes take for granted that, you know, take a lot of money to keep in good working shape,” said Joey Grieve, the city’s chief financial officer, in a recent interview. 

Jacksonville’s experience shows how sensible public pension reforms can positively impact the fiscal outlook of a major city while also improving public workers’ retirement security. The full effects of Jacksonville’s 2017 pension reform will be realized over decades, but it is clear from Moody’s credit rating upgrade that the reform has already contributed to improving the city’s finances. 

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This fluidity means retirement plans that were once advantageous to these lifetime workers are now less attractive to a growing number of more mobile workers. To address this trend, many public employers have introduced defined contribution retirement plans to provide a more portable and optimal retirement benefit to workers who aren’t planning on sticking around at that job for multiple decades.

A defined contribution plan uses an individual retirement account, like private sector 401(k) accounts, to which regular contributions are made, eventually resulting in a lump sum that is accessible at the worker’s retirement. This type of retirement plan does not place retirement saving risk on the public employer and taxpayers. And it provides the employee with a chunk of money that can move with them from one employer to the next if they change jobs. It also affords the worker more personal control over investments and other disbursement options in retirement, like annuities.

Unlike defined benefit pension plans, defined contribution plans do not depend on actuarial predictions on the market or other demographic assumptions. The feature that most impacts a defined contribution plan is the total contributions flowing into the member’s account. For a defined contribution plan to provide an adequate retirement, the contributions that are paid into that personal account must be sufficient.

What is ‘sufficient’ depends on various factors, including the type of job being performed and the existence of other supplementary benefits like personal savings and social security. Figure 1 shows the various contribution rates that are used for the primary defined contribution plans run by state governments.

Figure 1: Contribution Rates for State-Run Primary Defined Contribution Retirement Plans

As the table above demonstrates, there is quite a bit of variance in contribution levels among state-run defined contribution plans. For example, public safety workers tend to have earlier retirement ages, so they need higher contributions to achieve a sufficient sum by the time they exit the workforce. Some government employers also decline participation in Social Security, which should be counteracted with higher defined contributions to make up for the loss of that income stream. This is visible in the above chart, with most of the top total contributions coming from either public safety plans or non-Social Security plans.

In general, most financial experts recommend that total contributions for a member participating in Social Security need to be 10% to 15% of their pretax earnings to ensure they have enough money for a secure retirement. For public workers not participating in Social Security or any other supplementary benefit, a higher 18% to 25% contribution rate is advised. 

Judging by the advice of experts, Florida—which is positioned dead last in the ranking of total contributions—needs to increase its contributions to ensure that its public workers will be retiring with enough in their defined-contribution accounts. In fact, policymakers in Florida are proposing just this, with Gov. Ron DeSantis including a 3% increase on state contributions in his proposed budget. More recently, the Florida state legislature introduced House Bill 5007, which would implement that increase.

As more government employers turn to defined contribution plans to better serve their evolving workforces, they must consider the various plan features needed to provide employees a secure retirement. The most important consideration is the level of contributions that go to the plan. It is useful to see how other states are handling this crucial aspect of retirement policy and useful for state employers to closely monitor where their contribution rates stand in this aspect.

Government employers that fall close to or below recommended contribution rates should revisit their retirement contribution policies to ensure that they are providing a benefit that can be a valuable primary retirement vehicle capable of providing the type of income that workers need in retirement.

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My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation, a national 501(c)3 public policy think tank. Our team offers pro-bono consulting to public officials and stakeholders to help them design and implement policy solutions aimed at improving plan resiliency and promoting retirement security for public employees. We have played a technical assistance role in major retirement system reforms in states like Texas, Michigan, Arizona, Colorado, South Carolina, and New Mexico since 2015.

Regarding House Bill 971 authorizing the State Board of Administration (SBA)—which manages the Florida Retirement System Pension Plan trust fund—to expand their holding of alternative assets from 20% to 30%, we are not taking a position on House Bill 971. Rather, this testimony is intended to contextualize the underlying logic behind, and implications of, the investment class expansion based on our analysis of the FRS data. To mitigate the implications of HB 971, we highlight two opportunities before legislators to build on the legislation in a way that ensures the FRS Pension Plan’s long-term resiliency and solvency.

Florida Retirement System Investment at a Glance

• The FRS Pension Plan trust fund holds nearly $200 billion in assets, making it one of the largest investors in the world.
• According to the latest FRS reporting, historic post-pandemic market gains in the 2021 fiscal year resulted in private rquity investments returning 67.93%, followed by global equity with 41.78%, strategic investments with 17.14%, real estate with 8.58%.
• According to SBA Investment Reports, since 2013, the FRS Pension Plan trust fund has spent over $250 million in alternative asset management fees and commissions each year, most recently spending nearly $467 million in FY 21.
• Lowering the artificially high investment return bar for SBA and requiring fee reporting broken down by limited partners would build on House Bill 917 and give future members and taxpayers a more resilient FRS Pension Plan trust fund.

What Are Alternative Assets?

Alternative assets are investments that fall outside traditional cash, publicly traded stocks, and bonds. Commonly, alternative investments take the form of shares in limited partnerships, such as with private equity funds. As a statutorily protected fund worth nearly $200 billion, the Florida Retirement System is one of the largest institutional investors globally and, along with other state-level public pension systems across the country, is considered a major source of capital for alternative investment providers.

Why Would the SBA Seek to Expand its Alternative Asset Holdings?

Globalization taking hold of the world economy began the shift from high bond yields to today’s low-yield environment, pushing fund managers away from safe fixed-income sources to more exotic assets with increased potential upside.

According to the latest SBA annual investment report, private equity has been the highest performing asset class for three of the past four years for FRS. In the same report, SBA classifies private equity assets as having the greatest expected future returns along with the highest annualized risk, followed by global equities and hedge fund assets.

With an investment return assumption set at 6.8% and low-risk bonds yielding less than 4%, the SBA wants to double down on success by moving more of the FRS investment portfolio to high-risk, high-reward-style alternative assets. That logic is used widely by public pension plans throughout the country because many, like FRS, remain underfunded by billions of dollars and are seeking higher risks in hopes of avoiding the fiscal pain of higher contributions. Those missing funds need to be made up somehow. Florida House Bill 917 suggests the SBA be allowed to try its hand in the alternative asset market to make up that difference over time.

Concerns with Expanding Alternative Investments

Ask a group of public pension investment managers if a portfolio full of alternative assets is as safe as a classic large-cap stock and bond mix and odds are some will say yes, others no, and some will say it depends on your investment goals. Calling an investment “safe” implies a guarantee that no investments can claim outright, but traditional fixed income assets like U.S. Treasury bonds come close. Returns on bonds and large, publicly-traded stocks are what sustained large public pension systems like the FRS Pension Plan for generations without the need for unexpected infusions of public funds to close pension funding gaps.

Until the mid-1990s, Treasury bond rates were well above the FRS Pension Plan’s assumed rate of investment returns used by plan actuaries to calculate the cost of constitutionally protected retirement benefits until the mid-1990s. The FRS Pension Plan then began slowly drawing down its surplus, which totaled $13.5 billion in 2000 until the 2008 financial crisis flipped the fund from having a surplus to being underfunded.

The FRS Pension Plan historically assumed an investment return rate as high as 8%, before lowering the assumption to 7.75% in 2004. The plan adjusted the investment return rate assumption routinely throughout the years to reach the current 6.8% for 2022.

With the average FRS market valued returns between 2001 and 2020 barely reaching 5.6%, it would seem that investment market changes over the last two decades have left SBA managers with an outdated and artificially high investment return bar to exceed. The results have seen SBA investing more of the FRS Pension Plan trust fund into assets that they hope will not only meet expectations but greatly exceed expectations to make up for years of underfunding.

That kind of actively managed asset comes with management, administrative, and performance fees that can drain hundreds of millions from the FRS Pension Plan trust fund. Such hefty fees are not inherently bad for the Florida Retirement System if they result in equally hefty returns for the fund, but just like other investments, there is no guarantee those extra fees will result in returns that exceed those gained by passively managed, much less expensive, assets like index funds.

Currently, FRS is a leader in investment reporting among its peers because it provides details regarding its commitments and returns from limited partners, and reports fees by asset class. Combining those two reports to show which limited partners are receiving funds for little return and which deserve additional commitments increases stakeholder involvement and confidence in the funds’ ability to drive strong investment performance overall.

Building on House Bill 917

Although alternative assets are not inherently harmful to public pension systems, it would be prudent for policymakers to install boundaries around the investment decision-making process as well as provide increased oversight capabilities to the public.

Option #1 – Systematically Reduce the Need for Higher Investment Returns

Because SBA feels that alternative assets are more likely to produce the higher yields necessary to avoid the need for future funding increases—and their ability to eventually achieve this greatly depends on the assumed rate that they must achieve—our first suggested course of action is to continue to systematically reduce the assumed rate of return (ARR) used by the SBA from its current 6.8% set in Oct. 2021 by the Florida Retirement System Actuarial Assumption Estimating Conference.

Option #2 – Increase Investment Cost Reporting Details

Shifting to alternative assets usually involves higher costs, as actively managed private equity and hedge funds tend to demand higher fees for the services. A 2018 report by the Pew Charitable Trusts found pension plans spend at least $2 billion a year on investment fees alone, and FRS is no exception to this trend. Despite efforts to reduce fees through increased in-house investment management, unreported fees such as carried interest (i.e., performance fees) are not addressed in the current SBA reporting on FRS. Performance fees for private equity investments are typically far higher than the ordinary management fees for those assets, and most public pension funds—including FRS—do not report those performance fees.

Improving current fee reporting by adopting a robust investment cost report would directly address the issue of opaque fee reporting by outlining the fees and other expenses the public pension system incurs in the process of managing its portfolio. California’s teacher pension system, CalSTRS, offers a model in this regard. CalSTRS produces a report showing investment costs by type and asset category. An example of the report can be found at resources.calstrs.com.

This report is designed to provide stakeholders with detailed fee data and trends over a four-year period for each asset class and investment strategy. Reporting this ratio analysis to show the cost-effectiveness of the total fund, asset classes and strategies over time provides a quantitative metric to compare costs against the returns generated from those costs.

The retirement benefits of the Florida Retirement System’s members are paid for from net returns and not from gross returns. Since increased investment costs reduce net returns, the system’s fees and expenses should be consistently monitored and managers should be held accountable for the effectiveness of investments relative to the overall growth and resiliency of the Florida Retirement System.

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