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Scott discusses state pension reform

NAPLES -- Days before taking office as Florida’s governor, Rick Scott said he’s worried that the state’s public pension fund, which posted a $16.7 billion shortfall last year, is in even worse shape than the public has been told.

He thinks the pension is betting on achieving unrealistically high returns to meet its obligations to future retirees. And he fears using these rosier estimates merely delays the day of reckoning for taxpayers who will be on the hook for growing deficits.

Saying that he hopes to be a two-term governor, Scott promised that by the end of eight years, public employees could be confident that “the money’s going to be there when they retire.”

In a 45-minute interview with the St. Petersburg Times, Scott said the state’s $122 billion pension would be one of his top priorities -- and not just because it’s a lot of money.

“More important than that, it’s a whole bunch of people’s livelihoods,” he said.

Scott’s forecast of a deeper pension funding hole contradicts the position of the State Board of Administration, which invests $148 billion for more than 1 million current and future retirees and hundreds of state and local government agencies.

The SBA’s outgoing trustees -- Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink -- said the pension was recovering from steep losses during the recession.

“We continue to be in extraordinarily good condition,” SBA executive director Ash Williams said last month.

Scott, 58, a political novice who campaigned as a Tallahassee outsider, took several positions at odds with the way business has been run at the SBA. He signaled he will be much more involved than his predecessors in overseeing the pension. He will be cautious about taking on higher risks in the chase for higher returns.

He wants to use Florida’s clout as the nation’s fourth-largest pension to pare down excessive management fees that cut into returns.

And he expects the people who run the pension to be sensitive to potential conflicts of interest and disclose details of their investments to the taxpaying public.

“I’m going to make sure that whoever is responsible for it is somebody that is fine with transparency. He’s fine with somebody looking over their shoulder,” Scott said.

Asked if he intends to retain Williams, the SBA’s chief executive, Scott said, “I don’t know.”

To restore the pension to full funding, Scott is considering everything from closing the defined benefit plan to new hires to raising the retirement age to making employees contribute to the plan.

He knows such changes won’t be popular. But as he sits in his old office in Naples, days before the inauguration, Scott is determined not to sugarcoat the truth. Giving the public as much information as possible forces them to deal with reality, he said.

“That’s easier for me.”

Here is an edited transcript of the interview:

What did you mean when you called public sector pensions “a ticking fiscal time bomb’’?

My concern is the return expectations [of 7.75 percent] are high. I don’t think that’s easy to do and my concern is that if we say we’re 13 or 14 percent underfunded, but that’s assuming a 7.75 percent return, I don’t believe that’s realistic. It’s going to be difficult unless you take more risk than pension funds ought to be taking. Pension funds are for people’s retirement and so if I was worried about my retirement, I’d be more cautious with my investing. This is the way I look at life.

We have an economy that’s not growing very fast, so how do you get the increased income to get stocks to appreciate dramatically, other than believing that maybe there’ll be multiple expansion in the stocks? So the first thing I want to do is really look at what is realistic as far as return expectations.

Once we get whatever the right number is, then let’s look at how underfunded we are. I plan on being governor for eight years and I don’t want to be in the position at the end of that time frame that people don’t know where the pension fund is or they’re uncomfortable that the money’s going to be there when they retire.

How will you address the pension’s unfunded liability?

Step one is really understand what our pension obligations are, what is realistic from the standpoint of return, look at where we’re making our investments, and then look at how we get to where we’re fully funded. We can’t print money. We’ve got to write real checks. We’re the only state where employees don’t contribute. That’s unfair to taxpayers and it’s also probably unrealistic to get ourselves back in a position that we’re fully funded.

What do you think is a realistic return expectation?

I don’t have a target number. I’ll get more information starting next week, but we’ve got to look at what is realistic from a bond portfolio return, what’s realistic from a stock portfolio return.

If we’re going to make alternative investments, how much risk are we willing to take to get a bigger return? I’m probably less risk-oriented in investments than most people, so I’m going to be very cautious in looking at that.

What do you think of the proposal to reduce employer pension contributions for elected officials and judges to 2 percent, so it’s the same for all classes of public employees?

What I want to under- stand is why there are all these different classes. How did this even get set up? And then we want to do what’s fair.

Would you require that new public employees go into a 401(k)-like defined contribution plan as opposed to the defined benefit plan?

Yes, absolutely. If I made a commitment to you, I want to live up to my commitment. But if there is a problem, I want to stop the problem. I don’t want to make it worse.

Would you consider raising the retirement age for some employees?

Sure. I don’t want to change the deal on people that have a commitment, but there’s lots of things you can do. Some states are raising their retirement age, the employee contribution, [reviewing retirees’ cost-of-living adjustments]. I probably sound like a broken record but I want to make sure that it’s a viable program.

During the campaign you said some investment losses at the pension were caused by poor oversight. What do you plan to do differently?

I’m going to make sure that whoever is responsible for it [the pension] is somebody that is fine with transparency. He’s fine with somebody looking over their shoulder. Some people don’t like that, but being in a fiduciary position, you better be comfortable with that. I think this [the pension] is a big obligation.

Are you comfortable with the valuations of the pension’s alternative investments or are they due for a markdown?

I don’t know enough about all their different investments yet. It’s one of the things I’ll look at. Anything that is not fully tradable, you’ve got to be cautious on how you value it.

We found, and outside advisors have reported, it’s hard to get a straight answer from the pension’s managers.

That won’t be a problem. I work for the taxpayers of the state, so I’m going to make sure that I can get answers and taxpayers can get answers and potential recipients get answers.

There’s a constant tension on the private investment side between trade secrets and the public’s right to know.

If there’s a legitimate business reason that impacts the returns, I get it. I’d have to understand why it’s the case because I believe in accountability. It’s hard to be held accountable if people don’t have information. I’m going to lean on the side of giving people more information.

Hedge funds, for instance, say their investment strategy is a trade secret.

I’m not as comfortable making those type of investments.

What do you think of the pension’s plan to increase its allocation to alternative assets to 16 percent?

I understand that you constantly have to look at your asset allocations. And that’s important to do. But you still can be transparent with that, and I would want to look at where the asset allocations should be and where the safest places are to put my money. I don’t know if the right number’s 16 percent or not. I’d want to get more advice from people who do asset allocation and why.

Should the fees paid to money managers and placement agents be considered trade secrets?

If you’re going to do business with a government entity, you have to assume there’s going to be more transparency, so whoever the manager is might decide they don’t want to do business with us. That’s a legitimate decision. It seems like we would be a big enough investor that we could dictate some of those terms, such as more transparency.

What’s the difference between how you as a private investor handle your investments and how the state’s money managers should invest?

If I make an investment, then I get the upside and I take the risk. But in the state’s case, I’m responsible for the taxpayers and for the people that are going to get a return.

I [personally] limit myself to things I’m very comfortable with. That might mean I get a lower return sometimes because that’s not the time to be in that asset class, but I’m more worried about losing capital than I am about getting the best return. That’s just me as a person. That’s how I run my life.