Florida Gov. Rick Scott returned home to Naples this afternoon to visit a medical device company and announce his proposal to save $2.8 billion over two years by requiring state and local employees to contribute to their retirement accounts and eliminating other elements of the programs that he believes cost state and local governments too much money.
Scott wants employees to start paying 5 percent of their salaries to their retirement accounts. He proposes scrapping the defined benefit plan for new hires and requiring that all new employees get 401k-style defined contribution plans that they can take with them when they leave government.
Scott wants to end the Deferred Retirement Option Program beginning July 1, the popular program that encourages older workers to retire by allowing them to draw a pension check and return to work. He also proposes reducing the annual service credit to 1.6 percent for most members of the Florida Retirements System (special risk class members, to 2 percent), according to a press release.
Scott's plan also calls for eliminating the 3 percent cost-of-living adjustment for employees currently in the system but offering no cost-of-living adjustment to new hires. Scott predicts the program will save government $2.8 billion over two years, presumably a number derived from a government report that projected $1.3 billion in savings over one year.
Doug Martin, director of governmental affairs for the American Federation of State, Local and Municipal Employees said the proposal to end the pension plan for new hires and send everyone into a 401k-style program "is a catastrophically bad decision.'' It will causes employer contributions to soar, he said, because there will be fewer employees paying into the system as people retire. "So to pay for the increasing number of retirees versus active employees in a closed plan, those contribution rates are going to go up.''
Although the governor kept details sketchy, he told reporters at a question-and-answer session earlier today that the money expected to be saved is not linked to his plan to cut property taxes. He defended the plan, however, saying: "I want to make sure that the pension plan, that anybody that’s relying on it knows the money is going to be there. Second, I want to make sure that I treat taxpayers fairly, and I want to treat employees fairly. So, if you have a plan in the private sector, you are generally participating. So I think it’s only fair that those who participate in the pension plan contribute.''
Asked whether he considers the pension plan actuarially sound, Scott was not sure. "It all depends on if you are comfortable with the anticipated returns. None of us can see into the future. If you're uncomfortable with those returns, then we’re underfunded. It’s something I have to look at and see where I’m comfortable."
Scott, along with the chief financial officer and the attorney general, oversee the State Board of Administration, which manages investments for the retirement system. State Board of Administration executive director Ash Williams began his report on the SBA by announcing that the Florida Retirement System continues to increase in value, now at $125.1 billion.
After the meeting, Williams said that the fund does not need employee contributions to remain solvent. "Actuarially, I think we are one of the healthiest funds in the country,'' he said. "There’s no question about that." He said that there remains a "broader policy debate about the sustainability" of the plan based on whether the governor can continue to sustain the funding level that now requires government to contribute 100 percent of the retirement costs.
Chief Financial Officer Jeff Atwater agreed that Florida's retirement system is actuarially strong. "From the SBA perspective, as to the funding of the pension plan, it is in good shape,'' Atwater said after the Cabinet meeting. He added that he supports reforming how the program is funded.
Scott has also hinted in the past that he may be supportive of replacing Williams. He said he has met with Williams, and "I haven’t made a decision.'' Williams said he has not been asked to step down.
During his campaign for governor, Scott approved an ad run by the Republican Party of Florida blasting his Democratic opponent saying that when she was responsible for the fund it "lost $24 billion ... gone.'' At the time of his claim, the value of the fund was $118 billion, $16 billion lower than it was before the Wall Street crash of 2008, not $24 billion.
Scott later defended the ad as accurate, explaining that "that money was lost because you made a new investment decision every day to hold things."