Comments to the Honorable Ray Rodrigues, Chair, and Members of the Senate Governmental Oversight & Accountability Committee regarding SB 84 – Retirement
My name is Dominic M. Calabro, and I am President and CEO of Florida TaxWatch, an independent, nonpartisan, nonprofit taxpayer research institute and government watchdog which, for over 40 years, has worked to improve the effectiveness, efficiency, and accountability of Florida government and promote a fair and equitable system of taxation.
Due primarily to its substantial and unpredictable long-term costs, Florida TaxWatch has long been a proponent of reforming the Florida Retirement System (FRS). Requiring all new FRS members to enroll in the Defined Contribution Investment Plan will help modernize our state employee benefits and ensure that the FRS is actuarially sound going forward, avoiding billions in future liabilities and very likely increasing the retirement wealth of state employees.
The state currently bears the investment risk of ensuring that the defined benefit amount will be available to be paid to retired employees and beneficiaries. Defined benefit plans require complex actuarial projections and insurance for guarantees, making the costs of administration very high. Due to the risk inherent in this obsolete model, defined benefit plans have long been abandoned by most employers, especially private organizations.
The FRS Actuarial Assumption Conference met in October 2020 to adopt updated economic assumptions to be used for the actuarial valuation of the FRS. The preliminary results show that the FRS has an unfunded actuarial liability (UAL) of $32.1 billion, an increase from the $30.3 billion UAL in 2019. In 2015, the UAL was $23 billion. In 2019, the system was 84.2% funded on an actuarial basis; however, the funded status is expected to decrease to 83.7% in the 2020 updated valuation.
In addition to minimizing exposure and expenses, defined contribution plans allow employees to better align their investment strategy with their own individual retirement plans and preferences for risks and rewards. The employee is empowered with the ability to direct contributions and investments to grow the assets for their particular retirement needs. Defined contribution plans honor our commitment to a state employee's future AND respects our obligations to Florida Taxpayers to ensure sound and reasonable practices.
Florida TaxWatch supports the enactment of legislation that modernizes state employee benefits by requiring all new FRS members to enroll in the Defined Contribution (DC) Investment Plan. Legislation such as SB 84 can help remedy this longstanding problem. Enrolling all new FRS members in the Defined Contribution Investment Plan will modernize the state’s employee benefits, reduce the state’s financial liability, better align government benefits with successful practices provided by the private sector, and generate significant taxpayer savings in the long run.
You can find more recommendations on FRS Reforms and critical budgetary and taxpayer accountability issues at FloridaTaxWatch.org. We look forward to working with you and your colleagues as this issue and other critical funding and benefits issues are addressed.