In early 2011, the Florida Retirement System asked its actuary to value its pension liabilities using a range of discount rates — from 7.5 percent all the way down to 3% (the state uses 7.75% in its reporting). The difference in liability values, as one would expect from a large pension system such as Florida’s, was dramatic.
But a look at the effects shows just how painful acknowledging the truth would be. Moving the discount rate down 250 basis points increased the actuarial liability by $4.4 billion. Moving it to 5% increased it by $63 billion. And at 3%, or the de facto risk-free discount rate preferred by 95 percent of economists, the liability figure jumped by $137 billion. This would increase the percentage of payroll needed to fund pensions by 42% and force Florida to contribute an additional $11.6 billion per year (in a state with a $70 billion budget).
There are two major takeaways from this report. First, Florida’s pension system is so onerous that the money needed to properly fund it will require massive transfers of revenue in the state. Second, Florida’s executive branch requested this report and published it on its open government website. Although it hasn’t garnered a tremendous amount of news coverage, this stress test is a model for other states to follow in publishing their pension liabilities along different discount rate scenarios.
Florida’s recent pension overhaul to raise contribution rates and end cost of living allowances is now before the state Supreme Court, where lawyers representing government workers argue that these changes broke the pension contract. The state argues it had clear legal precedent to make these changes. This showdown is likely a harbinger of things to come as Florida, like so many other states, has to decide what to do about benefits it neither funded nor can now afford.
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