TALLAHASSEE, Fla. – Despite a topsy-turvy year in the world financial markets, Florida's $142 billion pension fund managed to show a gain for the seventh straight year.
Ash Williams, executive director of the State Board of Administration, which manages the fund, told Gov. Rick Scott and the Cabinet on Tuesday that the fund ended the state fiscal year on June 30 with a 0.61 percent gain. The fund pays retirement benefits for state workers, county employees, teachers and university personnel.
The gain keeps alive a streak that began after a 19 percent drop in 2009. It is the second longest streak in the fund's last four decades, Williams said.
The fund, which is one of the largest public retirement systems in the country, has earned a positive return in 34 of the last 43 years. In 24 of those years, the return exceeded 10 percent.
"The positive net returns show the value of diversification, our success in controlling costs, and the prudence and patience of sticking to the fund's long-term investment plan in a challenging year," Williams said.
Measuring the fund's performance since January shows "a slightly brighter picture," Williams said, with the investments gaining 4.93 percent through Monday.
Those gains came despite a volatile time in the markets, which Williams described in March as a "circular roller coaster."
The Brexit vote in Great Britain came just weeks before the close of the fiscal year, sending worldwide markets into a plunge, although most later recovered.
Interest rates have been at historical lows, making investments in bonds and other traditional financial instruments much less attractive. Williams said the average return on 10-year U.S. Treasury bonds since 1965 has been over 6 percent, although it is currently 1.5 percent.
"It's a very different world," Williams said.
"It makes it hard to get the returns you need to pay pensions," Scott said.
Against the backdrop of a challenging investment climate, Williams said the pension fund faced other challenges, including a "massive wave" of retirements by public employees enrolled in the Deferred Retirement Option Program, commonly known as DROP.
DROP allows older employees to remain at their jobs but have their retirement benefits accumulate with interest up to five years.
But a series of pension reforms in 2011 cut the DROP interest rates from 6.5 percent to 1.3 percent, depending on whether employees entered the deferred retirement program before or after July 1, 2011.
Many public employees entered DROP that year. But that meant five years later, by July 1, 2016, most of the employees would reach their five-year limit and retire, requiring the state to pay the DROP benefits.
It resulted in 14,298 DROP employees retiring during the past fiscal year, requiring $1.96 billion in retirement payments, State Board of Administration officials said.
Williams said the pension fund managers had long anticipated the financial hit and had prepared for it.
"If you have an item go on sale, some popular thing, everybody beats a path to it and cleans out the shelf. That's exactly what happened with DROP," he said. "We've been mapping this for a long time."
Florida's pension fund remains one of the strongest public retirement systems in the country, with the ability to pay 87 percent of its long-term obligations, compared to a national average of 74 percent, according to a new study by the Mercatus Center at George Mason University.
But its unfunded pension liability is estimated at $21.5 billion, and that has prompted efforts, particularly in the state House, to limit the future growth of the system.
In recent years, the House has backed proposals to encourage more workers to opt for a 401(k)-type investment plan rather than the traditional pension program. But the effort has not gained traction in the state Senate.