TALLAHASSEE, Fla. – State analysts agreed Thursday to lower the expected rate of return on Florida's $154 billion pension fund, which will put more pressure on lawmakers as they craft a new state budget.
The decrease from a 7.6 percent return to 7.5 percent will require an additional $124 million in state funding in the 2018-2019 budget to keep the pension fund financially sound, according to the state's long-range fiscal analysis.
It's the fourth year in a row that analysts, meeting as the Florida Retirement System Actuarial Assumption Conference, have lowered the assumed rate of return on the pension fund, which was 7.75 percent in 2013.
Amy Baker, coordinator for the Legislature's Office of Economic and Demographic Research, said more adjustments can be expected given long-term projections for the national and global economies.
“We in all certainty will be back here looking to make an incremental change next year,” Baker said. “I think the drumbeat is definitely building over time to show that continuing downward adjustments are going to be necessary.”
The assumed rate of return for the fund, which pays retirement benefits for school teachers, state workers, county workers and other public employees, is important because it could potentially hurt the state's credit rating if it is deemed too unrealistic by independent financial analysts.
On the other hand, lowering the expected gains from a massive collection of stocks, bonds, real estate and other assets in the fund means government agencies will have to increase their contributions to make sure there is enough money to pay retirement benefits in the long term.
Going from a 7.6 percent return to a 7.5 percent return will require an additional $124 million in the new state budget to cover school system employees, state workers and university employees, according to the state's recently approved long-range financial outlook. Lawmakers will craft the budget during an annual session starting in January.
But the $124 million figure does not cover county government workers, who make up about 23 percent of 630,000 active workers covered by the fund. Counties will have to come up with additional money to cover their workers.
The rate reduction came after new evaluations from independent financial consultants projected a 30-year rate of return for the pension assets in the range of 6.6 percent to 6.81 percent.
It also follows a trend of other major public pension funds reducing their assumed rates of return, according to a report from the firm Milliman, one of the financial consultants.
Four funds in California and New York have reduced their rates to 7 percent or are in the process of doing so. A Texas fund is at 8 percent, although officials have talked about a cut to 7.5 percent.
The rate reduction to 7.5 percent for Florida will bring it in line with a median assumed rate of return for the 126 largest public funds.
In addition to having the nation's fifth-largest public pension fund, Florida has one of the financially strongest retirement plans in the country.
At a 7.6 percent assumed rate of return, the Florida fund was projected to be able to pay 85.4 percent of its future obligations, with a $24.9 billion long-term unfunded actuarial liability, according to Milliman.
The unfunded liability rises to $27.9 billion with a 7.5 percent rate of return, with the ability to pay 84.4 percent of future obligations.
Ash Williams, head of the State Board of Administration, told the state analysts that investment opportunities are not “as robust” as they once were.
“Things are hard everywhere,” he said. “There is no ocean of untapped opportunity that you can get and scale and play in a prudent manner.”
Williams said not to expect “some sort of quantum change in returns from what the broad market expectations are.”
The lower projected rate of return is built on several key assumptions, including a long-term climate of low interest rates and low inflation.
Christian Weiss, an economic adviser to Gov. Rick Scott, said he was skeptical about those projections, noting oil prices could rise and a major federal tax cut could spur inflation.
Don Langston, staff director for the House Ways and Means Committee, said he did not have any expectations for a higher rate of return and he had suggested a 0.15 cut in the state's rate, although he agreed with compromise of 7.5 percent.
But he said government agencies that rely on the pension fund need to be prepared for future rate of return reductions.
“They should be expecting to continue to have this downward pressure on the assumption rate or the investment rate, with consequent budgetary impacts as well,” he said.