While Florida has a financially healthy state pension fund, a new report from the Department of Management Services warns the $144 billion system is relying on a projected investment return that independent financial consultants say is too optimistic.
State analysts lowered the projected rate of return to 7.6 percent in October, down from 7.65 percent.
But the Department of Management Services’ annual report notes that Milliman, the state’s actuarial consultant, recommended a 7 percent rate of return, saying that is more in line with the uncertain financial climate.
The 7.6 percent assumed rate is “materially above” the estimates developed by Milliman and Aon Hewitt, a financial consultant to the state Board of Administration, which oversees the pension fund, the report noted.
The consultants developed financial models that estimated the fund had a 50 percent chance of achieving its long-range rate of return if the projection was 6.3 percent to 7 percent.
The chance of meeting the long-range 7.6 percent projection is much lower.
“All models developed in 2016 indicated a likelihood of 35 percent or less of actual long-term future average returns meeting or exceeding 7.6 percent,” the report said.
The report said a lower projected rate of return would result in higher short-term contributions to the pension fund by the state, school boards, county governments and other entities that rely on the fund to pay benefits to retirees.
The issue of lowering the projected rate of return was debated in October by the Florida Retirement System Actuarial Assumption Conference.
The state House and the Office of Economic and Demographic Research had pushed for lowering the rate to 7.5 percent but were opposed by the Governor’s Office and the state Senate, which wanted to maintain the 7.65 percent rate.
The panel compromised on the 7.6 percent rate.
But the analysts were in agreement that Florida could not abruptly lower the rate without causing financial disruption for the governmental entities that contribute to the fund on behalf of their employees.
Lowering the rate of return to 7 percent would have yielded nearly a $38 billion unfunded liability, with the fund only being able to pay 79 percent of its long-term obligations.
That would have required a significant increase in the pension contributions made by the government agencies to cover that actuarial deficit.
With the 7.6 percent rate, the pension fund is projected to meet 85.4 percent of its future obligations, representing a $24.9 billion unfunded liability.
It will still require a projected contribution increase in the range of $90 million.
As of July 1, the Florida pension fund had 630,350 active members, including 114,000 enrolled in an alternative 401(k)-type investment plan, according to the Department of Management Services’ report. The department oversees employee benefits, including pension benefits.
A little under 400,000 retirees rely on the pension fund for benefits, with an average annual payment of $21,245.