Legislative update (2/14/14): Higher Education

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Although this was officially Valentine's Week, we weren't feeling much love up here in Tallahassee.  Legislators are once again starting their attack on the Florida Retirement System.  This week a bill was filed in the Senate which would create what is called a "cash balance" plan (more below).  Rumors indicate there are more FRS 'reform' bills to come.  It seems that legislators just can't keep their hands off your retirement!  The first hearing of the new bill is scheduled for Wednesday, February 19 in the Senate Community Affairs Committee at 2 p.m.

The House Higher Education & Workforce members grilled the new SUS Chancellor Marshall Criser after his presentation on the State University Vision and Performance Funding.  Committee members pummeled the chancellor with detailed questions about how the metrics adopted by the Board of Governors (BOG) would impact the universities and colleges located in their legislative districts.  Committee members expressed reservations about whether the metrics would be punitive for some institutions that by nature of their mission would face challenges that would make it impossible to successfully achieve the metrics.

Office of Program Policy Analysis & Government Accountability presented a status report to the House Higher Education panel on the Florida Virtual Campus. So far, it appears the FL Virtual Campus is making "virtually" no progress towards the goals and deadlines established by the Legislature in 2012.

 

What's in the new pension bill?     SPB 7046 Florida Retirement System <http://www.flsenate.gov/Session/Bill/2014/7046/BillText/__/PDF> by Community Affairs would create a new FRS plan called a 'cash balance' plan.  But hold on - before we get too deep into this bill, numerous folks who have been reading it have found glaring technical problems AND the House hasn't revealed their version AND we hear rumors of several possible FRS bills in the works.  So with that in mind - read on:

Currently the FRS gives employees the options of a 'defined benefit' (pension) plan or a 'defined contribution' (investment or 401K type) plan. The defined benefit plan provides a specific benefit at retirement for each eligible employee and the benefit is usually based on a formula that includes years of service multiplied by an accrual rate multiplied by an average final compensation figure.

The defined contribution plan specifies the amount of contributions to be made by the employer and the employees toward an employee's retirement account. In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the market gains or losses of the account.

This new twist called cash balance plans are complicated and vary widely in design.  Only three states currently have cash-balance plans, so there's not much long-term experience with their impact on public employees.  Generally, they provide lower benefits than a traditional pension like the Florida Retirement System defined benefit plan.

A cash balance plan is legally a defined benefit plan because the employer guarantees the annual pension payment. But, like an investment plan (aka defined contribution or 401K type plan), the guaranteed annual benefit is eliminated. In its place is an individual account that depends on employer and employee contributions plus an annual interest on the balance of the account. Retirement benefits are determined by the accumulated amount in the account, like an investment plan.  But cash balance plans don't provide comparable benefits, unless they are funded properly.  So, they are no less costly than traditional pension plans.

If the proposed bill passes, new 'regular class' employees (teachers and ESPs fall in this category) hired on or after July 1, 2015 would no longer have the option to choose the defined benefit plan.  However, they would be offered the cash balance plan and the investment plan options.  All new employees have an eight month enrollment window where they can pick the plan they desire. If they don't choose a plan the default is the riskier investment plan.  But keep in mind: risk is not eliminated in cash balance plans- they are just less riskier...

The 84 page bill would exempt current regular class employees as well as current and new law enforcement officers and firefighters, who fall into a category called "special risk." The inclusion of special risk employees in last year's proposal was one of the reasons it failed in the Senate.  But, all new employees-- no matter what category-- would be defaulted into the riskier investment plan if they don't make a choice of plans before the eight month window closes.

In other words, current regular employees would be able to remain in the pension plan or the investment plan or make a one-time transfer to the cash balance time at any time during their active career under the FRS.

Stay tuned!