Florida’s $160.4 billion state pension fund showed a preliminary return of 8.99 percent for the fiscal year that ended June 30, marking the ninth straight year the retirement fund has shown a positive gain.
Ash Williams, executive director of the State Board of Administration, which oversees the fund that pays retirement benefits for teachers, county workers, law enforcement officers, state workers and higher-education employees, said he expects the final number to be even higher.
“Preliminary figures for the Florida Retirement System pension plan project returns for fiscal-year 2017-18 just shy of 9 percent,” Williams said. “Fiscal year-end valuations for our private market assets --- real estate, private equity, etc. --- have not yet been posted, which should further improve the return.”
The initial estimate, according to the State Board of Administration, was .71 percent above the various indexes and benchmarks the financial managers use to gauge the performance of the investments, which include domestic and foreign stocks, bonds, real estate, other financial instruments and cash.
The nine-year positive run began after the fund plunged more than 19 percent in 2008-09 as Florida was dealing with the impact of the Great Recession. Since then, the fund had two years where the return was less than 1 percent, but there were also five years of double-digit returns, including a 13.77 percent return in 2016-17.
Over the last 33 years, the fund has only had five negative years and has had 21 years of double-digit returns.
The investment return is important because the fund pays out more than $9 billion in benefits to retirees each year. That is only partially offset by some $3.3 billion in contributions from the government agencies that participate in the fund and from active employees, who have been contributing 3 percent of their annual salaries since 2011.
The 8.99 percent return helped the fund grow to $160.4 billion as of June 30, which was $6.8 billion higher than it started last July 1, even after accounting for the benefit payouts offset by the contributions.
The investment return is also important for the long-term fiscal health of the fund. As of July 1, 2017, independent consultants calculated that the pension fund could pay 84.3 percent of its future obligations, leaving a $28 billion long-term unfunded liability.
The ability to pay more than 80 percent of its future obligations puts the Florida pension fund among the upper tier of state retirement plans. Moody’s Investor Service, which gave Florida a top-level credit rating last month, cited the pension fund as a sign of the state’s fiscal responsibility.
“The state has also maintained consistently low debt and pension liabilities that compare well with other Aaa-rated states,” Moody’s said.
The state has been taking other steps to make the pension fund more fiscally sound, although independent advisors say it may not be aggressive enough.
For the last four years, the state has lowered the “assumed” rate of return on the pension fund, which impacts the annual contribution amounts. Last fall, the Florida Retirement System Actuarial Assumption Conference lowered the projected rate from 7.6 percent to 7.5 percent.
That decision came despite an evaluation from independent financial consultants that suggested a more realistic long-term assumed rate of return would be in the range of 6.6 percent to 6.8 percent.
A lower assumed rate of return means the government agencies that participate in the fund have to increase their annual pension contributions.
Last year’s reduction in the assumed rate resulted in the government agencies paying an additional $178.5 million in the new budget year, including $66.4 million from the counties, $54.4 million from the school districts and $31 million from the state agencies.
In a December letter to state officials, Milliman, the consulting firm that acts as an independent actuary for the pension fund, noted the 7.5 percent projected return “conflicts” with what the actuaries believe “would constitute a reasonable assumption.”
The letter said that if the 7.5 percent assumed rate of return drops to an actual 7.1 or 7 percent over the next 15-year period, it would result in an $8 billion to $12 billion increase in the unfunded liability for the pension system.
If the 15-year actual rate of return is close to the 6.8 percent assumed rate suggested by the consultants, the unfunded liability could grow by 75 percent, the letter said.
State analysts will meet again this fall to review the assumed rate of return for the pension fund, with the likelihood that the conference will again recommend another reduction in the rate.
The state pension system includes more than 630,000 active employees, although about 117,000 are enrolled in a 401(k)-type plan rather than the traditional pension plan. School district employees represent nearly half of the active workers, followed by county workers at 23 percent and state workers at 20 percent.