March 28, 2024

Backdoor Borrowing

John D. McKinnon | 5/1/1996
The Florida Constitution requires state government to balance its budget. But if you think that means Tallahassee can't borrow from your future, think again.

State leaders are proposing these days to finance day-to-day expenses, such as cost-of-living raises for state workers, by cutting back on the state's contributions to its retirement plan. The Florida Retirement System (FRS) has promised tens of billions of dollars in future pensions to state and local workers. The economic consequence of not putting aside sufficient funds to pay for those pension promises is no different than if the state just ran a huge deficit and financed the shortfall with bonds. To pay for the shortfall, either future taxes will have to be raised, or benefits cut, or both.

The Chiles administration is responsible for suggesting this form of backdoor borrowing. Through a little-noticed provision in his budget proposals this spring, Chiles called on the Legislature to reduce state government's annual contributions to the FRS by about $240 million. Administration officials want to use that money instead for various "needs" of the moment, the most notable of which was a 3% pay raise for state workers.

Chiles and his budget advisors should know better. With about $45.2 billion in assets, FRS is the nation's third-largest state retirement plan. Unfortunately, its liabilities are even larger: $57.6 billion. This means that FRS assets cover only 78% of liabilities. This compares with a national average of about 85% for the two dozen or so states that have unfunded liabilities in their pension plans, according to the Government Finance Officers Association.

Since at least 1977, the state has been promising to eliminate the unfunded liabilities in the FRS, but it's all just been happy talk. In 1980, for example, the system's actuaries predicted the system's unfunded liabilities would top out at $5.8 billion by 1994 and then start to decline. But within three years, the debt had already surpassed that amount, largely because of benefit increases.

Having guessed wrong about this crucial variable, the state was forced in 1983 to revise its estimate of how much the debt would grow and when it would eventually be paid off. The new estimate was that the system's unfunded liabilities would top out at $8.6 billion in 1996 and then start to decline. But once again, the state was overly optimistic. Within two years, the system's debts already had reached $7.4 billion and were still rising.

So in 1985, the state revised its prediction yet again. It still called for the system's unfunded liabilities to top out around $8.5 billion, but set back the date the debt would be paid off by two years. Once again, it was all just wishful thinking. Within two years, the system's debt had already jumped to $10.6 billion and was still rising ["The $10-Billion Sinkhole" Florida Trend, February, 1989].

So what's the official prediction now? A roaring bull market on Wall Street has helped reduce the system's debts by about $1 billion a year since 1991. But with the system's unfunded liabilities still remaining above $12 billion, paying off this encumbrance will take until at least 2014, according to the latest projections. Given the state's long history of underestimating the system's debts, this latest projection will also probably prove to be just another fairy tale - even if the state keeps up its current contributions to the system and the bull market continues indefinitely. If those contributions are actually cut, as the Chiles administration now shamelessly proposes, we can be sure that the already high burden on future taxpayers will only increase.

How much exactly will the Chiles proposal cost? No one can know for sure, but some analysts estimate some $2.7 billion to $3.5 billion in extra taxes will be required in the long run because of lost investment income on the reduced contributions. Of course, this will come on top of the tens of billions in extra taxes that will be required to amortize the debts that have already been built up by previous politicians who underfunded the system.

In effect, says state Sen. Mario Diaz-Balart (R-Miami), "what happens is that when we've all moved on, then you have this huge balloon payment at the end."

"If only we could get some rock star interested in the Florida Retirement System," complains Rep. Rob Wallace, R-Tampa, noting the momentum being generated for a boating safety bill by Miami singer Gloria Estefan.

Meanwhile, other problems are also on the horizon for the FRS.

Internal Revenue Service rules scheduled to go into effect in 1999 could require the system to level out benefits for different classes of employees. Currently, judges and some other high-level employees receive far better pensions than the rank-and-file state workers (3.3% of pay per year of service, versus just 1.6%).

New accounting rules soon will force state actuaries to assume slower future growth in the government work force in its calculations of the FRS's debt payments. By assuming that state government payrolls will grow at a faster rate, the FRS actuaries have been able to make the system's debt payments smaller than they probably should be. Senate analysts worry that government downsizing being pushed by Republicans could have an even bigger impact on FRS than previously realized, by denying the system the workers contributions it needs to pay benefits to retirees.

The system also could face pressure to stop relying on high turnover among younger workers to pay for more senior workers and retirees. That occurs now because most workers need ten years to vest fully in it. Workers who stay only a few years leave their state-paid retirement contributions behind.

Finally, the system's portfolio manager from time to time comes under pressure from the governor and other politicians to invest FRS capital in various pet projects, such as a proposed Enterprise Florida venture capital fund devoted to the risky business of underwriting Florida startups. So far, FRS officials have rebuffed this particular idea. But they have gone along with a $15 million pledge to another fund, sponsored by Enterprise Florida, that looks for investment opportunities around the country.

The bottom line: not only is the FRS underfunded, its assets are imperiled by politics. Reducing benefits would be one sure way to reduce the system's debts below what they would otherwise be, but cutting contributions will never work.

Insurance Hikes
As the 1996 legislative session rounded the halfway mark, insurance groups were using the problems in the property insurance market to make an unexpectedly strong pitch for rewriting Florida's rating law. The move could prompt rate jumps not just in the troubled homeowners' area, but commercial property, commercial auto and liability insurance lines, too.

Insurance agents offered two studies to back up their argument that Florida's rating law is too strict. One, by a former Illinois insurance commissioner, shows that while Florida's rating scheme appears middle-of-the-road, it actually is one of the more restrictive in the U.S. in preventing market-based pricing. Agents also produced a separate survey from the Florida State University business school showing that insurance executives around the country regard Florida as one of the five worst regulatory environments in the country, partly because of the long delays in getting rate hikes approved.

The former Illinois official, Philip O'Connor, advocates a switch to more market-based rating. "No matter what other things are done, as long as you don't have a more market-based solution to pricing, the insurance supply problem will probably be chronic," he says.

Insurance Department officials defended themselves and their rating law, blaming companies for underpricing and overexposing themselves prior to Hurricane Andrew. Cecil Pearce, a director of the Residential Property and Casualty Joint Underwriting Association, also warned lawmakers that homeowner rates could zoom if controls were abolished.

At press time, the push for rate-law revisions was getting a sympathetic audience in the Senate as a way of relieving the property-insurance crisis. In the House, leaders were focused on higher deductibles for homeowners, as well as a renewal of the moratorium on property-insurance cancellations. The differences were causing some lobbyists to say the signs pointed to a classic train wreck. Any moratorium that passed was expected to be challenged in court almost immediately by one or more of the major carriers.

Florida Tax Man Bangs On Chambers' Doors
The state Department of Revenue, ever-vigilant, has gone after several local chambers of commerce in recent months, seeking back sales taxes totaling several hundred thousand dollars.

It seems that the chambers, including the Stuart-Martin County Chamber and others, were confused by the byzantine tax rules for not-for-profit organizations. Confusion over taxes, as many business people know, can be costly.

A bill circulating in the 1996 Legislature would get chambers that haven't paid off the hook. For 1993 and 1994 that amount totals about $400,000, according to the bill's sponsor, Rep. Ken Pruitt, R-Port St. Lucie.

Tags: Florida Small Business, Politics & Law, Business Florida

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