In the nine years since the Great Recession officially ended, many areas of the economy have roared back. California now has the world’s sixth largest economy as measured by gross domestic product. Despite a pullback in the first quarter of 2018, the S&P 500, a measure of large U.S. companies, has almost quadrupled over its 2009 lows. Real estate prices, as always, depend on location; most prices have risen, sometimes dramatically.
Not everything is rosy. Public pension plans struggle to reach their pre-Great Recession levels. A pension plan is considered healthy if it is 80 percent funded. In 2006 public retirement systems, measured by the Public Plans database, had sufficient assets to pay 85 percent of retirement benefits. Despite nine consecutive quarters of positive returns prior to last quarter’s setback, the average funding ratio of public pension plans currently is 72 percent.
Many pensions burdened themselves with unrealistic promises based on optimistic returns. Over the last five years, the vast majority of public pensions reduced their expectations. While this move to live in the real world is laudable, there is no free lunch. The Florida Retirement System (FRS) lowered their expected return during the current fiscal year from 7.6 to 7.5 percent. The seemingly innocuous change means counties, school districts, universities and other state agencies have to contribute an additional $178.5 million to the FRS this year.
The median expected return for pensions nationwide is 7.25 percent. Florida’s robust economy and population growth give the FRS and taxpayers funding leeway. The 2011 changes, much derided at the time, where state employees kick 3 percent of salary in the FRS also help keep the state’s funded ratio in the green zone, 84 percent.
Our neighbors to the north in Birmingham took a different approach and raised expected returns. The move increased their funded ratio and lessened taxpayers obligation, but this gambit won’t last long. Many small pension plans in Florida, primarily for law enforcement and first responders, still use 8 percent projections. The higher number keeps the tax watchers and participants happy, but it’s a fiscal mirage. Imprudently chasing returns, alternative investments have mushroomed in pension plans over the past decade and will end as a fool’s errand.
Pensions offset the lower pay scales for teachers, in particular. The public services arena pays less than private industry and pensions lower the inequity. Income in retirement without the stock market’s volatility leads to better outcomes, too. Public pensions including Social Security play a crucial role for retirees. Pensions can’t use pie in the sky numbers either. Math is the universal language, and it doesn’t matter what opinion you have. The next generations will bear the burden of reduced benefits and higher tax obligations unless they put down their phones and vote.
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.