FRS Changes Summary from 2011 Florida Legislative Session

The following is a summary of changes to the Florida Retirement System following the 2011 legislative session.

The information was provided by Mixon and Associates, the firm that the ECSD uses as our lobbiest in Tallahassee.

I'm told that next year additional measures will be taken to further "reform" our state's pension plan--including potentially elimination of the DROP program...we'll have to wait and see how that turns out.

Here's the summary of this year's changes:

MIXON AND ASSOCIATES

Florida Retirement System Changes

Before we get to the details, let’s answer the big question: What does this do to me?

1.         If you are a current employee and are enrolled in the FRS, you will have to pay three percent of your FRS earnings to your FRS account. That generally includes all earnings except bonuses.

2.         If you are an FRS enrolled employee in DROP, you are actually a retiree and you will not pay the assessment.

3.         If you are an FRS employee enrolled in the pension plan, the years of credit toward your retirement that you earn for the next five years will be excluded from the calculation of the Cost of Living Adjustment (COLA) that will be applied to your pension payment after you retire. (The details of this part are a little complicated and will be addressed below.)

4.         If you are a retiree, including a retiree working while you are in DROP, none of the provisions of this law will apply to you.

5.         If you are a current employee enrolled in the FRS, none of the provisions of the law will affect you except those for the contribution and the COLA.

6.         The Health Insurance Subsidy (HIS) that provides up to $150 a month to help you pay your post-retirement health insurance costs has not been changed.

The details of the conference committee agreement are provided below.

1.         “Compensation” and “Average Final Compensation:” For members initially enrolled on or after July 1, 2011, “average final compensation” means the average of the 8 highest fiscal years of creditable service prior to retirement, termination, or death. For in-line-of-duty disability benefits, if less than 8 years of creditable service have been completed, the term “average final compensation” means the average annual compensation for the total number of years service. It is projected that this will reduce the cost of the FRS $52.0 million per year for school districts.

What does this mean to me?

This does not affect current district employees who are enrolled in the FRS.  This only affects new employees who become members of the FRS on or after July 1, 2011.

Current employees will continue to have their retirement benefits based on the highest five fiscal years of compensation.

 

For current employees who are members of the FRS and for new employees enrolled on or after July 1, 2011, the law that provides for including payments for accumulated annual leave and overtime in the calculation of final compensation is not changed.

2.         Compulsory enrollment in the Investment Plan.      There is no compulsory enrollment in the investment plan required in the conference agreement.

3.         Normal Retirement Date: The conference committee agreement increases the normal retirement date for all members initially enrolled on or after July 1, 2011. It is estimated that this will generate $107.2 million per year in savings for school districts.

For Special Risk Class (mainly police and firefighters): Increases the age from 55 to 60 years of age; and increases the years of creditable service from 25 to 30.

For all other classes: (including regular class, senior management class and elected officials classes) Increases the age from 62 to 65 years of age; and increases the years of creditable service from 30 to 33 years.

What does this mean to me?

This does not affect current employees enrolled in the FRS.  This only affects employees enrolled into the FRS on or after July 1, 2011. New employees in the regular class will have to earn 33 years of creditable service or be at least 65 years of age to retire without penalty.

4.  Deferred Retirement Option Program (DROP): Maintains DROP; however, members entering DROP on or after July 1, 2011, will earn interest at a reduced accrual rate of 1.3%. It is estimated that this will reduce the FRS costs for school districts $57.4 million per year.

What does this mean for me?

This means that if you are currently in DROP nothing changes. It means that if you are not currently in DROP you will be able to enter DROP now, or on or after July 1, 2011 based on the rules and the current laws that specify how DROP operates.

However, if you enter DROP on or after July 1, 2011, the interest you earn will be 1.3% per year.

5.         Reenrollment in the FRS: The conference committee agreement does not address reenrollment in the FRS. 

What does this mean to me? It means if you are a current FRS employee and you are thinking about leaving employment, get good advice about the consequences

6.         Investment Plan Vesting: The conference committee agreement does not address vesting in the Investment Plan.

What does this mean to me? This means that if you are in the Investment Plan (formerly known as the Defined Contribution Plan), the vesting law has not changed.

7.         Pension Plan Vesting: For members initially enrolled in the pension plan (formerly known as the Defined Benefit Plan) on or after July 1, 2011, such members will vest 100% of employer contributions upon completion of 8 years of creditable service. This will save school districts an estimated $21.2 million in FRS costs.

What does this mean to me?  This does not affect any employee currently enrolled in the FRS. Employees currently enrolled in the FRS will vest 100% of employer contributions upon completion of six years of creditable service.

8.         Employee contributions: Effective July 1, 2011, requires a 3% employee contribution for all FRS members. DROP participants are not required to pay employee contributions. It is estimated that this will save school districts $336.7 million per year in FRS costs.

What does this mean to me?  Effective July 1, 2011 all FRS enrolled employees, except those in DROP, will have to pay 3% of their FRS earnings toward their retirement program. FRS qualified earnings generally include all earnings except bonuses. More details will be provided in the future as the law becomes effective.

Those employees who are in DROP will not pay the 3% contribution. This is because employees in DROP are retired and additional contributions would not be applied to affect the amount of the employee’s retirement benefit. Employees enrolled in DROP before July 1, 2011, will not have to make the contribution.  Employees entering DROP on or after July 1, 2011, will stop making contributions upon entering DROP.

9.         Cost-of-Living-Adjustment (COLA): Eliminates the cost-of-living-adjustment (COLA) for service earned on or after July 1, 2011. Subject to the availability of funding and the Legislature enacting sufficient employer contributions specifically for the purpose of funding the expiration of the COLA, in accordance with s. 14, Art. X of the State Constitution, the COLA formula will expire effective June 30, 2016, and the 3% cost-of-living adjustment will be reinstated. It is estimated that this will save school districts $284.6 million in FRS costs.

What does this mean to me?

This is the most complicated provision of the conference committee agreement.  There is a reference to the COLA formula, which was included in the Senate bill. The summary also refers to the Constitutional requirement that the FRS be actuarially sound.

Based on what was available prior to conference meetings, this is what this means:

Current law provides retirees with a 3% COLA applied to their annual retirement benefit. For example if you were a retiree and your initial annual benefit was $30,000 per year, at the start of the second year you would receive a COLA adjustment of 3%, or $900.  Your second year benefit would be $30,900. At the start of the next year you would receive a COLA adjustment of 3% or $927.  The new benefit would be $31,827.

The way the formula was presented in the Senate bill, this is what would happen.  Assume you are an employee enrolled in the pension plan, and you have 25 years of creditable service. Assume further that you plan on working five more years before either retiring completely or retiring by entering DROP.

During the last five years of your career, your pension will not earn a COLA. The formula that was presented in the Senate bill calls for this calculation: Divide the years of creditable service when a COLA was earned by the total number of years of creditable service, multiply the result by 3% and apply the product to the retirement benefit to determine the COLA.

What does that look like? Using the example above with an initial retirement benefit of $30,000 per year, here is what happens: First, divide 25 by 30. (Number of years with COLA credit by total years of service) 25/30 = .833. Multiply 3% by .833: 3% X .833 = 2.499%.  The COLA rate becomes 2.499%

At the end of the first year of retirement, the 2.499% COLA is applied to the $30,000 benefit.  The COLA is $749.70.  The new benefit becomes $30,749.70.  At the end of the second year, the COLA of 2.499% is applied to the new benefit of $30,749.70 to generate a COLA of $768.44.  The new benefit becomes $31,518.14.

This is a little complicated.  The conference report contemplates the possibility of the COLA reduction being eliminated after five years.  When the actual bill is provided, it will be analyzed and we will communicate the information again.  Be advised that this understanding may be changed when the actual bill is available.

The COLA changes will not affect current retirees, including retirees in DROP.