An overly optimistic earnings forecast could collapse Florida’s pension system but any revision would force already cash-strapped local governments to shell out billions more in contributions, according to a new report obtained by the St. Petersburg Times.
The study – from Florida’s state investment board – comes as states across the country face mounting pressure to account for smaller investment returns in the wake of the financial crisis. Florida’s discount rate problem mirrors a similar quandary in California, where the state pension board recently ignored recommendations to lower its annual investment forecast in the face of intense pressure from local governments.
Florida, like California, assumes an annual rate-of-investment-return outlook of 7.75%. If the discount rate was lowered to 6%, the report says, the state’s unfunded pension liabilities – now about $16.7 billion – could grow to more than $50 billion. Public employer contributions – now about 12% of payrolls – would jump to between 18% and 25% and be a crushing financial burden for local governments.
On the other hand, a prolonged period of low return could bring the pension system to a grinding halt. A growing number of economists and analysts – including Bill Gates – argue that overly rosy investment outlooks are merely budgeting tricks that allow states to mask the true size of pension obligations and pass the costs on to future taxpayers.
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