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Florida Retired Educators Association
Disagrees With Times Articles
Sydney F. Freedberg has written some inflammatory stories in the past few months about the State Board of Administration gambling away our retirement trust fund dollars. I feel that it will be helpful to give another perspective on the SBA operations. An investment allocation formula is the DIRECTIVE for how the SBA invests the Trust Fund's assets. This formula is approved by the Florida Legislature upon recommendations from the Board of Trustees. It is reviewed annually by consultants and state experts, and changed whenever there is agreement that it should be. The current (May 31, 2009) allocation formula is:
*The range is needed to avoid excessive asset trading (which would be costly) when prices are fluctuating. For comparison purposes, look at the national practice of investing public retirement system funds. According to a publication of the National Association of State Retirement System Administrators, the allocation of public pension funds nationwide as of 12/31/2008 were:
As we can see, the SBA is not out of line with the rest of the retirement systems in the country. The newspaper articles focus on the high risk part of the allocation which are private equity, high yield or alternative investments (6% for Florida, 5.5% national). The practice of risk taking in a portfolio of investment is supported by "financial wizards" who serve as consultants to the SBA, but it is where critics find fuel to attack the SBA. Although the SBA subjects each "risky" investment to a structured analysis of the risk/reward potential (which is supposedly much more scientific that a roll of the dice) before it is purchased, the possibility of loss is always present. This is the "to get high returns, you have to take risks" axiom. How well the different investment agencies throughout the country perform depends on the expertise of the staffs and policies they follow. Florida's SBA almost always ranks among the top quartile. When the Florida Legislature created the Florida Retirement System (FRS) in 1970,the FRS Trust Fund had assets equal to only 40 percent of its actuarial liabilities. The 60% unfunded liability was called the "pension debt", and FRS employers (school boards, the state, etc.) were required to add 6% to the required contribution rate to FRS in order to pay off the debt. At the time I began watching the Trust Fund in 1995, the funded level was up to 75% with a projection to reach 100% by 2014. The required contribution rate (including the 6%) was over 16% of payroll for the regular class. During the 1995 - 1998 period, the SBA investment activity was so successful (reaching $1B/month return at one point) that the pension debt was erased and there were surplus assets by July, 1998. This allowed dropping the 6% add-on and lowering the required contribution rate to less than 10 percent for employers. This success by the SBA resulted in saving employers 6% of employee payrolls for the last 10 years. I haven't a figure, but it certainly must be a large dollar amount for the 700,000 or so active employees covered by FRS. The SBA is spending many Trust Fund dollars to respond to demands for information and response to the St. Petersburg Times inquiries; as a stakeholder (as are all taxpayers in Florida) I resent having a reporter go on a "witch hunt" that is costing our Trust Fund. Unless there is an educated investigation resulting in substantive information warranting accusations of the type being made by Reporter Freedberg, these activities by the St. Petersburg Time should be classified as a witch hunt. Although extremely well researched, I find the articles are fragmented and biased; the total picture is not even considered. I would judge them rationally unjustifiable and therefore a witch hunt. This entire report is dedicated to this issue due to having seen how such uninformed publication of the partial story a couple of years ago created a crisis (it did not exist) for the Local Government Investment Pool run by the SBA. The result was unbelievable disruption to the orderly process of daily government operations in many areas of the state, and the loss of many investment return dollars to the local governments involved. I do not want to see any unnecessary distractions to the operations of the SBA interfering with their efforts to achieve the maximum returns possible with investing Florida Retirement System Trust Fund assets. Larry Carmichael Legislative Chairman |