Our sonís fiancťe, Stephanie, influences him positively. On Valentineís Day, he called his mom. After floating down from the clouds, Susan said he liked living in California but expressed concern about the Golden Stateís pension system.

Jim, trust me, you can run but you canít hide from pension woes.

Florida appears poised to put the kibosh on the state retirement systemís (FRS) defined benefit pension plan ó after all, itís supposedly a ticking time bomb with looming benefit cuts and/or higher costs for taxpayers. Status quo supporters point out the FRS pension ranks among the countryís best funded. Unfortunately, both sides cherry pick statistics and the optimal solution lies somewhere amongst the 50 shades of grey between each position. 

Floridaís Department of Management Services commissioned Milliman, an actuarial firm, to study the financial impact of closing the pension plan to new members effective Jan. 1, 2014. Their report released Friday night (and completely off the Internet Sunday) belies the main premise shuttering the plan will save billions and not affect current or future beneficiaries. Milliman reported, according to the Miami Herald, restricting the plan would mean higher contribution levels from taxpayers or participants to maintain benefits.

The math is simple because when future employees canít join a pension plan, the payroll base shrinks and thatís where benefits are generated.  Milliman also warned despite closing the plan, FRSís unfunded liability would not decrease for two decades. 

Labor groups, unions and other opponents of FRS changes claim the FRS pension system remains actuarially sound.  New laws requiring employee contributions, changes in cost of living adjustment formulas and vesting requirements would only solidify FRSís preeminence. Being a well-funded pension system is akin to being the smartest kid in summer school. Our 87 percent funded level (80 percent being adequate) looks good but our rosy projections assume a 7.75 percent growth rate. Comparatively, California uses 7.5 percent, Wisconsin 7.2 percent.   

Taxpayers and FRS participants should demand more fee disclosure. Currently, the State Board of Administration only makes public management fees while performance fees paid to hedge funds and venture capital firms remain hidden.

My good friend and Marine aviator Rick Ferri ďconservativelyĒ estimates Florida pays $500 million annually in performance fees, management fees and trading costs. Ferri also notes FRS splits their investments between passive and active investment styles. From 2001 to 2011, a simple portfolio of four Vanguard funds beat the active boys of old Florida by Ĺ percent annually. Over a 30-year career coupled with a 25-year retirement, the slight difference adds up. Taxpayers cover any shortfalls, benefits get reduced or participants increase contributions; itís math, not politics.  

If the FRS is a ticking time bomb, Florida municipal pensions including the South Walton Fire District pose a larger problem.  Currently, the SWFDís pension is 68 percent funded but with a fiscally insane 8 percent expected return. SWFD reduced benefits for new hires and temporarily increased employee contributions, but we ainít out of the woods by a long shot.

FRS and SWFD need a dose of reality; at our firm we use a 7 percent expected return assuming similar stock allocations. Treat pension reform with a healthy dose of skepticism; Florida taxpayers should cast a pox on both houses. Instead of replacing the FRS pension plan, look for ways to improve it. 401(k) plans are no panacea.

Buz Livingston, CFP offers hourly financial planning and fee-only investment management to clients along Floridaís Emerald Coast.  Contact him at 267-1068, Buz@LivingstonFinancial.net or www.LivingstonFinancial.net.