Florida lawmakers need to be aware of long-term pension strategy

Florida has $71.82 billion in debt, making it the 10th most indebted state in the nation. Sarasota County is over $1.5 billion in debt, the city of Sarasota over $412 million, and the Sarasota County School District is $724 million. That’s a lot of debt.

The flagship fiscal proposal from Governor DeSantis this year is to ask voters to approve an elimination of property taxes. 

He has not been clear about what spending cuts would balance out this massive tax cut, not least because property taxes mostly go to local governments, and they will be the ones forced to cut spending.

We are fans of tax cuts, but they must accompany spending cuts or else they just drive up government debt and ultimately cost taxpayers even more than the tax cuts benefit them. 

Given Florida’s state and local debts, getting spending under control and reducing debt should probably come before tax cuts.

The example of state pensions

You can see these particularly clearly with the instructive example of Florida’s pension plan that covers all state workers, teachers, and many local government employees. 

A decade ago the plan was buried in debt, but the state has been digging out of this hole and is 17 years away from eliminating expensive pension debt. But that only happens if the state continues to focus on paying down the debt and not hit by a recession — so it’s a fragile path.

An analysis by Aon Investments USA Inc. (a market consulting company) commissioned by the Florida State Board of Administrators (SBA) indicates that the Florida Retirement System (FRS) is on track to eliminate all unfunded pension liabilities by 2042.

Since major reforms on the system in 2011 creating a defined contribution (DC) option called the Investment Plan, and the change making this the default retirement plan for most new hires in 2018, FRS has made some progress in closing what was a nearly $40 billion funding shortfall after the Great Recession.

The latest reporting from FRS now gives the system an 83.7% funded ratio (up from 70% in 2009), indicating that the state has made some progress but still needs to stay the course to return to its pre-recession, full funding status. 

According to Reason’s recently released Annual Pension Solvency and Performance Report, one bad year in the market (0% returns in 2026) would essentially undo that progress, bringing the system’s unfunded liabilities back to an estimated $40 billion overnight.

If market outcomes play out like the last 20 years, FRS will not be achieving full funding any time soon. If the system achieves an investment return equal to its 24-year average (6.4%) since 2001, it would fall short of the plan’s 6.7% expectation. According to Reason’s actuarial modeling of FRS, this seemingly meager shortfall would extend the date at which it arrives at full funding by another three years.

Another major recession could also significantly derail the system. Reason’s modeling indicates that an investment loss similar to that of 2009 would result in a funding ratio of 62%, and it would take 15 years to get back to today’s funding levels. The full funding date would extend well beyond 2055 in that scenario.

A recession could also drive up the annual costs of FRS, which taxpayers and lawmakers should be wary of. In 2024, employers contributing into the FRS pension on behalf of government employees paid an amount equal to around 12.7% of pay (totaling $5.6 billion statewide annually). 

If everything goes as planned, with returns matching the system’s assumptions, this cost will remain relatively stable and drop significantly once the system is free from pension debt. 

Under the scenario of a major recession, annual costs will need to rise to as high as 22.9% to keep up with paying pension benefits in full.

When it comes to pensions, policymakers can hope for the best, but they should prepare for the worst. At the very least, they should prepare government pensions to withstand the same pressures that created the costly pension debt in the first place.

Florida lawmakers need to keep these risks in mind as they weigh in on proposals to grant more benefits. During the 2025 session, the State Legislature saw (and rejected) a proposal to unroll the state’s crucial 2011 reform by again granting cost-of-living adjustments (COLAs) to all FRS members. 

Reason’s analysis of the proposal warned that the move would add $36 billion in new costs over 30 years, and that was only the best-case scenario. 

A scenario in which the system sees multiple recessions over the next 30 years would have driven the estimated costs of the proposed COLA to $47 billion. For a pension fund that is still many years away from having the funding to fulfill existing retirement promises, the last thing it needs is to double down with more potential runaway costs with even more liabilities.

It is safe to say that the idea of increasing pension costs on Florida’s local governments while simultaneously facing the prospect of reduced property tax revenue is ill-advised.

Through prudent reforms, Florida has made some laudable progress in improving the funding of its pension system. 

They are still several years away from achieving the end goal of all these efforts, and any level of market turbulence would push the finish line out by decades. 

Policymakers need to be aware of Florida’s long-term pension strategy and avoid any proposals to add to the costs and risks imposed on taxpayers through new pension benefits.

Zachary Christensen, Adrian Moore and Steven Vu are with Reason Foundation. Moore lives in Sarasota.