Bill Summary – FastDemocracy

The Florida Senate
                  BILL ANALYSIS AND FISCAL IMPACT STATEMENT
              (This document is based on the provisions contained in the legislation as of the latest date listed below.)
                        Prepared By: The Professional Staff of the Committee on Appropriations
BILL:           CS/SB 1156
INTRODUCER:     Governmental Oversight and Accountability Committee and Senator Burton
SUBJECT:        Florida Retirement System
DATE:           April 24, 2023                  REVISED:
           ANALYST                    STAFF DIRECTOR                 REFERENCE                                 ACTION
1. McVaney                          McVaney                               GO              Fav/CS
2. Shettle                          Sadberry                              AP              Favorable
                     Please see Section IX. for Additional Information:
                                   COMMITTEE SUBSTITUTE - Substantial Changes
 I.     Summary:
        CS/SB 1156 allows a retiree to provide certain volunteer services to a Florida Retirement System
        (FRS) employer while maintaining his or her bona fide termination status, which is required for
        the payment of retirement benefits to the retiree.
        Under the bill, an FRS employer may establish a post-employment volunteer program that does
        not negatively impact a volunteer’s status as a bona fide retiree if the program meets all of the
        following criteria:
         At the time of retirement, there is no agreement or understanding between an FRS employer
            and the retiree that the retiree would provide services to an employer post-retirement.
         The employer or third party may not provide any form of compensation to the volunteer for
            the volunteer services.
         Employee benefits may not be provided to the volunteer, except in certain limited instances.
         The number of volunteer hours per week is limited to no more than 20 percent of the amount
            of time that was expected of the retiree per week before retirement.
         A clear distinction between the duties of a volunteer and the duties of an employee is
            required.
         Volunteers must maintain control of their volunteer schedule.
         Adequate record keeping must be maintained by the volunteer and the FRS employer.
        The bill is not expected to impact state and local government revenues and expenditures. See V.
        Fiscal Impact Statement below.
BILL:     CS/SB 1156                                                                                                  Page 2
           The bill takes effect on July 1, 2023.
    II.    Present Situation:
           The Florida Retirement System (FRS)
           The Florida Retirement System (FRS) was established in 1970 when the Legislature consolidated
           the Teachers’ Retirement System, the State and County Officers and Employees’ Retirement
           System, and the Highway Patrol Pension Fund. In 1972, the Judicial Retirement System was
           consolidated into the FRS, and in 2007, the Institute of Food and Agricultural Sciences
           Supplemental Retirement Program was consolidated under the Regular Class of the FRS as a
           closed group.1 The FRS is a contributory system, with active members contributing 3 percent of
           their salaries.2
           The FRS is a multi-employer plan, governed by ch. 121, F.S., the “Florida Retirement System
           Act.” As of June 30, 2022, the FRS had 629,073 active non-retired members, 448,846 annuitants,
           14,858 disabled retirees, and 28,827 active participants of the Deferred Retirement Option
           Program (DROP).3 As of September 2022, the FRS consisted of 990 total employers; it is the
           primary retirement plan for employees of state and county government agencies, district school
           boards, Florida College institutions, and state universities, and includes the 180 cities and 153
           special districts that have elected to join the system.4
           The membership of the FRS is divided into five membership classes:
            The Regular Class5 consists of 537,128 active members and 7,806 in renewed membership;
            The Special Risk Class6 includes 72,925 active members and 1,100 in renewed membership;
            The Special Risk Administrative Support Class7 has 104 active members and one in renewed
              membership;
            The Elected Officers’ Class8 has 2,075 active members and 109 in renewed membership; and
1
  Florida Department of Management Services (DMS), Division of Retirement, Florida Retirement System Pension Plan and
Other State Administered Retirement Systems FY 2021-22 Annual Comprehensive Financial Report, 35, available at
https://employer.frs.fl.gov/forms/2020-21_ACFR.pdf. (last visited Mar. 7, 2023).
2
  Prior to 1975, members of the FRS were required to make employee contributions of either 4 percent for Regular Class
employees or 6 percent for Special Risk Class members. Employees were again required to contribute to the system after
July 1, 2011. See, ch. 2011-68, s. 33, Laws of Fla. Members in the Deferred Retirement Option Program do not contribute to
the system.
3
  DMS, Division of Retirement, Florida Retirement System Pension Plan and Other State Administered Retirement Systems
FY 2021-22 Annual Comprehensive Financial Report, at 260, available at https://employer.frs.fl.gov/forms/2020-
21_ACFR.pdf. (last visited Mar. 7, 2023).
4
  DMS, Division of Retirement, Participating Employers for Fiscal Year 2022-2023 (Sept. 2022), available at
https://employer.frs.fl.gov/forms/part-emp.pdf (last visited Mar. 7, 2023).
5
  The Regular Class is for all members who are not assigned to another class. Section 121.021(12), F.S.
6
  The Special Risk Class is for members employed as law enforcement officers, firefighters, correctional officers, probation
officers, paramedics and emergency technicians, among others. Section 121.0515, F.S.
7
  The Special Risk Administrative Support Class is for a special risk member who moved or was reassigned to a nonspecial
risk law enforcement, firefighting, correctional, or emergency medical care administrative support position with the same
agency, or who is subsequently employed in such a position under the Florida Retirement System. Section 121.0515(8), F.S.
8
  The Elected Officers’ Class includes elected state and county officers, and those elected municipal or special district
officers whose governing body has chosen Elected Officers’ Class participation for its elected officers. Section 121.052, F.S.
BILL:   CS/SB 1156                                                                                                    Page 3
            The Senior Management Service Class9 has 7,610 active members and 210 in renewed
             membership.10
         Each class is funded separately based upon the costs attributable to the members of that class.
         Members of the FRS have two primary plan options available for participation:11
          The defined contribution plan, also known as the Investment Plan; and
          The defined benefit plan, also known as the Pension Plan.
         Investment Plan
         In 2000, the Public Employee Optional Retirement Program (investment plan) was created as a
         defined contribution plan offered to eligible employees as an alternative to the FRS Pension
         Plan.12
         Benefits under the investment plan accrue in individual member accounts funded by both
         employee and employer contributions and earnings. Benefits are provided through employee-
         directed investments offered by approved investment providers.13
         A member vests immediately in all employee contributions paid to the investment plan.14 With
         respect to the employer contributions, a member vests after completing one work year of
         employment with an FRS employer.15 Vested benefits are payable upon termination or death as a
         lump-sum distribution, direct rollover distribution, or periodic distribution.16 The investment
         plan also provides disability coverage for both in-line-of-duty and regular disability retirement
         benefits.17 An FRS member who qualifies for disability while enrolled in the investment plan
         may apply for benefits as if the employee were a member of the pension plan. If approved for
         retirement disability benefits, the member is transferred to the pension plan.18
9
  The Senior Management Service Class is for members who fill senior management level positions assigned by law to the
Senior Management Service Class or authorized by law as eligible for Senior Management Service designation. Section
121.055, F.S.
10
   All figures are from Florida Retirement System Pension Plan and Other State Administered Retirement Systems FY 2021-
22 Annual Comprehensive Financial Report, at 263.
11
   Florida State Board of Administration (SBA), Plan Comparison Chart (Jul. 2020), available at
https://www.myfrs.com/pdf/forms/plancomparison.pdf (last visited Mar. 7, 2023).
12
   See, ch. 2000-169, Laws of Fla.
13
   Section 121.4501(1), F.S.
14
   Section 121.4501(6)(a), F.S.
15
   If a member terminates employment before vesting in the investment plan, the nonvested money is transferred from the
member’s account to the SBA for deposit and investment by the SBA in its suspense account for up to five years. If the
member is not reemployed as an eligible employee within five years, any nonvested accumulations transferred from a
member’s account to the SBA’s suspense account are forfeited. Section 121.4501(6)(b)-(d), F.S.
16
   Section 121.591, F.S.
17
   See s. 121.4501(16), F.S.
18
   Pension plan disability retirement benefits, which apply for investment plan members who qualify for disability,
compensate a line-of-duty disabled member up to 65 percent of the average monthly compensation as of the disability
retirement date for special risk class members. Other members may receive up to 42 percent of the member’s average
monthly compensation for disability retirement benefits. If the disability occurs other than in the line-of-duty, the monthly
benefit may not be less than 25 percent of the average monthly compensation as of the disability retirement date.
Section 121.091(4)(f), F.S.
BILL:   CS/SB 1156                                                                                               Page 4
         The State Board of Administration (SBA) is primarily responsible for administering the
         investment plan.19 The Board of Trustees of the SBA is comprised of the Governor as chair, the
         Chief Financial Officer, and the Attorney General.20
         Pension Plan
         The pension plan is administered by the Secretary of Management Services (DMS) through the
         Division of Retirement.21 The State Board of Administration manages the pension fund’s
         assets.22
         Any member initially enrolled in the pension plan before July 1, 2011, vests in the pension plan
         after completing six years of service with an FRS employer.23 For members initially enrolled on
         or after July 1, 2011, the member vests in the pension plan after eight years of creditable
         service.24 Benefits payable under the pension plan are calculated based on the member’s years of
         creditable service multiplied by the service accrual rate multiplied by the member’s average final
         compensation.25 For most current members of the pension plan, normal retirement (when first
         eligible for unreduced benefits) occurs at the earliest attainment of 30 years of service or age
         62.26 For public safety employees in the Special Risk and Special Risk Administrative Support
         Classes, normal retirement is the earliest of 25 years of service or age 55.27 Members initially
         enrolled in the pension plan on or after July 1, 2011, have longer service requirements. For
         members initially enrolled after that date, the member must complete 33 years of service or attain
         age 65, and members in the Special Risk classes must complete 30 years of service or attain age
         60.28
         Optional Retirement Programs
         Eligible employees may choose to participate in one of three retirement programs instead of
         participating in the FRS:
          Members of the Senior Management Service Class may elect to enroll in the Senior
             Management Service Optional Annuity Program;29
19
   Section 121.4501(8), F.S.
20
   FLA. CONST. art. IV, s. 4.
21
   Section 121.025, F.S.
22
   Florida SBA, Summary Overview of the State Board of Administration of Florida, 4, available at
https://www.sbafla.com/fsb/Portals/FSB/Content/Topics/SBAOverview_20211025.pdf?ver=2021-10-28-120954-217 (last
visited Mar. 7, 2023).
23
   Section 121.021(45)(a), F.S.
24
   Section 121.021(45)(b), F.S.
25
   Section 121.091, F.S. See also, Florida Retirement System Pension Plan and Other State Administered Retirement Systems
FY 2021-22 Annual Comprehensive Financial Report, 35-37, supra at 1.
26
   Section 121.021(29)(a)1., F.S.
27
   Section 121.021(29)(b)1., F.S.
28
   Sections 121.021(29)(a)2. and (b)2., F.S.
29
   The Senior Management Service Optional Annuity Program (SMSOAP) was established in 1986 for members of the
Senior Management Service Class. Employees in eligible positions may irrevocably elect to participate in the SMSOAP
rather than the FRS. Effective July 1, 2017, the SMSOAP is closed to new members. Section 121.055(6), F.S. See also,
Florida DMS, Senior Management Service Optional Annuity Program,
https://www.dms.myflorida.com/workforce_operations/retirement/optional_retirement_programs/senior_management_servic
e_optional_annuity_program (last visited Mar. 7, 2023).
BILL:   CS/SB 1156                                                                                                  Page 5
          Members in specified positions in the State University System may elect to enroll in the State
           University System Optional Retirement Program;30 and
         Members in specified positions at a Florida College institution may elect to enroll in the State
         Community College System Optional Retirement Program.31
         Maintaining Status as a Qualified Plan
         The FRS includes a governmental defined benefit plan under Internal Revenue Code section
         414(d) and is qualified under Internal Revenue Code section 401(a). This means that the
         contributions to the FRS qualify for tax deductions, and that investment earnings are tax-deferred
         until they are distributed to retirees.
         “In order for a pension plan to be a qualified plan under section 401(a), the plan must be
         established and maintained by an employer primarily to provide systematically for the payment
         of definitely determinable benefits to its employees over a period of years, usually for life, after
         retirement (emphasis added) or attainment of normal retirement age . . ..”32
         A termination of employment must be bona fide (i.e., not a mere subterfuge in order to initiate an
         otherwise impermissible distribution where no substantial change in employment has
         occurred).33 “Retirement does not include a mere reduction in the number of hours that an
         employee works. Accordingly, benefits may not be distributed prior to normal retirement age
         solely due to a reduction in the number of hours that an employee works.”34
         Current law relating to the FRS requires an employee to terminate his or her employment in
         order to commence a retirement benefit, either before or after normal retirement age. The
         determination of whether a bona fide termination from employment has occurred is critical for
         both the tax qualification of the FRS and Florida statutory compliance purposes. 35
         To address the requirement of bona fide termination, the FRS states “termination” occurs “when
         a member ceases all employment relationships with participating employers.”36 This includes a
         relationship with an FRS-participating employer as an officer, employee, or volunteer. If the
         retiree is reemployed by an FRS-participating employer within the first 6 calendar months after
         the month of retirement, termination is deemed not to have occurred, and the retiree must return
30
   Eligible participants of the State University System Optional Retirement Program (SUSORP) are automatically enrolled in
the SUSORP. However, the member must execute a contract with a SUSORP provider within the first 90 days of
employment or the employee will default into the pension plan. If the employee decides to remain in the SUSORP, the
decision is irrevocable and the member must remain in the SUSORP as long as the member remains in a SUSORP-eligible
position. Section 121.35, F.S.
31
   If the member is eligible for participation in a State Community College System Optional Retirement Program, the member
must elect to participate in the program within 90 days of employment. Unlike the other optional programs, an employee who
elects to participate in this optional retirement program has one opportunity to transfer to the FRS. Section 1012.875, F.S.
32
   Treas. Reg. section 1.401(a)-1(b)(1)(i).
33
   Private Letter Ruling 201147038 (Apr. 20, 2010).
34
   Treas. Reg. section 1.401(a)-1(b)(3).
35
   Memorandum to David DiSalvo, Director, Division of Retirement, Re: Bona Fide Terminations from Employment and
Bona Fide Volunteer Services (dated January 8, 2021).
36
   Section 121.021(39), F.S.
BILL:    CS/SB 1156                                                                                      Page 6
           all retirement distributions, including DROP accumulations.37 Generally, if the retiree is
           employed by an FRS-participating employer during the 7th through 12th calendar months after
           the month of retirement, the retiree’s benefit for those months is suspended and is forfeited.38
           There are no restrictions on receiving salary and retirement benefits from FRS-participating
           employers after the 12th calendar month from