REPLY TO: TALLAHASSEE

MEMORANDUM

TO: Municipal and Special District Clients

FROM: Jim Linn and Glenn E. Thomas

DATE: January 24, 2011

RE: Pension Reform Update – HB 303 Filed

HB 303, a comprehensive pension bill by Representative Costello, was filed last week. As of
yet, no Senate companion to HB 303 has been filed. HB 303 amends several provisions of
Florida law pertaining to public pension plans, including Chapters 112, 121, 175 and 185,
Florida Statutes. While most local governments are familiar with Chapters 175 and 185, Part
VII, Chapter 112 is applicable to all governmental retirement plans in the state, and to the extent
there are any conflicts with other laws or ordinances governing pension plans for public
employees, Chapter 112 will prevail. See, Section 112.62, Florida Statutes. A section by section
summary of HB 303 follows.

Section 112.65 would be amended to create a minimum normal retirement age of 55 for all
public employees. This would supersede any current provisions setting a minimum normal
retirement age under any other law, city ordinance or resolution. Section 112.65 would also be
amended to prohibit any benefit multiplier greater than 1.6% of average final compensation. The
change will only apply to service earned in fiscal years beginning on or after July 1, 2011. In
addition, public employers would no longer be required to make any contribution to a pension
plan in excess of 15% of payroll. If the actuarially required contribution exceeds 15%, the plan
members would vote on whether to increase member contributions or decrease benefits. Finally,
all public pension plans would be prohibited from including a deferred retirement option plan
(DROP) as an option. All DROP plans would cease operation and members currently in the
DROP would have to cease participation and receive a distribution prior to December 31, 2012.

BRADENTON JACKSONVILLE TALLAHASSEE WEST PALM BEACH

1001 3rd Avenue West 245 Riverside Avenue 2600 Centennial Place 515 North Flagler Drive
Suite 670 Suite 150 Suite 100 Suite 1500
Bradenton, FL 34205 Jacksonville, FL 32202 Tallahassee, FL 32308-0572 West Palm Beach, FL 33401
(941) 708-4040 (904) 353-6410 (850) 222-5702 (561) 640-0820
Fax: (941) 708-4024 Fax: (904) 353-7619 Fax: (850) 224-9242 Fax: (561) 640-8202
www.llw-law.com
January 18, 2011
Page 2

Chapter 121, Florida Statutes (governing the Florida Retirement System) would also be amended
under HB 303. Several categories of pay currently included in the definition of compensation
(and average final compensation) for purposes of calculating FRS pension benefits would be
excluded, such as overtime, accumulated annual leave, and incentive pay. Under the proposed
definition, compensation would be limited to base pay.

Changes to section 121.0515 would remove a practical barrier to cities converting to the Florida
Retirement System. The proposed language would provide for the purchase of past service
credit for cities and districts that join FRS for police officers and firefighters at a benefit rate of
up to 3% for each year of past service. Currently past service for firefighters and police officers
may only be purchased at the 2% rate. Contributions for upgrading the first 2% of special risk
credited service would be made in accordance with current law. However, contributions for
upgrading special risk credit in excess of 2% would be in an amount equal to the full actuarial
cost of the upgrade.

Several substantive changes are proposed for Chapters 175 and 185. Section 175.021 and 185.01
(Legislative Intent) currently state that it is a proper and legitimate state purpose to provide a
uniform retirement system for the benefit of firefighters (and police officers). The bill would
remove the word “uniform,” which along with sections 175.041 and 185.03, has been cited by
the Division of Retirement as the basis for requiring the same benefit level for all plan members.
In addition, these sections are amended to remove references to “minimum benefit” levels,
thereby removing a barrier to reducing certain benefits below the 175 and 185 thresholds.

Sections 175.032 and 185.02 would be amended by limiting the definition of “compensation” or
“salary” to base pay. Overtime, unused leave or any other form of compensation over base pay
would be excluded from compensation for purposes of pension benefit calculations. A provision
in sections 175.041 and 185.03 would be removed that currently prohibits a plan sponsor from
establishing more than one retirement plan for police officers or firefighters. Requirements for
serving on a pension board under sections 175.061 and 185.05 would be revised to ensure that a
majority of pension board members are not plan members. The new language would also require
an accounting by pension boards and board budget oversight.

Revisions to sections 175.091 and 185.07 would permit employers to increase member
contributions without the need to provide greater benefits. Under current law, member
contributions may be increased only if approved by the employee bargaining unit (or by vote of
active firefighters) and if accompanied by an increase in benefits. Under the proposed
amendment, approval of employees would still be required for an increase in member
contributions, but not an increase in benefits.

Sections 175.162 and 185.16 are amended to eliminate the ability to retire with an unreduced
benefit at age 52 with 25 years of service. Normal retirement age would be limited to 55 years of
age with 10 years of credited service. Sections 175.191 and 185.18 would be amended to require
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employer approval for all disability determinations under the plan. Currently, the pension board
alone makes all such determinations.

Changes to sections 175.351 and 185.35 would remove a requirement that pension plans meet
the minimum benefit levels as a condition of receiving premium tax revenue distributions.
Instead, plans would only be required to provide benefits that are equal to or greater than those
provided to general employees. References to “extra benefits” in this section would be removed,
and a plan would be considered in compliance with the minimum benefit provisions so long as
the plan provides benefits which “in the aggregate” exceed the minimum benefits set forth in
Chapters 175 and 185. This provision would remove the requirement that an employer provide
every minimum benefit under Chapters 175 and 185 to be considered compliant. In addition,
employers would be expressly authorized to establish “tiered” benefits (different benefit levels
for employees based on date of hire), or to move to the Florida Retirement System for new hires
and continue to receive premium tax revenue distributions.

Sections 175.361 and 185.37 would be amended to grant the plan sponsor the right to determine
the date and method of plan asset distribution in the event of a plan termination. Currently, the
pension board has sole authority to determine how and when benefits are to be paid, including
lump sum payments.

Sections 175.371 and 185.38 would be repealed and replaced with new sections 175.372 and
185.381. The current sections provide that when every active participant in a plan elects to
transfer to FRS, the plan must be terminated and the assets distributed. If some participants elect
to transfer to another state retirement system and other participants elect to remain in the existing
plan, the plan will continue to receive premium tax moneys until it is fully funded.

Under the new sections 175.372 and 185.381, employers can establish any new retirement
program, including for existing employees, and continue to receive state premium tax moneys.
The employer can use those funds to fund an existing plan or to reduce the required contributions to a
new plan.

If you have any questions please contact us.