You have been hired as a consultant by CARE (Conservatives Are REsponsible), a political action committee focusing on fiscal responsibility. The Florida chapter has become increasingly worried about the state’s indebtedness. In an effort to assess the extent of the problem, you have been hired to estimate by how much the state pension plan is underfunded. Luckily for you, Florida publishes an annual financial audit on the status of the state’s pension plan.

1. Download the latest financial audit by going to the Florida State Auditor General’s Web site:

www.myflorida.com/audgen/ and clicking on REPORTS and selecting REPORTS ISSUED BY THE AUDITOR GENERAL.

2. In the “Entity Type” drop down box, select “State Agencies and Related Entities.” Choose the latest year the report is available. (In 2017, it was called “Florida Retirement System Pension Plan and Other State-Administered Systems—Financial Audit” and was listed as report number 2017-

073 in the 2017 fiscal year.)

3. Search for the place in the report listing the fund’s future liabilities—its promised payments to existing empoyees. (In 2017, this information was listed as “PROJECTED FRS PENSION PLAN BENEFIT PAYMENTS” on p. 104 in graphical format only. The Internet site WebPlotDigitizer—

https://automeris.io/WebPlotDigitizer/ —provides a convenient way to digitize information that is provided in graphical format. Alternatively, you can just eyeball the data.)

4. Because these pension payments are a legal obligation for the state, you assess their risk to be similar to other state debt, and therefore the cost of capital should be similar to Florida’s current borrowing rate. Begin by first searching for the State of Florida’s bond rating. Once you know the rating, go to FMSBonds Inc. (www.fmsbonds.com/market-yields/) to find out what Florida bonds at different maturities with this rating are currently yielding.

5. Using these yields to approximate the cost of capital, estimate the present value of Florida’s pension liabilities.
6. Calculate the level of underfunding by finding the value of the pension fund’s assets (in 2017, this information was on p. 18 of the report) and subtracting the present value of the liabilities.
Express the underfunding as the value of the assets as a percentage of the present value of the pension liabilities.
7. Compare your estimate of the actual level of underfunding to what the report calculates using GAAP accounting. (In 2017, this information was on p. 101 of the report.) Explain the difference between your result and theirs.
8. Find the current level of the State of Florida indebtedness by going to the following Web site:
www.usgovernmentspending.com/compare_state_spending_2017bH0a 9. In percentage terms, how much would the stated level of the indebtedness of the State of Florida increase if the level of underfunding in the state’s pension plan is included in overall state indebtedness?