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RETIREMENT SECURITY ACT 2011-H 6319 2011-S 1111 Staff Briefing November 9, 2011 House Finance Committee
RETIREMENT SECURITY ACT
2011-H 6319
2011-S 1111
Staff Briefing
November 9, 2011
House Finance Committee
Senate Finance Committee
1
RETIREMENT SECURITY PROPOSAL H 6319 AND S 1111 • Introduction • Legislation Comparison • Overview
RETIREMENT SECURITY PROPOSAL
H 6319 AND S 1111
• Introduction
• Legislation Comparison
• Overview
• Budgetary Impact
• Plan Design Changes
• Other Issues
• Independent Plans
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INTRODUCTION Recap of recent actions • Sept 6th event for all members • Briefings for
INTRODUCTION
Recap of recent actions
• Sept 6th event for all members
• Briefings for both chambers from the Treasurer
• 3 joint Finance Committee Meetings in September
• 3 joint finance Committee Meetings to take public
testimony
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INTRODUCTION Why Does It Matter? • Current projections have pension costs consuming larger proportion of
INTRODUCTION
Why Does It Matter?
• Current projections have pension costs
consuming larger proportion of resources
• State struggling to emerge from most recent
economic downturn
• Still facing structural deficits in five-year forecast
• No near term projection to grow our way out
of the problem
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LEGISLATION: OVERVIEW • Suspends increases (COLAs) to retirees’ benefits until the system is better funded,
LEGISLATION: OVERVIEW
• Suspends increases (COLAs) to retirees’ benefits
until the system is better funded, BUT provides for
intermittent COLA every 5 years
• Moves all but public safety employees to hybrid
pension plans
• Increases minimum retirement age for most
employees not already eligible to retire
• Preserves accrued benefits
• Begins addressing local plan solvency issues
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PENSIONS – FUNDED RATIO 1993-2010 VALUATIONS (STATE EMPLOYEES) 90% 82% 80% 67% 70% 61% 59%
PENSIONS – FUNDED RATIO
1993-2010 VALUATIONS (STATE EMPLOYEES)
90%
82%
80%
67%
70%
61%
59%
60%
60%
48%
53%
50%
40%
30%
1993
1995
1997
1999
2001
2003
2005
2007
2009
2010R
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FISCAL IMPACT: STATE EMPLOYEES Valuation Results *(in millions) Baseline (Current) Sub A (incl. 1% DC)
FISCAL IMPACT: STATE EMPLOYEES
Valuation Results
*(in millions)
Baseline
(Current)
Sub A
(incl. 1% DC)
Change
FY 2013 Contribution Rate
36.34%
22.40%
-13.94%
Normal Cost Percentage
11.39%
9.38%
-2.01%
Unfunded Liability*
$2,700.4
$1,720.0
($980.4)
Funded Ratio
48.4%
59.55%
11.15%
Long Term Normal Cost
11.39%
6.17%
-5.22%
FY 2013 Contribution*
$243.0
$143.1
($99.9)
Out-years
FY 2014 Contribution Rate
38.92%
23.75%
-15.17%
FY 2015 Contribution Rate
41.23%
25.33%
-15.90%
FY 2016 Contribution Rate
42.35%
25.92%
-16.43%
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FISCAL IMPACT: TEACHERS - Valuation Results *(in millions) Baseline (Current) Sub A (est.) (incl. 1%
FISCAL IMPACT: TEACHERS -
Valuation Results
*(in millions)
Baseline
(Current)
Sub A (est.)
(incl. 1% DC)
Change
FY 2013 Contribution Rate
35.25%
20.45%
-14.8%
Normal Cost Percentage
11.82%
8.77%
-3.05%
Unfunded Liability*
$4,133.2
$2,389.3
(1,743.9)
Funded Ratio
48.4%
61.2%
12.8%
Long Term Normal Cost
11.82%
5.07%
-6.75%
FY 2013 Contribution*
$371.8
$211.4
($160.4)
Out-years
FY 2014 Contribution Rate
37.20%
21.41%
-15.79%
FY 2015 Contribution Rate
39.39%
22.87%
-16.52%
FY 2016 Contribution Rate
40.41%
23.40%
-17.01%
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Plan Design Changes 9
Plan Design Changes
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PLAN DESIGN CHANGES • Cost of Living Adjustments • Specific Employee Groups • State Employees
PLAN DESIGN CHANGES
• Cost of Living Adjustments
• Specific Employee Groups
• State Employees and Teachers
• State Police
• Judges
• MERS General
• MERS Police and Fire
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COST OF LIVING ADJUSTMENTS: CURRENT Group Rate Type Start Application Retirees – State Emp. &
COST OF LIVING ADJUSTMENTS:
CURRENT
Group
Rate
Type
Start
Application
Retirees – State
Emp. & Teachers
3%
Compound
3 rd Jan.
after retire
Full Benefit
Active – State
Emp. & Teachers
CPI up
Compound
to 3%
Later of 3 rd
anniv. or
age 65
First $35k
indexed to CPI
Judges
3%
Simple ex.
for Traffic
& W. Comp
3 rd Jan.
after retire
Full benefit ex.
for non-eligible
limited to $35k
State Police
$1,500
Flat
3 rd January
n/a
MERS (Optional)
3%
Simple
1 st anniv.
Full Benefit
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COST OF LIVING ADJUSTMENTS: PROPOSED All groups move to same COLA • Risk based •
COST OF LIVING ADJUSTMENTS:
PROPOSED
All groups move to same COLA
• Risk based
• Limited
• Granted annually only if system is well
funded
• every five years from enacted until 80%
funded
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COST OF LIVING ADJUSTMENTS: PROPOSED COLA Provisions Proposal Revised Risk Based: 7.5% - 5.5% =
COST OF LIVING ADJUSTMENTS:
PROPOSED
COLA Provisions
Proposal
Revised
Risk Based:
7.5% - 5.5% = 2% average
COLA applied to:
$35,000, indexed
$25,000, indexed
COLA limits:
0.0% to 4.0%
COLA - Annually
80.0% funding
COLA - Interim
70%, limited to under
$20,000 and base = $500
per years of service
Every five years, risk
based calculation
COLA Funding
Test
Each plan’s independent
status
State plans are
blended, MERS stay
separate
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PLAN DESIGN CHANGES • Cost of Living Adjustments • Specific Employee Groups • State Employees
PLAN DESIGN CHANGES
• Cost of Living Adjustments
• Specific Employee Groups
• State Employees and Teachers
• MERS General
• State Police
• Judges
• MERS Police and Fire
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BENEFIT DESIGN: STATE EMPLOYEES & TEACHERS HYBRID PROPOSAL Provision Current Plan New Plan Member Contribution
BENEFIT DESIGN: STATE EMPLOYEES
& TEACHERS HYBRID PROPOSAL
Provision
Current Plan
New Plan
Member Contribution Rate
8.75% (S) 9.5% (T)
3.75%
Benefit Accrual at 40 Yrs.
75% capped at 38 yrs.
40% + DC balance
Benefit Accrual at 26 Yrs.
46%
26% +DC balance
Unreduced Retirement
Eligibility
Age 65 w/10 yrs. or
Age 62 w/29 yrs.
SS NRA = 67 for those
born after 1960 -67 Max
Reduced Eligibility
Age 62 w/20 yrs.
SS NRA -5 w/20 yrs.
COLA – all members,
including current retirees
CPI capped at 3% on
first $35,000
Risk adjusted: 2% w/
7.5% return on first $25K
Average Salary Period
5 years
5
years
Vesting
10 years
5
years
DC Member Contribution
n/a
5.00%
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PENSIONS: STATE POLICE Current Plan New Plan Member 8.75% into DB plan, no DC component
PENSIONS: STATE POLICE
Current Plan
New Plan
Member
8.75% into DB plan, no DC component
Contribution
Eligibility
Hired before 7/1/07: 20 yrs. & must
retire at 62; hired after, 25 yrs. & must
retire at 30 yrs.
May retire after 50%
accrual; must retire at
65%
Benefit Accrual
50% of final salary + 3% per year over
25 not to exceed 65% pre-7/1/07
hires get 3% per year over 20
2% per service year
not to exceed 65%
COLA
$1,500 annually
Risk adjusted: 2% w/
7.5% return on first
$25K
Vesting
10 years
5 years
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PENSIONS: JUDGES Current Plan New Plan Eligibility Age 65 & 20 yrs.; 70 & 15
PENSIONS: JUDGES
Current Plan
New Plan
Eligibility
Age 65 & 20 yrs.; 70 & 15 yrs.
Member
12.00%
Contribution
0% - Hired before 7/97
8.75% all others
Benefit Accrual
Hired after July 1, 2009
80% full; 65% reduced – 5 highest year
Earlier hires have benefit as high as 100% of final salary
COLA
3% simple on first $35,000
on 3 rd anniversary or age 65
Traffic and WC get
compounded
Risk adjusted: 2% w/
7.5% return on first
$25K
Vesting
10 years
5 years
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PENSIONS: JUDGES - REVISED • COLA lowered and now based on aggregate plan funding •
PENSIONS: JUDGES - REVISED
• COLA lowered and now based on aggregate plan
funding
• Revised proposal excludes active Supreme Court
justices
• Constitution prohibits any reduction in compensation
for sitting Supreme Court justices
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EMPLOYEE CONTRIBUTION RATES: STATE EMPLOYEES & TEACHERS – NO CHANGE FROM PROPOSAL Group Current Proposal
EMPLOYEE CONTRIBUTION RATES:
STATE EMPLOYEES & TEACHERS – NO
CHANGE FROM PROPOSAL
Group
Current
Proposal
DB
DC
Suppl.
Total
State
8.75%
3.75%
5%
n/a
8.75%
Employee
Teacher
w/Soc. Sec.
9.5%
3.75%
5%
n/a
8.75%
Teacher w/o
Soc. Sec.
9.5%
3.75%
5%
2%
10.75%
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PROPOSED: STATE EMP, TEACHERS, MERS GENERAL TRANSITION • Previous retirement age change for state employees
PROPOSED: STATE EMP, TEACHERS,
MERS GENERAL TRANSITION
• Previous retirement age change for state employees
and teachers was applied proportionally to active
employees based on progress toward prior
retirement age
• Proposal offered two transition rules:
• Transition Rule 1: Members age 52 w/ at least 10
years of service currently eligible to retire before age
62 may retire at age 62
• Transition Rule 2: Members may retire at their current
retirement age but benefit is based on benefit as of
June 30, 2012
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REVISED: STATE EMP, TEACHERS, MERS GENERAL TRANSITION • Retain methodology that retirement age change is
REVISED: STATE EMP, TEACHERS,
MERS GENERAL TRANSITION
• Retain methodology that retirement age change
is applied proportionally to active employees
based on progress toward prior retirement age
• Retain Transition Rule 2: Members may retire at
their current retirement age but benefit is based on
benefit as of June 30, 2012
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CORRECTIONAL OFFICERS – PROPOSED • Preserves the 2.0% accrual rate, but eliminates the increasing accrual
CORRECTIONAL OFFICERS –
PROPOSED
• Preserves the 2.0% accrual rate, but eliminates
the increasing accrual rate to 6.0%, 5.0%, 4.0%,
and 3.0% for service years 31 through 34 – except
for those with 25 years or more of service
• Reduces the maximum benefit from 80% to 75%
• Preserves age 55 with 25 years of service, but if
Officer does not reach 25 years, must wait until
social security age for distribution
• No defined contribution plan participation
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Municipal Employees Retirement System (MERS) 23
Municipal Employees Retirement
System (MERS)
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MUNICIPAL EMPLOYEES RETIREMENT SYSTEM (MERS) • Covers various local employees – general municipal, police and
MUNICIPAL EMPLOYEES RETIREMENT
SYSTEM (MERS)
• Covers various local employees – general municipal,
police and fire - become members at date of
employment
• Can include some school employees, elected officials
• Total assets of $1.2 billion as of June 30, 2010
• Unfunded Actuarial Accrued Liability of $430.2
million as of June 30, 2010
• Funded ratio of 73.6% as of June 30, 2010
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BENEFIT DESIGN: MERS GENERAL HYBRID PROPOSAL Provision Current Plan New Plan Member Contribution Rate 6%
BENEFIT DESIGN: MERS GENERAL
HYBRID PROPOSAL
Provision
Current Plan
New Plan
Member Contribution Rate
6% ~ 7.0% (w/COLA)
1% ~ 2.0% (w/COLA)
Benefit Accrual at 40 Yrs.
75% capped at 37.5yrs.
40% + DC balance
Benefit Accrual at 26 Yrs.
52%
26% +DC balance
Unreduced Retirement
Eligibility
Age 58 w/10 yrs. or
Any age w/30 yrs.
SS NRA = 67 for those
born after 1960 - 67 Max
Reduced Eligibility
Age 62 w/20 yrs.
SS NRA -5 w/20 yrs.
COLA – all members,
including current retirees
Optional: simple 3% on
1 st Anniversary
Risk adjusted: 2% w/
7.5% return on first $25K
Average Salary Period
3 years
5
years
Vesting
10 years
5
years
DC Member Contribution
n/a
5.00%
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MERS – CURRENT STANDARD PLAN BENEFITS – PUBLIC SAFETY- 25 YEARS Provision Basic Plan Optional
MERS – CURRENT STANDARD PLAN
BENEFITS – PUBLIC SAFETY- 25 YEARS
Provision
Basic Plan
Optional Plan
Age
25 Years of Service or 55 with 10 Years
Final Average
Compensation (FAC)
3 Year Average
Service Credit
2.0% annually with 75.0% maximum
COLA
None
3.0% simple
Employee Contribution
7.0%
8.0%
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MERS PUBLIC SAFETY PROPOSAL Provision Current Plan New Plan Member Contribution Rate 9% 7% ~
MERS PUBLIC SAFETY PROPOSAL
Provision
Current Plan
New Plan
Member Contribution Rate
9%
7% ~ 8% (w/COLA)
Replacement Income at 20
Yrs.
50% for 20 yrs., 40%
for 25 yrs.
40%
Unreduced Retirement
Eligibility
20 and out
Age 55 w/25 yrs
Reduced Eligibility
Age 50 with 20 yrs.
COLA – all members,
including current retirees
3% simple
Risk adjusted: 2% w/
7.5% return on first $25K
Benefit Multiplier
2.5% for 20 yrs.; 2%
for 25 yrs.
2%
Average Salary Period
3 years
5
years
Vesting
10 years
5
years
DC Member Contribution
w/out Soc. Sec.
n/a
3% employee and
employer
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EMPLOYEE CONTRIBUTION RATES: MERS EMPLOYEES Group Basic Optional Proposal DB DC Suppl. Total General 6.0%
EMPLOYEE CONTRIBUTION RATES:
MERS EMPLOYEES
Group
Basic
Optional
Proposal
DB
DC
Suppl.
Total
General
6.0%
7.0%
1-2%
5%
n/a
6-7%
Public Safety
w/Soc. Sec.
7-8%
8-9%
7-8%
n/a
n/a
7-8%
Public Safety
w/o Soc. Sec.
7-8%
8-9%
7-8%
n/a
3%
10-11%
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ESTIMATED IMPACT ON MUNICIPALITIES Current Law FY 2013 Revised (Est) Contributions (millions) FY 2012 FY
ESTIMATED IMPACT ON MUNICIPALITIES
Current Law
FY 2013 Revised (Est)
Contributions
(millions)
FY 2012
FY 2013
DB
DC
Total
MERS Municipal
$20.4
$40.9
$23.8
$2.2
$26.0
MERS Police &
Fire
$12.8
$24.8
$10.7
$1.0
$11.7
MERS Subtotal
$33.1
$65.7
$34.7
$3.2
$37.7
Teachers
$142.8
$220.9
$109.0
$16.2
$125.2
Total
$176.0
$286.7
$143.7
$19.3
$162.9
MERS/Teachers
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Other Issues 30
Other Issues
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RE-AMORTIZATION • No change to proposed re-amortization • Act proposes to re-amortize the remaining unfunded
RE-AMORTIZATION
• No change to proposed re-amortization
• Act proposes to re-amortize the remaining
unfunded liability over a 25-year period
• Provides for “laddered” re-amortization designed
to smooth out the cliff effect and reduce volatility
over a long period of time
31
SOCIAL SECURITY PROVISIONS • No change to proposal • Establishes mandatory supplemental contributions for those
SOCIAL SECURITY PROVISIONS
• No change to proposal
• Establishes mandatory supplemental
contributions for those not participating in social
security (about half the teachers and some MERS
public safety employees)
Contribution
Teachers
MERS Police and Fire
Employee
2%
3%
Employer
2%
3%
Total
4%
6%
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SELF CORRECTING PROPOSAL • Creates a trigger to indicate pension plans need course correction •
SELF CORRECTING PROPOSAL
• Creates a trigger to indicate pension plans need
course correction
• Trigger is if plan under 50% funded and 5 years of
decline in funded ratio leads to a default plan which
cannot include further benefit reductions, only
increased contribution rates
• Requires all state and MERS plans that are less than
80% funded to adopt a funding improvement plan
that will provide a realistic, actuarially determined
path to reach 80% funding status over a reasonable
period (10 years)
33
SELF CORRECTING CONCEPT • Risk adjusted COLA • Mechanisms to effectuate shared risk if pension
SELF CORRECTING CONCEPT
• Risk adjusted COLA
• Mechanisms to effectuate shared risk if pension
systems fail to meet pre-determined benchmarks
• Triggers to move the system to a reform schedule
if system fails to meet benchmarks
• Potential to design triggers for a shared benefit
should pension systems exceed pre-determined
benchmarks
34
DISABILITY • Proposal requires those that apply and receive accidental disability after July 1, 2012
DISABILITY
• Proposal requires those that apply and receive
accidental disability after July 1, 2012 not totally
disabled to have their tax-free disability benefit
convert to a taxable service retirement benefit in
the same amount upon their attainment of
retirement age
• Reduces the floor for disability from 66.6% to
50.0% for all pension systems
35
PART TIME EMPLOYEES • Revised proposal: • No change in current law as it applies
PART TIME EMPLOYEES
• Revised proposal:
• No change in current law as it applies to part time
status
• Clarifies language to ensure that teachers who
work less than a full year receive proportional
service credit
• Revises the calculation to be based on 10 highest
years for those who move to full time at end of
career
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OTHER ISSUES Survivor Benefits • Allows a one year window for members who elected a
OTHER ISSUES
Survivor Benefits
• Allows a one year window for members who
elected a survivor annuity option to change to
singe life annuity option if beneficiary still
living
Incentive Pay
• Technical change to include incentive pay
• Back to current law
37
OTHER ISSUES Defined Contribution Vendor Selection • Requires State Investment Commission to consider potential
OTHER ISSUES
Defined Contribution Vendor Selection
• Requires State Investment Commission to
consider potential vendors’ disclosure of criminal
convictions, judgments or regulatory fines
assessed against them
SSNR
• Social Security retirement age cannot exceed age
67 – does not go up if feds change it
38
OTHER ISSUES • Clarifying language that service credit purchases are based on date of application
OTHER ISSUES
• Clarifying language that service credit purchases
are based on date of application not completion
of payment
• Retains requirement that they be made within 3
years of the date of initial eligibility for the
purchase (or by July 1, 2015, whichever is later)
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Independent Local Plans 40
Independent Local Plans
40
LOCAL PENSION PLANS 36 plans provided through 24 municipalities, of which half cover public safety
LOCAL PENSION PLANS
36 plans provided through 24 municipalities, of which
half cover public safety employees
• Overall funded ratio of 40.3%
• 31 of 36 plans are less than 80.0% funded
• 24 plans are identified as “at risk” by Auditor
General
• Not governed by state law - municipality entirely
responsible for administration and funding the plans
41
LOCAL PENSION PLANS – REVISED Revisions include: • Required actuarial studies by April 2012 •
LOCAL PENSION PLANS – REVISED
Revisions include:
• Required actuarial studies by April 2012
• Critical status plans (<60% funded) to submit
funding improvement plans to Commission
• Director of Revenue, Auditor General, local
representation
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