Transcript State Retirement Legislation in 2010

Pensions Issues and
State Legislation in 2010
Denver University Strategic Issues Panel
on the Future of State Government
November 4, 2010
Ron Snell
National Conference of State Legislatures
Public and Private Pensions in the US
 Two important differences:
 Public
employees are much more likely to be
covered by any kind of employer-sponsored
retirement benefit than private-sector employees.
 Public
employees are much more likely to have a
guaranteed lifetime retirement income from their
employer than private -sector workers.
Access to Retirement Plans: All Employees
100%
90%
90%
85%
80%
70%
65%
60%
50%
50%
40%
30%
20%
10%
0%
Private Sector
Access to Retirement Plan
Public Sector
Participation in Plan
Access to Retirement Plans by Compensation
100%
94%
90%
80%
Percent Participating
70%
75%
69%
60%
50%
40%
30%
20%
20%
10%
0%
Lowest Paid 25%
Highest Paid 25%
Public Sector
Private Sector
Basic U.S. Pension Plans
 Two kinds of retirement plans in the US:

1. Traditional Defined Benefit (DB):
Retired person receives a lifetime, guaranteed annuity (annual
pension) based on earnings and length of employment.
Increasingly limited to state and local government, but still found
among large private sector employers.

2. Defined Contribution (DC) . Often called 401(k):
Employee builds up a retirement account, usually with matching
employer contributions. At retirement employee receives a lump
sum or an annuity. Predominates in the private sector.

Basic U.S. Pension Policy
 A major difference between DB and DC plans is who
is responsible for the retired person's pension.
 For DB plans, the employer. Contributions go into a
trust fund. It is invested. Benefits are paid from the
trust fund and are a legal obligation of the employer
to the retired person.
 For 401(k) plans, the employee. Employer's legal
obligation is to make contributions to the account.
Participation in Retirement Plans
100
Percent of All Workers
90
80
70
60
50
40
30
20
10
0
State/Local Govt
Defined Benefit Plan
Bureau of Labor Statistics, March 2009
Private Sector
Defined Contribution Plan
Public and Private Pensions
 Percent of Employees with a Traditional (Defined
Benefit) Retirement Plan
Full Time State/Local Government: 87%
3
Employees in Large Companies: 46%
2
All Private Sector Employees: 20%
1
0%
10%
20%
Bureau of Labor Statistics, March 2009
30%
40%
50%
60%
70%
80%
90%
100%
Public Employees Contribute to Retirement Plans
 Public Employee Contribution Rates, 2009
60%
50%
40%
30%
20%
10%
0%
5% or Less
Wisconsin Legislative Council, 2010
More than 5%
Noncontributory
Rate Varies
Public Pension Fund Sources of Revenue
1982-2009
EMPLOYEE
CONTRIBUTIONS 13.1%
INVESTMENT
EARNINGS: 60%
EMPLOYER
CONTRIBUTIONS
26.9%
126 Large state and local
government plans.
National Association of State Retirement Administrators; U.S. Bureau of the Census
Colorado PERA Assets vs. Liabilities
Market Value as of December 31 for each year
$60.0
In Billions
$50.0
$40.0
$30.0
$20.0
$10.0
$0.0
Assets
Liabilities
Source: Colorado Public Employee Retirement Association, 2010
11
Assets of State and Local Government Retirement
Plans, 2003-2010 estimates
Trillion
$3.09
$3.20
$2.72
$2.69
$2.58
$2.35
03
$2.72
$2.32
04
05
06
07
Years Ended
National Association of State Retirement Administrators; U.S. Federal Reserve Bank
08
09
10*
*est. for
9/30/10
Public Plan Unfunded Liabilities, 2001-2013
 Estimates for 126 Large State and Local Plans
$1,400
$1,200
Billions
$1,000
$800
$600
$400
$200
$0
2001
2003
2005
Boston College Center for Retirement Research Oct. 2010
2007
2009
2011
2013
What's Been Happening
 More states have enacted significant retirement
legislation in 2010 than in any other year in memory.
 This reflects:

Concerns about the viability of retirement plan benefits and
funding that date to the 2001 recession.
Severe investment losses in the recent recession.
State fiscal conditions.
Major Pensions Legislation in 2010: All Topics
20 states represented
Major Pensions Legislation 2005- 2010: All Topics
30 states represented
Increase in Employee Contributions, 2010
Future Hires Only 4)
Active Employees (7)
MO, UT, VA, WY imposed contributions
where plans had been noncontributory.
Higher Age & Service Requirement for Normal Retirement,
2010
10 states represented
Longer Period for Calculation of Final Average Salary, 2010
8 states represented
Reduced Post-Retirement Benefit Increase, 2010
Future Hires Only (4)
People Already Retired (3)
Some Active Employees (1)
Trends in 2010
 Reduced benefits for new employees with the same




service and compensation.
Higher employee contributions as a percent of
salary.
More restrictions on retirement before normal age
and on retired people returning to covered service
Most changes occur within the framework of defined
benefit (DB) plans.
Replacement of DB plans with hybrid plans in
Michigan and Utah.
Possible Consequences for Personnel
Management in Government
 How will these changes affect future state employees
and employment?
 Are public employees being made a scapegoat for
state fiscal problems?
 Effect on employees' morale.
 Issue of disparity of treatment.
 Impact on recruitment of new employees.
Structural Change in Michigan in 2010
 Michigan School Employees Retirement System


Includes K-12 teachers statewide.
Replaces a defined benefit (DB) plan for employees hired after July 1,
2010 with a hybrid plan:
 A DB with higher age and service requirements and a lower benefit
than the former plan. FAS based on 5 years (3 years in the closed
plan).
 Plus an opt-out defined contribution (401k) plan, with an
employer match (4-year vesting) to employee contributions.
Within limits, school districts may negotiate levels of employee
contributions and employer match.
 No post-retirement COLA for the DB portion.
Structural Change in Utah in 2010
 The Utah Legislature also replaced a traditional
defined benefit plan with an alternative structure in
2010.
 It provided choice for employees:
A defined contribution plan fully funded by employers
with a contribution of 10% of salary or
 A plan that combines features of a defined contribution
and a defined benefit plan.

Structural Change in Utah in 2010
 The Utah hybrid plan:





For DB component, employers will contribute 10% of salary.
When the 10% is insufficient to meet the actuarially required
contribution to meet full funding, employees will make up the
difference.
When the 10% is more than is required to keep the plan actuarially
sound, the difference will be deposited in an employee 401(k)
account.
Employees may but are not required to contribute to the 401(k).
DB benefit available at 65/4; 60/20; 62/10; any age with 35 years of
service. Five-year FAS; DB benefit = 1.5% FAS for each year of
service (presently 3-year FAS, 2% factor)
 This report is based on NCSL's annual report on state
pensions and retirement legislation.
 The 2010 report, covering legislation enacted through
October 15, 2010, is available on the NCSL website at
http://www.ncsl.org/?tabid=20836
 For further information:
Ron Snell -- [email protected]
303-856-1534