november joint hearing sub a

8/3/2019 November Joint Hearing Sub A

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Staff Briefing

November 9, 2011

House Finance Committee

Senate Finance Committee

RETIREMENT SECURITY ACT2011-H 6319 2011-S 1111

1


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RETIREMENT SECURITY PROPOSAL

H 6319 AND S 1111

2

Introduction

Legislation Comparison

Overview Budgetary Impact

Plan Design Changes

Other Issues

Independent Plans


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INTRODUCTION

3

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

4

Why Does It Matter?

Current projections have pension costsconsuming larger proportion of resources

State struggling to emerge from most recenteconomic downturn

Still facing structural deficits in five-year forecast

No near term projection to grow our way outof the problem


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LEGISLATION: OVERVIEW Suspends increases (COLAs) to retirees benefits

until the system is better funded, BUT provides forintermittent COLA every 5 years

Moves all but public safety employees to hybridpension plans

Increases minimum retirement age for mostemployees not already eligible to retire

Preserves accrued benefits

Begins addressing local plan solvency issues

5


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PENSIONS FUNDED RATIO

1993-2010 VALUATIONS(STATE EMPLOYEES)

67%

82%

59%

53% 48%

61%60%

30%

40%

50%

60%

70%

80%

90%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2010R

6


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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-yearsFY 2014 Contribution Rate 38.92% 23.75% -15.17%



7


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FISCAL IMPACT: TEACHERS -

8

Valuation Results

*(in millions)

Baseline

(Current)

Sub A (est.)

(incl. 1% DC) Change


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-yearsFY 2014 Contribution Rate 37.20% 21.41% -15.79%




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9

Plan Design Changes


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PLAN DESIGN CHANGES

10

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

11

Group Rate Type Start Application

Retirees State

Emp. & Teachers

3% Compound 3rd Jan.

after retire

Full Benefit

Active StateEmp. & Teachers CPI upto 3% Compound Later of 3rd

anniv. or

age 65

First $35kindexed to CPI

Judges 3% Simple ex.

for Traffic

& W. Comp

3rd Jan.

after retire

Full benefit ex.

for non-eligible

limited to $35kState Police $1,500 Flat 3rd January n/a

MERS (Optional) 3% Simple 1st anniv. Full Benefit


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PROPOSED

12

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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PROPOSED

13

COLA Provisions Proposal Revised

Risk Based: 7.5% - 5.5% = 2% average

COLA applied to: $35,000, indexed $25,000, indexedCOLA 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 plans independent

status

State plans are

blended, MERS stay

separate


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PLAN DESIGN CHANGES

14

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 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

Contribution8.75% into DB plan, no DC component

Eligibility

Hired before 7/1/07: 20 yrs. & must

retire at 62; hired after, 25 yrs. & mustretire at 30 yrs.

May retire after 50%

accrual; must retire at65%

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 annuallyRisk adjusted: 2% w/7.5% return on first

$25K


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PENSIONS: JUDGESCurrent Plan New Plan

Eligibility Age 65 & 20 yrs.; 70 & 15 yrs.

Member

Contribution

0% - Hired before 7/97

8.75% all others12.00%

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 3rd anniversary or age 65

Traffic and WC get

compounded


7.5% return on first$25K


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PENSIONS: JUDGES - REVISED

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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

19

Group Current Proposal

DB DC Suppl. Total

StateEmployee

8.75% 3.75% 5% n/a 8.75%

Teacher

w/Soc. Sec.

9.5% 3.75% 5% n/a 8.75%

Teacher w/oSoc. Sec.

9.5% 3.75% 5% 2% 10.75%


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PROPOSED: STATE EMP, TEACHERS,

MERS GENERAL TRANSITION

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Previous retirement age change for state employeesand teachers was applied proportionally to activeemployees based on progress toward priorretirement age

Proposal offered two transition rules:

Transition Rule 1: Members age 52 w/ at least 10years of service currently eligible to retire before age62 may retire at age 62

Transition Rule 2: Members may retire at their currentretirement age but benefit is based on benefit as ofJune 30, 2012


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REVISED: STATE EMP, TEACHERS,

MERS GENERAL TRANSITION

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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 attheir current retirement age but benefit is based on

benefit as of June 30, 2012


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CORRECTIONAL OFFICERS

PROPOSED

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Preserves the 2.0% accrual rate, but eliminatesthe 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 ifOfficer does not reach 25 years, must wait until

social security age for distribution No defined contribution plan participation


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23

Municipal Employees Retirement

System (MERS)


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MUNICIPAL EMPLOYEES RETIREMENT

SYSTEM (MERS)

24

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% ~ 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


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,


Optional: simple 3% on

1st Anniversary





DC Member Contribution n/a 5.00%

25


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MERS CURRENT STANDARD PLAN

BENEFITS PUBLIC SAFETY- 25 YEARS

26

Provision Basic Plan Optional Plan

Age 25 Years of Service or 55 with 10 YearsFinal Average

Compensation (FAC)

3 Year Average

Service Credit 2.0% annually with 75.0% maximum

COLA None 3.0% simpleEmployee Contribution 7.0% 8.0%


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MERS PUBLIC SAFETY PROPOSALProvision 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%


Eligibility

20 and out Age 55 w/25 yrs

Reduced Eligibility Age 50 with 20 yrs.

COLA all members,


3% simple Risk adjusted: 2% w/


Benefit Multiplier 2.5% for 20 yrs.; 2%

for 25 yrs.

2%



DC Member Contribution

w/out Soc. Sec.

n/a 3% employee and

employer

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EMPLOYEE CONTRIBUTION RATES:

MERS EMPLOYEES

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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

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Contributions

(millions)

Current Law FY 2013 Revised (Est)

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

MERS/Teachers$176.0 $286.7 $143.7 $19.3 $162.9


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Other Issues


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RE-AMORTIZATION

31

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


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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%

SOCIAL SECURITY PROVISIONS

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SELF CORRECTING PROPOSAL

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Creates a trigger to indicate pension plans needcourse correction

Trigger is if plan under 50% funded and 5 years ofdecline in funded ratio leads to a default plan which

cannot include further benefit reductions, onlyincreased contribution rates

Requires all state and MERS plans that are less than80% funded to adopt a funding improvement planthat will provide a realistic, actuarially determined

path to reach 80% funding status over a reasonableperiod (10 years)


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SELF CORRECTING CONCEPT

34

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-determinedbenchmarks


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DISABILITY

35

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 inthe same amount upon their attainment of

retirement age

Reduces the floor for disability from 66.6% to

50.0% for all pension systems


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PART TIME EMPLOYEES

36

Revised proposal:

No change in current law as it applies to part timestatus

Clarifies language to ensure that teachers whowork less than a full year receive proportionalservice credit

Revises the calculation to be based on 10 highest

years for those who move to full time at end ofcareer


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OTHER ISSUES

37

Survivor Benefits

Allows a one year window for members whoelected a survivor annuity option to change to

singe life annuity option if beneficiary stillliving

Incentive Pay

Technical change to include incentive pay

Back to current law


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OTHER ISSUES

38

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 age67 does not go up if feds change it


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OTHER ISSUES

39

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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40

Independent Local Plans


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LOCAL PENSION PLANS

41

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 entirelyresponsible for administration and funding the plans


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LOCAL PENSION PLANS REVISED

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Revisions include:

Required actuarial studies by April 2012

Critical status plans (

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