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State Pensions and Retirement Legislation in 2006 and 2007

NCSL Fall Forum, November 2007
Phoenix, Arizona

Presented to the
Standing Committee on Budgets and Revenue and the
Standing Committee on Education

Introduction:

This report is concerned with the state policies toward pensions and retirement issues that appear in legislation enacted in 2006 and 2007 legislative sessions. It is based on NCSL's annual summaries of state pensions and retirement legislation. You have the 2007 report as a handout. The 2006 report and similar reports for earlier years back to 1999 are available on the NCSL website at http://www.ncsl.org/programs/fiscal/all_pensun.htm.

This presentation concerns general public employee retirement plans as well as teachers' retirement plans. Legislative policy toward the two groups of public employees is very similar in any given state at any time. The presentation covers 2006 and 2007 in order to increase the number of states that can be reported on and thus identify trends more clearly.

I. State action to provide secure funding for public retirement plans through restructuring benefits.

In the past two years, and since 2001 in fact:

• Provisions to increase benefits through pension redesign have been scarce—such things as
  • Pension multipliers – meaning the percentage of salary a pension replaces
  • Vesting requirements – the length of time a person must work to be entitled to a retirement benefit
  • Calculation of final average salary – the base on which benefits are calculated.
• There were two important exceptions to that observation in 2006 for teachers in Maryland and Oklahoma, where benefit formulas were out of line with comparable states.
  • In both cases benefits were improved, with some cost to teachers.
  • In Maryland, teachers were required to make higher contributions.
  • In Oklahoma, teachers have to work longer to take advantage of the formula improvements.
• More typically, states have restructured plans to reduce benefits for new employees compared to existing employees.
• Benefit reductions can occur only through creation of a new plan: the existing plan is closed to new members, and a new plan is created that is mandatory for employees who start work after some specified date.
• Examples of increased age and service requirements for normal retirement (retirement benefits without a reduction for early retirement):
  • Colorado (2006) – Rule of 85 (replacing the Rule of 80) – teachers and public employees
  • Kansas (2007) -- Age 65 with 5 years of service (replacing 65/1) or age 60 with 30 years of service (replacing Rule of 85, or 60/25) – teachers and public employees.
  • Mississippi (2007) Age 60 with 8 years of service (replacing 60/4) – public employees.
  • North Dakota (2007) Rule of 90 (replacing the Rule of 85), with early retirement at age 55 with 5 years of service (replacing 55/3) – teachers.
• Some states have enacted longer vesting requirements.
  • The long-term trend (for more than 20 years) has been to shorten vesting requirements, as Kansas did in 2007, from 10 years to 5, where most state plans are.
  • Mississippi lengthened vesting for new public employees from 4 years to 8.
  • North Dakota lengthened vesting for new teachers from 3 years to 5.
  • Those were the first examples of longer vesting requirements I have found in more than 10 years.
• Base for calculating benefits (usually the average of the highest 3 years or last 3 years)
  • In the past, states have increased benefits by shortening this period (a 3-year average usually is higher than a 5-year average would be).
  • In 2006 and 2007, Louisiana, Kansas and North Dakota increased the length of the base period from 36 months to 60 months, very unusual actions.
• Anti-spiking provisions. In some states, employers have increased pension benefits by giving employees very large salary increases in their final year of employment, which inflates the average salary and so the pension. More common among school districts than any other kind of employer. In recent years, states have cracked down on this procedure.
  • Iowa (2006) caps annual salary increases in the last three years of employment at about 10 percent.
  • Colorado (2006) set and 8 percent salary growth cap for employees hired after December 2006.
  • Missouri (2007) set a 10 percent annual cap.

II. States have also acted to shore up funding for existing plans.

• Some states have made lump-sum deposits to state retirement funds to reduce actuarial accrued unfunded liabilities.
  • Connecticut (2006) $245 million for teachers' retirement
  • Connecticut (2007) $300 million over two years for teachers' retirement
  • West Virginia (2006) $335 million for teachers' retirement, in addition to scheduled contributions of $335 million
• Connecticut also has authorized the sale of $2 billion in general obligation bonds to benefit the teachers' retirement fund (2007)
• In 2007, West Virginia authorized the sale of the state's interest in future tobacco master settlement funds, if the sale realizes at least $800 million, and the deposit of the receipts into the Teachers' Retirement System to reduce its actuarial accrued unfunded liability.
• Numerous states have increased employer contribution rates to retirement plans, including a long-term plan in Oklahoma to increase funding for Teachers' Retirement, one of the most underfunded statewide plans in the 50 states.
• Some states have increased employee contribution rates.
  • Iowa legislation (2006) gave the Public Employee Retirement System power to increase employee and employer contribution rates, within limits, over six years if needed to amortized the unfunded liability within 10 years.
  • Minnesota legislation (2006) allowed executive directors of various public employee retirement plans to increase both employee and employer contributions if actuarial estimates make it necessary; increases have to be submitted to a legislative commission for approval or adjustment.
  • Minnesota also increased employee contribution levels for its state teachers' plan in the wake of the consolidation of the Minneapolis Teachers Retirement System into the state plan.
  • New Jersey reached agreement with public employee unions to increase employee contributions to retirement plans.
• Kansas took unique action with regard to employee contributions in its 2007 plan for new employees.
  • Increased employee contribution rate from 4% in present plan to 6% for the plan for new employees.
  • Provides a floor for the employer contribution – to be at the actuarially required level, but at least equal to the employee level.
  • Requires that future cost increases be shared equally between employers and employees, a legal basis for future employee contribution increases.
  • Employees gain a guaranteed annual cost of living adjustment.

III. Summary—Plan Design and Funding Issues in 2006 and 2007

• The clear trend in legislation is to solidify long-term funding through limiting benefit growth and increasing funding.
  • Very few benefit increases in either year.
  • Several states created new retirement tiers with somewhat lower benefits for
  • newer employees as compared to present employees.
  • Attention given to funding issues, especially in states that have been singled out for particularly weak plans.
• What did not happen is also significant.
  • No legislature adopted a defined contribution plan – like a 401(k) in 2006 or 2007.
  • The Alaska conversion to DC plans in 2005 was the first in a decade for a statewide plan (though other states have adopted them as options employees may choose if they wish to).

IV. Other 2007 Issues

• Divestment
  This report lists divestment legislation or resolutions from 14 states in 2007. Most focus on companies operating in Sudan; an Oklahoma resolution urges scrutiny of companies operating in Iran, Syria and North Korea as well. NCSL tracks the issue closely; a full listing of such legislation is available on the NCSL website at http://www.ncsl.org/standcomm/sclaborecon/statedivestbills.htm
• Retiree Health Benefits
  This report lists enactments from 14 states to create state trust funds or enable local trust funds for retiree health care or other post-employment benefits, or otherwise to prepare to comply with accounting rules issued by the Government Accounting Standards Board. Those rules require state and local governments to report on progress toward funding their accrued obligation for retiree health care benefits and other retiree benefits other than pensions.
  • Resulting issues are largely financial.
  • The Texas Legislature enacted legislation to allow the use of alternative accounting rules on the ground that the GASB rules conflict with the Texas constitution.
• Massachusetts and Missouri adopted measures to strengthen local government retirement systems.
• Massachusetts provided that a state investment board will take over fund management for local government retirement funds whose funded ratio and investment rate of return fall below specified minimums over the previous decade.
• Missouri provided a mechanism to force local governments to make contributions to their retirement plans if those plans fail to meet minimum funding standards, provides for accelerated contribution schedules, and prohibits benefit increases.
• Forfeiture of Benefits
  Legislation providing for forfeiture of retirement benefits upon a public official's violation of the public trust was enacted in three states in 2007. The enactments in Alaska and North Carolina appear to be new provisions. The New Jersey enactment strengthens existing law. Missouri legislation provides that any trustee, employee or participant of a plan who is convicted of a plan-related felony shall forfeit any retirement benefits from the plan.

Posted March 2008.
E-mail statefiscal-info@ncsl.org for more information.
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