RETIREMENT SECURITY ACT

2011-H 6319 2011-S 1111

Staff Briefing November 9, 2011 House Finance Committee Senate Finance Committee

RETIREMENT SECURITY PROPOSAL H 6319 AND S 1111

Introduction Legislation Comparison
Overview Budgetary Impact Plan Design Changes Other Issues Independent Plans

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

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

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% 70% 60% 50% 40% 30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2010R

67% 59% 53% 61% 60%

48%

FISCAL IMPACT: STATE EMPLOYEES

Valuation Results *(in millions) FY 2013 Contribution Rate Normal Cost Percentage Unfunded Liability* Funded Ratio Long Term Normal Cost FY 2013 Contribution* Out-years FY 2014 Contribution Rate FY 2015 Contribution Rate FY 2016 Contribution Rate 38.92% 41.23% 42.35% 23.75% 25.33% 25.92% -15.17% -15.90% -16.43%
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Baseline (Current) 36.34% 11.39% $2,700.4 48.4% 11.39% $243.0

Sub A (incl. 1% DC) 22.40% 9.38% $1,720.0 59.55% 6.17% $143.1

Change -13.94% -2.01% ($980.4) 11.15% -5.22% ($99.9)

FISCAL IMPACT: TEACHERS Valuation Results *(in millions) FY 2013 Contribution Rate Normal Cost Percentage Unfunded Liability* Funded Ratio Long Term Normal Cost FY 2013 Contribution* Out-years FY 2014 Contribution Rate FY 2015 Contribution Rate FY 2016 Contribution Rate 37.20% 39.39% 40.41% 21.41% 22.87% 23.40% -15.79% -16.52% -17.01%
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Baseline (Current) 35.25% 11.82% $4,133.2 48.4% 11.82% $371.8

Sub A (est.) (incl. 1% DC) 20.45% 8.77% $2,389.3 61.2% 5.07% $211.4

Change -14.8% -3.05% (1,743.9) 12.8% -6.75% ($160.4)

Plan Design Changes

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 Retirees State Emp. & Teachers Active State Emp. & Teachers Start 3rd Jan. after retire CPI up Compound Later of 3rd to 3% anniv. or age 65 Judges 3% Simple ex. 3rd Jan. for Traffic after retire & W. Comp State Police $1,500 Flat 3rd January MERS (Optional) 3% Simple 1st anniv. Rate 3% Type Compound Application Full Benefit
First $35k indexed to CPI Full benefit ex. for non-eligible limited to $35k n/a Full Benefit
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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 Risk Based: COLA applied to: COLA limits: COLA - Annually COLA - Interim Proposal Revised 7.5% - 5.5% = 2% average $35,000, indexed $25,000, indexed 0.0% to 4.0% 80.0% funding 70%, limited to under $20,000 and base = $500 per years of service Each plans independent status Every five years, risk based calculation State plans are blended, MERS stay separate
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COLA Funding Test

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 Member Contribution Rate Benefit Accrual at 40 Yrs. Benefit Accrual at 26 Yrs. Unreduced Retirement Eligibility Reduced Eligibility COLA all members, including current retirees Average Salary Period Vesting DC Member Contribution Current Plan 8.75% (S) 9.5% (T) 75% capped at 38 yrs. 46% Age 65 w/10 yrs. or Age 62 w/29 yrs. Age 62 w/20 yrs. CPI capped at 3% on first $35,000 5 years 10 years n/a New Plan 3.75% 40% + DC balance 26% +DC balance SS NRA = 67 for those born after 1960 -67 Max SS NRA -5 w/20 yrs. Risk adjusted: 2% w/ 7.5% return on first $25K 5 years 5 years 5.00%
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PENSIONS: STATE POLICE

Current Plan Member Contribution Eligibility New Plan 8.75% into DB plan, no DC component Hired before 7/1/07: 20 yrs. & must May retire after 50% retire at 62; hired after, 25 yrs. & must accrual; must retire at retire at 30 yrs. 65% 50% of final salary + 3% per year over 2% per service year 25 not to exceed 65% pre-7/1/07 not to exceed 65% hires get 3% per year over 20 $1,500 annually 10 years Risk adjusted: 2% w/ 7.5% return on first $25K 5 years
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Benefit Accrual

COLA Vesting

PENSIONS: JUDGES
Current Plan
Eligibility Member Contribution Benefit Accrual 0% - Hired before 7/97 8.75% all others

New Plan
12.00%

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

Hired after July 1, 2009 80% full; 65% reduced 5 highest year Earlier hires have benefit as high as 100% of final salary 3% simple on first $35,000 on 3rd anniversary or age 65 Traffic and WC get compounded 10 years Risk adjusted: 2% w/ 7.5% return on first $25K 5 years

COLA Vesting

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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 State Employee Teacher w/Soc. Sec. Teacher w/o Soc. Sec. Current 8.75% 9.5% 9.5% DB 3.75% 3.75% 3.75% Proposal DC Suppl. 5% n/a 5% 5% n/a 2% Total 8.75% 8.75% 10.75%

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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 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 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)

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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 Member Contribution Rate Benefit Accrual at 40 Yrs. Benefit Accrual at 26 Yrs. Unreduced Retirement Eligibility Reduced Eligibility COLA all members, including current retirees Average Salary Period Vesting DC Member Contribution Current Plan 6% ~ 7.0% (w/COLA) 75% capped at 37.5yrs. 52% Age 58 w/10 yrs. or Any age w/30 yrs. Age 62 w/20 yrs. Optional: simple 3% on 1st Anniversary 3 years 10 years n/a New Plan 1% ~ 2.0% (w/COLA) 40% + DC balance 26% +DC balance SS NRA = 67 for those born after 1960 - 67 Max SS NRA -5 w/20 yrs. Risk adjusted: 2% w/ 7.5% return on first $25K 5 years 5 years 5.00%
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MERS CURRENT STANDARD PLAN BENEFITS PUBLIC SAFETY- 25 YEARS

Provision Age Final Average Compensation (FAC) Service Credit COLA Employee Contribution Basic Plan Optional Plan

25 Years of Service or 55 with 10 Years 3 Year Average 2.0% annually with 75.0% maximum None 3.0% simple 7.0% 8.0%

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MERS PUBLIC SAFETY PROPOSAL

Provision Member Contribution Rate Replacement Income at 20 Yrs. Unreduced Retirement Eligibility Reduced Eligibility COLA all members, including current retirees Benefit Multiplier Average Salary Period Vesting DC Member Contribution w/out Soc. Sec. 3% simple 2.5% for 20 yrs.; 2% for 25 yrs. 3 years 10 years n/a Current Plan 9% 50% for 20 yrs., 40% for 25 yrs. 20 and out New Plan 7% ~ 8% (w/COLA) 40% Age 55 w/25 yrs Age 50 with 20 yrs. Risk adjusted: 2% w/ 7.5% return on first $25K 2% 5 years 5 years 3% employee and employer
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EMPLOYEE CONTRIBUTION RATES: MERS EMPLOYEES

Group General Public Safety w/Soc. Sec. Public Safety w/o Soc. Sec. Basic Optional 6.0% 7-8% 7-8% 7.0% 8-9% 8-9% DB 1-2% 7-8% 7-8% Proposal DC Suppl. 5% n/a n/a n/a n/a 3% Total 6-7% 7-8% 10-11%

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ESTIMATED IMPACT ON MUNICIPALITIES

Contributions (millions) MERS Municipal MERS Police & Fire MERS Subtotal Teachers Total MERS/Teachers Current Law FY 2012 FY 2013 $20.4 $12.8 $33.1 $142.8 $176.0 $40.9 $24.8 $65.7 FY 2013 Revised (Est) DB $23.8 $10.7 $34.7 DC $2.2 $1.0 $3.2 $16.2 $19.3 Total $26.0 $11.7 $37.7 $125.2 $162.9

$220.9 $109.0 $286.7 $143.7

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Other Issues

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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

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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 Employee Employer Total Teachers 2% 2% 4% MERS Police and Fire 3% 3% 6%
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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)

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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

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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

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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 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

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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

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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

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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
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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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