State Retirement Legislation

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1 State Retirement Legislation July 31, 2012 R o n S n e l l N a t i o n a l C o n f e r e n c e o f S t a t e L e g i s l a t u r e s

2 Overview This report is concerned with state legislation changing state retirement plans for general employees and teachers, which 44 states revised some of them more than once: In 2009, 10 states. In 2010, 21 states. In 2011, 32 states. In 2012, 7 states.

3 Major Pensions Legislation in : All Topics 44 States Represented

4 Significant Structural Changes in 2012: Active and Enacted as of June states represented Enacted Legislation in 2012 Significant Changes Being Considered

5 Increases in Employee Contributions, Future Members Only (7 states) At Least Some Current Members (21 states) Enacted for Current Members and Overturned

6 Changes in Employee Contributions in 2012 Alabama Uniquely for state plans in recent years, members of a new retirement tier face lower required contributions than members of the closed tier. The required employee contribution for general employees and teachers will fall from 7.5% to 6%. Higher age and service requirements for normal retirement, extension of the period for calculating FAS from three years to five, and a reduction in the benefit factor from % to 1.65% allows for the reduction.

7 Changes in Employee Contributions in 2012 Kansas Tier 1 members (tier closed to new members on June 30, 2009) will choose between Accepting an increased contribution rate from 4% to 5% in 2014 and 6% in 2015 in order to preserve their current multiplier of 1.85%, or Accepting a reduction in the multiplier to 1.4% for future service and keeping the 4% contribution rate. Tier 2 members will keep the current contribution rate of 6%, gain an increase in the multiplier from 1.75% to 1.85%, and lose the annual COLA provided in 2007 legislation.

8 Changes in Employee Contributions in 2012 New York A new Tier VI for most state and local government employees and teachers, including the New York City plans. The new tier scales contributions to salary: Wages of $45,000 or less...3% More than $45,000 to $55, % More than $55,000 to $75, % More than $75,000 to $100, % More than $100,000 to $179, % No contribution on earnings in excess of the governor s salary, currently $179,000 [Current levels are 3% for general employees; 3.5% for teachers.]

9 Changes in Employee Contributions in 2012 South Carolina Employee contributions will increase from 6.5% to 8% of salary over three years beginning on July 1, 2012 Employer contributions will increase from 10.6% of salary to 10.9% over the same period. If future increases are required to maintain the schedule of actuarial funding, they will be split between employees and employers and will maintain the 2.9 percentage point differential between them.

10 Changes in Employee Contributions in 2012 Virginia All local government members will contribute 5% of salary to their retirement plan (for many years in the past, this was picked up by employers). Local governments will provide an offsetting 5% salary increase that, at their discretion, can be phased in over a period as long as five years. The employee contribution requirement is for the DB plans that will close to new members Jan. 1, This is similar to 2011 legislation that affected state employees.

11 Higher Age and Service Requirements for Normal Retirement, for New Members, States Represented

12 Higher Age and Service Requirements for Normal Retirement, for New Members in 2012 Alabama: Applicable to state and local employees, teachers, and law enforcement other than state police. New hires only as of January 1, TIER 1 PROVISIONS: Normal Retirement after 25 years or at 60 Benefits Base: highest 3 years of last 10 Multiplier: % TIER 2 PROVISIONS: Normal Retirement at 62 (no 25-and-out) Benefits Base: highest 5 years of last 10 Multiplier: 1.65%

13 Higher Age and Service Requirements for Normal Retirement, for New Members in 2012 New York: Applicable to state and local employees, teachers, and law enforcement other than state police. New hires only as of April 1, TIER 5 PROVISIONS: Normal Retirement at 60 Benefits Base: highest 3 years TIER 6 PROVISIONS: Normal Retirement at 62 Benefits Base: highest 5 years Multipliers vary with length of service. Tier 6 reduces them for higher years of service. For 30 years of service, Tier 6 benefits will be about 11% below Tier 5 benefits.

14 Higher Age and Service Requirements for Normal Retirement, for New Members in 2012 South Carolina: Applicable to state and local employees, teachers, and police officers. New hires only as of July 1, OLD TIER PROVISIONS (except for police): Normal Retirement after 28 years of service Benefits Base: highest 3 years NEW TIER PROVISIONS: Normal Retirement at age 65 with 8 years of service or Rule of 90 (age plus years of service equal 90) Benefits Base: highest 5 years

15 Higher Age and Service Requirements for Normal Retirement, for New Members in 2012 Wyoming: Applicable to state and local members. New hires and certain returning employees as of August 31, OLD TIER PROVISIONS: Normal Retirement at 60 Benefits Base: high 3 Multiplier: 2.125% for the first 15 years of service and 2.25% for additional years of service NEW TIER PROVISIONS (effective August 31, 2012): Normal Retirement at 65 Benefits Base: high 5 Multiplier: 2% for all service

16 Reductions in Post-Retirement Benefit Increases Enacted in 2010 and States Represented Future hires only (6 states) At least some active employees (6) People already retired and active employees (6)

17 Reductions in Post-Retirement Benefit Increases Enacted in 2012 Kansas: repealed cost-of-living increases entirely except for people who retire by December 31, South Carolina: capped future cost-of-living increases at $500 per year. Virginia: Lowered cap on future cost-of-living increases for new and non-vested employees from 5% to 3%. Wyoming: Effectively prohibited future cost-of-living increases.

18 Some States Have Replaced DB Plans In 2010, Utah closed its DB plan for all state and local employees. As of July 1, 2011, Utah offers new employees the choice of a defined contribution plan or a hybrid plan that includes a DB plan and a mandatory 401(k). As of July 1, 2010, Michigan replaced its School Employees DB plan with a hybrid plan. Rhode Island will transfer all members of the state DB plans (except judges and public safety) to a hybrid plan in 2012.

19 Two States Adopted Cash Balance Plans in 2012 Very rare in the public sector. A cash balance plan Provides each member with an individual account. Employees and employers contribute to the account. The member cannot choose how the money is invested. Members' accounts are managed in one trust fund, and members are guaranteed a return on investment. If investment return makes it possible, member accounts can receive additional returns. In public plans, upon retirement, the member receives an annuity based on the account balance.

20 Kansas Cash Balance Plan (2012) Kansas will close DB plans and replace them with a cash-balance plan for new members as of Jan. 1, 2015 Employee Contribution: 6% Employer Credit to Account: 3% to 6% depending on years of service (4% at 5 years, 5% at 12 years, 6% at 24 years). Guaranteed Interest Credit: 5.25% annually with possible additional dividends if investment experience warrants. Vesting at 5 years. At retirement, all balances will be annuitized, except members may withdraw up to 30% of their balance in a lump sum.

21 Louisiana Cash Balance Plan (2012) Louisiana will close DB plans and replace them with a cash balance plan for new public employees as of July 1, Mandatory for non-hazardous state employees and higher education faculty; optional for other education employees. Employee Contribution: 8% Employer Credit to Account: 4% Interest Credit: 1% below the actuarial rate of return for system, not to fall below zero. Additional interest credits are possible if investment experience allows. Vesting: 5 years, same a current plans.

22 Louisiana Cash Balance Plan (2012) Louisiana cash balance plan Vested members who leave covered employment may at any time Withdraw full account balance Transfer it to another qualified retirement plan or IRA Leave it with the system and annuitize it at age 60. withdraw full account balance, At normal retirement (60/5) balances may be annuitized or members may choose a partial withdrawal and a reduced annuity. Provisions for survivors' benefits and disability benefits are based upon account balances.

23 Virginia Hybrid Plan (2012) Virginia will close DB plans and replace them with a hybrid plan with DB and DC components in January New members only. The total employee contribution stays at 5%, split between the DB (4%) and DC (1%) components. Employees can contribute more to the DC plan if they wish, and will get a higher employer match if they do so. Employer match can be as high as 5%. Multiplier for DB component is 1% (in the old DB plan, 1.7%). Applicable to almost all state and local government members.

24 Additional Proposed Legislation in 2012 Illinois Proposals (died at end of session) RETIRED MEMBERS: Choice 1: Continuation of compounded COLAs and no retiree health insurance. Choice 2: A non-compounded COLA and access to retiree health insurance ACTIVE MEMBERS: Choice 1: Compounded COLA after retirement, no future salary increases included in final average compensation, no retiree health insurance Choice 2: Non-compounded COLA after retirement, current FAS calculation, access to retiree health insurance

25 Additional Proposed Legislation in 2012 Ohio Proposals (0n hold for now): Higher age and service requirements for retirement; Reductions in benefit formula; Reduced COLA for current and future retirees; Increases in member contributions.

26 Sources This report is based on NCSL's annual reports on state pensions and retirement legislation and The Widening Gap (Pew Center on the States, 2011). NCSL resources on pensions and retirement are available here: NCSL gratefully acknowledges the support of the Pew Center on the States for its research and publications on pensions and retirement issues.

27 Questions & Contact Info To ask a question, please type your question in the chat box In the right hand corner of your screen. You will not be identified and only the presenters will see your question. For further information: NCSL - Ron Snell - ron.snell@ncsl.org PCS - David Draine - ddraine@pewtrusts.org