PUBLIC PENSIONS: SOLUTIONS FROM THE SLC. Senator Arthur Orr Alabama

Transcription

1 PUBLIC PENSIONS: SOLUTIONS FROM THE SLC Senator Arthur Orr Alabama

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3 I. ALABAMA S DROP

4 ALABAMA S DROP Was available for member: Who had at least 25 years of service (exclusive of sick leave); Who was at least 55 years old; and Who was eligible for service retirement Participation from 3 to 5 years Participant still received regular salary Retirement benefit plus employee s retirement contribution was paid into DROP account and earned interest at a rate of 4%

5 PROJECTED SAVINGS BY ELIMINATING DROP At the time DROP was eliminated, it was projected to reduce employer retirement contributions by approximately 0.75% of payroll annually For FY 2012, this resulted in estimated employer savings of about $60 million If the same amount of savings occurs each year, this would result in an estimated total employer savings of over $600 million over the next 10 years Note - exact estimate cannot be determined at this time, as this amount is dependent upon retiree behavior and trends which are affected by numerous factors (but $600 million sure sounds good)

6 II. ALABAMA S RETIREMENT

7 RETIREMENT PLANS TIER I (employees with service prior to Jan. 1, 2013) Earnable Compensation Does not specifically include or exclude overtime TIER II (employees first hired on or after Jan. 1, 2013) Includes overtime up to 125% of annual base compensation Average Final Compensation Average 3 of last 10 years for which average is highest Average 5 of last 10 years for which average is highest Accrued Sick Leave May convert into creditable service Cannot convert accrued sick leave into creditable service Retirement Age 60 with at least 10 years of creditable service or at least 25 years in system 62 with at least 10 years of creditable service Retirement Allowance - Pension Retirement allowance is equal to % of average final compensation x years of creditable service Retirement allowance is equal to 1.65% of member's average final compensation x years of creditable service. Allowance cannot exceed 80% of average final compensation. Method of Financing Employee pays 7.5% of earnable compensation (was 5% but changed in 2011) into retirement (regular Employee pays 6% of earnable compensation into retirement state employees) *Note - correctional officers, firefighters, and law enforcement officers are awarded 1 year hazardous duty time for every 5 years of employment provided that the member made additional contributions. This section will not apply to Tier II employees. However, these employees may retire at age 56 with 10 years of creditable service. These members pay 7% of their earnable compensation into retirement under Tier II.

8 EMPLOYER RETIREMENT COSTS UNDER TIER I $1,200,000,000 Total Cost for Teachers' and Employees' Retirement Systems Agencies $1,000,000,000 $800,000,000 $600,000,000 Total Cost $400,000,000 $200,000,000 $0 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010 FY 2012 *Note - employee contribution rates increased in 2011 and 2012

9 PROJECTED EMPLOYER SAVINGS UNDER TIER II Total Savings for Teachers and Employees Retirement Systems Agencies $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 Total Savings $50,000,000 $0 FY 2013 FY 2018 FY 2023 FY 2028 FY 2033 FY 2038 FY 2043 * Information provided by the actuary for the Retirement Systems of Alabama

10 PROJECTED EMPLOYER SAVINGS UNDER TIER II TOTAL SAVINGS UNDER TIER II OVER 30 YEARS APPROXIMATELY $5 BILLION (sounds really good)

11 RETIREMENT EXAMPLE Salary at time of retirement Average final compensation* Herb (Tier I employee) Ethel (Tier II employee) $50,000 $50,000 $48,000 $46,000 Age at retirement Years of service Annual retirement allowance $36,708 $28,842 *Note - assuming both employees earned $42,000, $44,000, $46,000, $48,000 and $50,000 during their last 5 years of employment, which were the highest 5 years of compensation

12 GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB) RULE CHANGES

13 III. RETIREE HEALTH INSURANCE

14 RETIREE HEALTH INSURANCE ELIGIBILITY OLD SYSTEM Based on years of service (retiree must have at least 10 years of creditable coverage to be eligible) NEW SLIDING SCALE Same as old system STATE AND RETIREE SHARE State Insurance Boards set a non- Medicare retiree rate that applied to all ages and years of service with the state incurring the balance of the cost (state share) RETIREE SHARE of premiums: Increase 1% per year for every year prior to Medicare age Each year less than 25 years, increased by 4% Each year over 25 years, retiree share reduced by 2% NOTES Most individuals are entitled to Medicare at age 65. By October 2016, net employer contribution to the health insurance for non-medicare retirees who retire after December 1, 2011 shall not exceed the amount of the employer contribution to cover the cost of an active employee.

15 RETIREE HEALTH INSURANCE EXAMPLE Old System Base rate would apply to every retiree, regardless of service or age Early Retiree Health Insurance Changes (based on Sept. 1, 2013 premium) New System Employee with 10 years of service, age 62 New System Employee with 25 years of service, age 62 New System Employee with 35 years of service, age 62 Monthly Premium $261 Base rate $261 Base rate $261 Base rate $261 Sliding scale service (under 25 years) Sliding scale service $333 (25 years) Sliding scale service $0 (over 25 years) -$111 Sliding scale age (under 65) Sliding scale age $16 (under 65) Sliding scale age $16 (under 65) $16 Non-tobacco -$45 Non-tobacco -$45 Non-tobacco -$45 Non-tobacco -$45 Total premium non-tobacco Total premium $216 non-tobacco Total premium $565 non-tobacco Total premium $232 non-tobacco $121

16 QUESTIONS? (if so, the Legislative Fiscal Office is here with all of the answers)