Public Pension Roundup: Reform And Regression
A round-up of reports across the country.
Florida: ending pensions for new employees?
From Tampa Bay Times,
“After years of discussions about the tricky issue of overhauling Florida’s retirement system for government employees, a Senate committee this week approved a proposal that would shut future workers out of a traditional pension plan.
“The proposal, sponsored by Senate Governmental Oversight and Accountability Chairman Ray Rodrigues, R-Estero, would require new employees as of July 1, 2022, to enroll in a 401(k)-style “investment” plan. Employees currently are allowed to choose whether to take part in the pension plan or the investment plan. . . .
“The pension plan was considered fully funded from the 1997-1998 fiscal year to the 2007-2008 fiscal year but then started running actuarial deficits, said Amy Baker, coordinator of the Legislature’s Office of Economic & Demographic Research. The deficits began during a major recession that hammered investments.”
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Now, generally speaking, when an employer switches from a traditional pension to a defined contribution plan, this means a significant drop in plan benefits for employees. In Florida, that’s not the case — at least nominally not so: the employer contribution rate is the same for either type of plan, and varies only by employment class. (Of course, this doesn’t take into account any additional contributions needed to remedy funded status.) In addition, regular readers will know that I insist whenever the opportunity arises that state and local employees should participate in Social Security just as much as the rest of us do; as it happens, that is already the case for public employees in Florida. In addition, unlike the 8 year vesting of the traditional pension plan, the employer contributions to the defined contribution plan vest after only a year of service.
Kentucky: a new hybrid pension plan?
“A bill creating a new pension tier for future teachers that will require them to pay more toward their retirement and work longer before they can earn full benefits passed the House Thursday.
“House Bill 258, sponsored by Rep. C. Ed Massey, moved to the House floor on a 14-4 vote and cleared the lower chamber hours later on a 68-28 vote. The measure, if passed, would put teachers and others covered by the Kentucky Teachers Retirement System hired after Jan. 1, 2022, into a new hybrid pension plan that includes foundational and supplemental benefits.
“Massey, R-Hebron, said the proposal would keep future hires from joining an already burdened and overtaxed’ defined-benefit pension system at KTRS, which actuaries expect will have unfunded pension liabilities totaling $14.8 billion and have 58.4% of the money needed to cover pension costs for current retirees and workers by fiscal year 2023.”
As described by WDRB as well as by the Louisville Courier Journal, the bill is not without opponents but there is a degree of consensus that reform is needed. However, unlike Florida, teachers do not participate in Social Security in Kentucky, so much more is at stake.
Illinois: pension spiking is back, baby
From The Patch, a local news publication in suburban Chicago:
“The Hinsdale High School District 86 board on Thursday approved a two-year agreement with the teachers union, including a “pension spiking” provision and relatively small pay raises.
“The agreement is retroactive to the beginning of the 2020-21 school year. Over the two years, teachers are expected to see base salary increases amounting to 2.2 percent.
“Under the agreement, the teachers will now get 6 percent annual increases in the last four years of their careers, up from the current 3 percent.
“This change will mean higher pensions for teachers, a practice that critics call ‘pension spiking.’ In Illinois, the state foots the bill for local districts’ pension contributions. So District 86 won’t suffer the long-term costs of the end-of-career pay hikes.”
Of course, the pension boosts won’t be free — but it will be Illinois taxpayers who will bear the cost, and quite substantially so. Receiving a guaranteed pay increase of 6%, rather than the current 3%, for four years, will mean one’s final salary is 12% higher than it otherwise would be, and one’s lifetime pension benefit (a four year average), 8% higher.
New York and Massachusetts: early retirement incentives on tap, boosting pension costs
From Spectrum News (Albany),
“Public workers in New York could have an incentive to retire early under a proposal by a pair of state lawmakers unveiled on Thursday.
“The bill backed by Sen. Peter Harckham and Assemblyman Tom Abinanti would create early retirement incentives for workers 55 and older who have 10 years of service with state or workers with 25 years of government service. A separate bill that covers early retirement for public workers in New York City was previously introduced. . . .
“To be eligible, a worker would have to be in a position that can be eliminated. . . .
“’It is better that longtime employees retire with guaranteed income than governments be forced to lay off employees who then seek unemployment benefits,’ said Abinanti. ‘Retirements in the short term will cut local payrolls, and in the long term, open jobs for those who want to work in government.’”
What is the incentive, specifically? Up to 3 years of additional service credit, based on current years of service, plus, for employers in “an optional retirement program,” additional retirement account contributions of as much as 45% of pay. In addition, employees at least 55 years old with 25 years of service would be spared the early retirement reductions that would otherwise apply — reductions which are as high as 27%, depending on age.
Not surprisingly, the bill comes with no actuarial analysis of the long-term cost of these benefit increases. And, although the plan is fully funded (based on the public plan funding methods), the new costs still must be paid by taxpayers.
Finally, according to MassLive, in Massachusetts,
“A bill that would allow teachers who are eligible to retire to purchase up to five years of service, age or a combination of the two in order to make room for new teachers has been backed by state Sen. John Velis, D-Westfield, and state Rep. Carol Doherty, D-Taunton.
“If approved, the bill known as ‘An Act to provide a retirement enhancement opportunity to members of the Massachusetts Teachers Retirement System,’ would be voted on by each city or town’s School Committee before teachers in those communities would be eligible. . . .
“The proposal was created by the Massachusetts Teachers Association as a way to provide an early retirement opportunity for teachers who have struggled to adapt to the remote teaching model and those who are at high-risk for COVID-19 and do not want to return to or continue teaching in-person while also giving opportunities to younger teachers in need of work.
“’With the money saved from allowing teachers with higher salaries and advanced degrees to retire early you could hire two teachers and then some,’ said Lori Lyncosky, president of the Westfield Education Association and a spokesperson for the Massachusetts Teachers Association which drafted the bill.”
This bill would increase the retirement benefit of an eligible teacher by adding 5 years to the teacher’s age and 5 years to the teacher’s service, or by some combination of each up to a total of 10 years. In principle, participating teachers would be required to “purchase” these credits based on a calculation of the costs; however, these calculations tend to understate the true cost, for instance, by the way assumptions are selected, or by using flat costs without regard to age, even if employees who “win” from this cost-setting are more likely to take the benefit.
It is, of course, an indicator of a broken salary schedule system at any particular school district if long-service teachers earn pay that’s double their new hire counterparts without adding double the value in terms of their experience, ability to mentor younger teachers, and the like. And this sort of incentive, even ignoring the question of whether the buy-in cost is fairly set, boosts the costs of pensions, which assume, in terms of such assumptions as retirement age, that even though teachers generally have very young retirement eligibility, a significant number of teachers will continue teaching to an older age, with the side benefit of less cost in pensions.
The bottom line: we have 50 states and 50 different pension systems, and significant differences in the reform-mindedness of those states’ legislators.