Recent State Legislation Affecting Public Retirement Plans, 2005-2009
January 2010
introduction
Since 2007, investment losses and the weakness of state
and local government revenues have produced extraordinary stress for public
retirement funds in the United States.
This stress magnified the funding issues retirement funds encountered
because of the recession at the turn of the century.
Policy makers' responses are occurring in the context of
an additional issue, that of providing for the commitments state and local
governments have made for retiree health insurance and other post-employment
benefits. These obligations have accumulated gradually for many years. Current
accounting rules now require recognition of them. State government liabilities,
aside from any local government amounts, have recently been estimated to be as
much as $560 billion.
Legislatures and governors began to address pension
system issues while the economy was still strong; the recession added urgency
to their endeavors to strengthen the funding streams and reduce the long-term
costs of their public retirement systems. This report summarizes the most
significant features of state public retirement plan changes in 18 states from 2005
through 2009.
In general, states have made a broad range of relatively
minor changes to plans, rather than undertaking fundamental change. Their goal
has been to adjust rather than radically alter their retirement plans. Several
of the states listed in this report have made a number of the following changes
at once:
¤ Increases in employee
contributions
¤ Extending the period over
which salary is calculated for the purpose of determining retirement benefits
¤ Increases in the age or
service requirement, or both, for eligibility for retirement benefits
¤ Anti-spiking provision
¤ Reductions in or greater
controls over post-retirement cost-of-living adjustments
As an example, these are the changes that Kansas enacted
in 2008 for newly-hired state employees and teachers
in the Kansas Public Employee Retirement System:
¤ Employee contribution
increased from 4% to 6% of salary
¤ Future cost increases, in
the old plan the employer's responsibility, will be
shared equally by employees and employers in the new plan.
¤ The base for calculating
final average salary increased from the four highest years to five highest
years.
¤ Age and service requirements
were increased to allow retirement at 60 only with 30 years of service and to
encourage retirement at 65.
¤ Included benefits employees
had requested, including immediate membership for all members (in place of a
six-month wait); vesting in five years (as opposed to 10 years) and a
guaranteed post-retirement benefit increase of 2% a year for retirees over age
65.
Although the Kansas legislation included the widest
range of policy changes reported here, the kinds of changes in that legislation
and the general approach of changing a number of features of the plan in a
relatively moderate degree are typical of the state legislation of the period.
Kansas acted in another way typical of most states in
the period in choosing to preserve and reform a traditional defined benefit
retirement plan (which provides a guaranteed life-time annuity) rather than
fundamentally restructure the kind of benefit it provides. Two states in this
period did carry out fundamental restructuring of their retirement provisions:
Alaska and Georgia. They replaced traditional defined benefit (DB) plans with
alternatives. Alaska created defined contribution (DC) plans for teachers and
public employees. Georgia enacted
a hybrid plan that combines a traditional defined benefit plan with a 401(k) in
which all new employees are automatically enrolled.
In recent years, many legislatures have considered replacing a DB
plan with a DC plan. Defined contribution plans provide each member with an
individual account to which the member and the employer make contributions
throughout the member's employment at some percentage of the employeeŐs salary.
The member's retirement benefit depends upon the accumulation of contributions
and investment earnings in the account when the member retires. The general
practice is for the employee to control the investment of his or her account.
At present, DC plans are the basic state retirement plan only for
state employees in Michigan, public employees and teachers in Alaska, and state
employees in Nebraska, which now uses the variant of a cash balance plan. The
District of Columbia also has a DC plan as its primary pension coverage. West
Virginia's retirement plan for teachers was a defined contribution plan from
1991 to 2005, when it was closed to new enrollment. Otherwise, and except for higher education, their use
in state government takes two forms:
¤ An alternative
to a defined benefit plan that employees may choose to join if they wish
to. Examples are Colorado,
Florida, Ohio, Montana and South Carolina. A few additional states sponsor DC
plans for elected officials, as in Utah and Virginia. In these jurisdictions, a
new employee is enrolled in the defined benefit plan unless he or she makes an
explicit decision to join the DC plan.
¤ A component of a
mandatory hybrid plan, in which the general practice is for employee
contributions to support a defined contribution account and employer contributions
to support a defined benefit program.
Such plans, with various plan designs, exist in Georgia, Indiana, Oregon
and Washington.
In 2005, Alaska became the first state to close
statewide DB plans and enroll all new employees in DC plans since Michigan had
done so for state employees in 1997.
In 2008, Georgia became the first state to enroll all
new employees in a hybrid plan since Washington had created hybrid plans for
its teachers and state employees in 1998-2000. Its DB component is funded by
both employers and employees but with the employee contribution and potential
benefit reduced from the previous state DB plan. All new members will also be
enrolled in a 401(k) with a provision for self-directed levels of employee
contributions and a limited employer match. Employees may withdraw from the 401(k) plan if they wish to
do so.
About this report. In the
following chart, major changes in state retirement plan provisions are
organized first by topic—for example, employee contribution changes or
changes in age and service requirements for retirement eligibility—and
then by year and state. The data
in this chart are taken from NCSLŐs annual reports on state pensions and
retirement legislation. The complete reports are available on the NCSL website
at http://www.ncsl.org/default.aspx?tabid=13399
or by searching on the NCSL website for ŇPension and Retirement Plan
Enactments.Ó
|
Major Changes in State Public Retirement Plan Provisions, 2005
– 2009 The changes listed in this
chart affect only new hires unless otherwise stated. |
||
|
|
|
|
|
Employee Contributions |
Alaska Public Employees and TeachersŐ
Defined Contribution Plans: 2006 |
Increased employee contribution from
defined benefit plan level to 8 % of salary, and provided for a flat employer
contribution of 5%. |
|
Colorado Public Employees: 2006. |
Additional 1% of salary to fund
post-retirement benefit increases |
|
|
Iowa Public Employees: 2006 |
To increase 0.5% a year, 2008-2012, if
needed to fully fund the system by 2016 |
|
|
Kansas Public Employees: 2007 |
Contribution for new employees was
increased from 4% to 6%. |
|
|
New Jersey Public Employee System,
TeachersŐ Fund, and defined contribution plan: 2007 |
Increased to 5.5% (from 5%), and caps the base on which contributions are made at the maximum amount
on which Social Security contributions are levied. Effective for current and
future employees. |
|
|
Iowa Public Employees: 2008. |
Re-enacts the 2006 legislation on employee
contributions and caps the annual increase at 0.5% |
|
|
Kentucky Public Employee Retirement
Plan: 2008. |
Additional 1% of salary dedicated to the
retiree health insurance plan. |
|
|
Nebraska School Employees: 2009 |
Increase of 1% for five years (current
employees). |
|
|
New Hampshire Retirement System: 2009 |
Increased from 5% to 7% of salary for new
employees. |
|
|
New Jersey Public Employee System,
TeachersŐ Fund, and defined contribution plan: 2007 |
Increased to 5.5% (from 5%), and caps the base on which contributions are made at the maximum amount
on which Social Security contributions are levied. Effective for current and
future employees. |
|
|
Georgia Public Employees Retirement System:
2009. |
For new hybrid plan, employee contribution
to the defined benefit portion is 1.25% of salary;
for personal account may range from 0% to 5% of salary. |
|
|
New Mexico Public Employee plan and
teachersŐ plan: 2009 |
Increase of 1.5% of salary for fiscal years
2010 and 2011, affecting current employees. |
|
|
|
|
|
|
Calculation of final average salary, and
percentage factor for calculating benefits |
Alaska Public Employees
and TeachersŐ Defined Contribution Plans: 2006. |
No defined retirement
benefit; the benefit will depend upon the accumulations in a memberŐs
account. |
|
Louisiana Teachers: 2005. |
Base for final average
salary increased from 36 months to 60 months. |
|
|
Rhode Island Public Employees: 2005. |
Rhode Island applies different multipliers
to groups of years of service. As service grows longer, the multiplier
increases. The scale was reduced for shorter mounts of service in 2005. The
former highest multiplier was 3.0%; under new law, the highest multiplier is
2.5%. The cap of benefits as a percent of final average salary was reduced
from 80% to 75%. |
|
|
Kansas Public Employees: 2007. |
Base for final average salary increased from
four years to five years. |
|
|
New Jersey State and Local Plans: 2007. |
Limited to salary on which
Social Security tax is levied. |
|
|
North Dakota Teachers: 2007. |
Base for final average salary increased
from 36 months to 60 months. |
|
|
Kentucky Public Employees 2008. |
Benefit percentage previously was 1.97%;
changed to range from 1.1% to 1.7 percent depending on years of service. For
years in excess of 30, a factor of 2% applies. |
|
|
Georgia Public Employees: 2009. |
For the member account,
the benefit base will be the accumulation in the account. For the defined
benefit portion, the multiplier was reduced from 2% to 1%. |
|
|
Nevada Public Employees Retirement System:
2009. |
Formerly allowed a benefit
factor of 2.67% for service after July 1, 2001. This was reduced to 2.5%. |
|
|
Rhode Island Public Employees System: 2009. |
Base for final average salary increased
from three highest consecutive years to five highest consecutive years. |
|
|
New York State & Local Employees: 2009. |
Increased the minimum
retirement age from 55 to 62; increased the minimum retirement age for the NY
State Teachers system from 55 to 57 with 30 years of service. |
|
|
|
|
|
|
Age and Service Requirements for Normal
Retirement |
Alaska Public Employees and TeachersŐ
Defined Contribution Plans: 2006. |
No state restrictions, but receipt of
benefits is subject to federal rules governing withdrawals from individual
retirement accounts. |
|
Colorado Public Employees: 2006. |
Rule of 85 replaces the Rule of 80. |
|
|
Louisiana Teachers: 2005. |
Minimum age of 60, up from 55. |
|
|
Rhode Island Public Employees System: 2005. |
Previous law allowed
general employees to retire at age 60 with 10 years or service or any age
with 28 years. New law for new and non-vested employees allows normal
retirement at age 65 with 10 years of service or age 59 with 29 years of
service. For current employees, the minimum age of eligibility for retirement
will vary with length of service. |
|
|
Kansas Public Employees: 2007. |
Increased from age 65, or age 62 with 10
years of service, or the Rule of 85, to age 65 with five years of service or
age 60 with 30 years of service; the Rule of 85 will not apply. |
|
|
New Jersey State and Local: 2007 and 2008. |
Prohibited contractual employees from
earning service credit. Raised normal retirement age
for public employees and teachers' systems from 60 to 62 for those who become
members after the effective date of the bill (previously 55/25 or age 60). |
|
|
North Dakota Teachers: 2007. |
Rule of 90 instead of the Rule of 85; 5 year service minimum for benefits. |
|
|
Kentucky Public Employees Retirement
System: 2008 |
Previously allowed general employees to
retire at age 65 with four years of service, or any age with 27 years of
service. For subsequent hires, it will be age 57 with 30 years of service;
rule of 87 (with minimum age of 57); 65 with five
years of service. |
|
|
Nevada Public Employee Retirement System:
2009. |
Previously
allowed general members to retire at age 60 with 10 years of service; revised
to age 62 with 10 years of service. For new police and firefighter members,
the eligible age for retirement after 10 years of service is raised from age
55 to age 60 and the former option to retire at any age after 25 years of
service was eliminated. |
|
|
Texas Employee Retirement System:
2009. |
Minimum eligibility at age 65 with 10 years
of service rather than 60/5; or the Rule of 80. |
|
|
|
|
|
|
Anti-Spiking Provisions |
Colorado Public Employees: 2006. |
Annual salary growth for calculation of
benefit capped at 8%. |
|
Iowa Public Employees: 2006. |
Annual salary growth for calculation of
benefit capped at about 7% |
|
|
Louisiana State Employee System: 2005. |
Annual salary growth for calculation of
benefit capped at 15%, down from 25% |
|
|
Kansas Public Employees: 2007. |
Annual salary growth for calculation of
benefit capped at 7.5%, down from 15% |
|
|
New Hampshire, all members: 2008. |
If compensation in the final year of
service exceeds 125% of final average compensation, the retiree's last
employer will be assessed the cost of the excess benefit. |
|
|
Nevada Public Employees Retirement System:
2009. |
Annual salary growth for calculation of
benefit capped at 10% for last five years of service. |
|
|
Georgia all systems: 2009. |
For all members, the employer must pay the
system the actuarial cost of benefits whose calculation includes a pay
increase of more than 5% in the last 12 months before retirement; for future
employees, such salary increases will not be included in the benefit
calculation. |
|
|
|
|
|
|
Post-Retirement Increases |
Alaska Public Employees and TeachersŐ
Defined Contribution Plans: 2006. |
DB plan provided annual automatic
adjustments; no provision for post-retirement increases in the defined
contribution plans. |
|
Colorado Public Employees: 2006. |
Capped at 3% per year (previously 3.5%) or
less depending on the consumer price index (CPI). |
|
|
Missouri local government plans: 2006. |
Allowable only in plans that are at least
80% funded; must be amortized over 20 years. |
|
|
Kansas Public Employees: 2007. |
For all pre-retirement employees, provided
an annual adjustment of 2% in place of ad hoc adjustments. |
|
|
Georgia, all systems: 2009. |
Future post-retirement increases are
prohibited for public employees hired after July 1, 2009. |
|
|
Iowa Public Employees: 2006. |
No future benefit increases without
increases in contribution rates. |
|
|
Kentucky Public Employee Retirement Plan:
2008. |
Replaced a COLA at the rate of the consumer
price index, capped at 5%, with an annual 1.5%, for all future retirees. |
|
|
Louisiana State Employees: 2009. |
Future permanent benefit increases require
age of 60 for eligibility (previously age 55) and link them to the system's
actuarial funding level and investment return. |
|
|
Vermont Retirement System: 2008. |
Replaces the existing-law COLA, which is an
annual adjustment equal to 50% of the CPI, whether
positive or negative. For active members as of June 30, 2008 who retire after
July 1, 2008, the COLA will be the CPI percentage or at least 1%, to a
maximum of 5%, beginning on January 1, 2014. Members' contribution rates are
increased from 3.25% to 5% until July 1, 2019, when the contribution rate
will fall to 4.75%. The
additional cost of the COLA will be amortized separately from the existing
UAAL over 30 years. |
|
|
|
|
|
|
Vesting |
Alaska defined contribution plans: 2006. |
Employee contributions to the individual
account are immediately vested and employer contributions are vested
gradually with 100% vesting after five years of service. |
|
Mississippi Public Employees: 2007. |
Vesting period increased
from four years to eight years. |
|
|
North Dakota Teachers: 2007 |
Vesting period increased
from three years to five years. |
|
|
Kentucky Public Employee Retirement Plan:
2008. |
Vesting period for retiree health insurance
benefits increased from 10 years to 15 years. |
|
|
Georgia hybrid plan: 2009. |
Vesting for the defined benefit portion of
the plan remains at 10 years. Employee contributions to the individual
account are immediately vested and employer contributions are vested
gradually with 100% vesting after five years of service. |
|
|
New York State and Local Employees System,
and the State Teachers System: 2009. |
Increased vesting requirement for new
employees from five years to 10 years. |
|
|
|
|
|
|
Sources This report is based on NCSL's annual
compilation of state legislation concerning pensions and retirement plans.
The annual reports are available on the NCSL website at http://www.ncsl.org/default.aspx?tabid=13399 |
||