Note: There is updated information on this topic. Read the latest article.
Update April 8, 2022: The Pension Commission hearing scheduled to discuss the amendment with the changes described in this article was unexpectedly canceled. The League believes this amendment or a version of it will likely be rescheduled for discussion in the Pension Commission in the near future. The League will report on any developments.
A proposal would, among other changes, reduce employee contributions to the Police & Fire Plan and replace them with state aid.
The Legislative Commission on Pensions and Retirement will consider a proposal on April 5 that would make significant changes to the Public Employee’s Retirement Association Police & Fire Plan (PERA P&F).
The proposal is a delete-all amendment for SF 3541.
Assumed rate of return lowered
The delete-all amendment would reduce the assumed rate of return for all statewide pension plans from 7.5% to 7.0%.
The state’s pension actuaries have actually recommended a further reduction to no more than 6.6% to reflect analyst’s expectations for future investment earnings. A reduction in the assumed rate of return decreases the funding level of all plans and lengthens the horizon for plans to reach full funding.
Reduced employee contribution
Under the delete-all amendment, the employee contribution rate to the PERA P&F Plan would be permanently reduced from 11.8% to 9.4%. The employer contribution rate would not be changed from the current 17.7%.
To allow for the modification to the contribution rates, the bill would modify the language that targets the current 60% employer/40% employee contribution ratio to specify that the employee rate be no more than 40% and the employer rate be no less than 60%. The change in the employee contributions would be effective July 1, 2022.
Increase in COLA
The draft amendment would also increase the annual cost-of-living adjustment (COLA) for retirees in the P&F Plan from 1% to 1.5%. This increase would also apply to other PERA plans that are currently limited to 1%. P&F retirees would also be eligible for the first COLA adjustment in their annuity after 12 months, rather than the current two-year deferral.
For cities, the proposed COLA adjustments will not impact the PERA General Plan.
Reduced vesting time
Finally, the draft amendment would reduce the current 20-year phased-in vesting for the P&F Plan to a flat 10 years of service.
Return to employment
The draft amendment also allows retirees from the P&F Plan to return to employment without any reduction or suspension of their pension payments. The provision only applies to employees who return to work after the new law’s effective date and only if they return to work with the approval of the police or fire chief.
Increase in state aid
Presumably, the shortfall in the contributions and the increased COLA would be made up from an increase in state aid into the P&F Plan. Under the draft amendment, the state aid would increase from $9 million per year to $100 million per year until the plan is fully funded.
After years of progress through legislative actions to restore the funding for the state’s pension plans, including the PERA P&F Plan, the proposal’s employee contribution reductions and COLA increases raise concerns about the long-term funding of the plans, whether the plan’s funding will continue to improve, and whether the state can maintain such a large increase in state aid from the state’s general fund.
This concern is heightened by the rapid rise in disability claims by public safety personnel and the impact on the P&F Plan financial status. In addition, should the plan funding falter, the revised 60/40 split for employer/employee contributions could cause battles over P&F contribution increases between employers and employees.