The new amendment differs from previous proposals and addresses several League concerns.
The Legislative Commission on Pensions and Retirement will meet on May 16 to discuss revised legislation that would modify employee contributions to the Public Employees Retirement Association (PERA) Police & Fire (P&F) Plan and General Plan. It would also increase the annual cost-of-living adjustment (COLA) to retirees of the P&F system.
Assumed rate of return reduced
The delete-all amendment to SF 3541 would reduce the assumed rate of return for all the major state public employee pension plans to 7% from the current rate of 7.5%. This reduction is based on recommendations of the pension plan actuaries and is based on market and investment considerations.
Last fiscal year, ending on June 30, 2021, the State Board of Investment realized a remarkable 30.3% return on invested pension assets. Unfortunately, this fiscal year to date, the investment return is currently less than -3% due to the stock market downturn and interest rate rise.
A reduction in the assumed rate of return negatively impacts the funding status of the plans, although the funding of the PERA plans has improved markedly since the passage of the 2018 reforms in the omnibus pension bill.
Contribution rate changes
More specific for cities, the delete-all amendment reduces employee contributions into the P&F and the General Plan and generally covers the loss of revenue to the plans by implementing a general state aid program to replace the revenue.
The employee contribution reductions have been proposed because the rapid increase in inflation has eroded salaries at a time when the labor market is tight and public employers are encountering challenges retaining employees. By reducing pension contributions and replacing the reduced revenue to the pension plans with additional state aid, the state would essentially use a portion of its surplus to effectively increase public employee take-home pay.
The reduction in the General Plan is 0.25% of salary. For the P&F plan, employees would have their contributions reduced from 11.8% of salary to 9.4%. These reductions would begin on July 1, 2022. The stated reason for the larger P&F plan reduction is to address not only retention but also recruitment challenges faced by many police departments across the state.
When this proposal first was released two weeks ago, the reduction in the P&F contributions also included a significant policy change that has for more than 50 years included a statutory split of 60% employer contribution and 40% employee contribution into the P&F plan. The earlier version of the legislation coupled the employee contribution reduction with language that specified employers would pay not less than 60% and employees would pay not more than 40% into the plan. The League expressed concerns that the proposed language could have opened the door to significant pressure to shift P&F contributions to employers.
This new draft preserves the 60/40 split by also reducing the employer contribution rate by 3.6% (from 17.7% percent to 14.1%), but then the legislation adds a supplemental employer contribution of 3.6%, which would essentially maintain the employer contributions at 17.7%. For cities, the supplemental employer contribution would sunset when the plan is fully funded on an actuarial basis for two consecutive years.
The delete-all amendment also modifies the COLA for some of the statewide plans to help retirees with high inflation. For cities, the bill does not modify the General Plan retiree COLA, which currently is set on a formula and will likely remain at the 1.5% maximum for at least the near future. However, P&F retirees are currently limited to an annual COLA of 1%. The legislation would increase their COLA to 1.5%.
Under the legislation, the state will fully cover, at least initially, the loss of plan revenues due to the employee contribution reductions and for the P&F plan, the cost of the larger COLA for retirees. The General Plan would receive $17 million annually, while the P&F plan would have the existing $9 million state contribution increased to $84 million.
Although these are significant contributions by the state, these aid amounts do not grow as payroll grows, meaning that when compared to current law employee contributions, the plans would have at least a modest reduction in funding into the future.
The delete-all amendment makes two other changes to the P&F plan. First, the vesting period for police and fire would be reduced to 10 years compared to the current law vesting that is fully phased in at 20 years. The amendment also allows the reemployment of retired P&F employees without any reduction in their pension. This would be in effect until Dec. 31, 2032.
The League has supported past actions to improve the funding of the PERA pension plans, including holding the line on benefit improvements. The delete-all amendment does not include any benefit improvements beyond the modest vesting and reemployment provisions, but it does include employee contribution reductions that are supposed to be covered by ongoing state aid.
As a package including the contribution reductions, COLA adjustments, and state contributions to the funds, the proposal is generally balanced and the funding status of the PERA plans will continue to improve. However, without the ongoing state aid contribution to the PERA plans, the League’s policies would oppose the associated employee contribution reductions and the COLA changes.
For more background information about this bill, read a previous article.