Benefit Sustainability Commission Discusses Options, Including Teacher Pension Shift

The Public Employees’ and Retirees’ Benefit Sustainability Commission met today to discuss numerous benefit changes and cost saving options.  To assist with this discussion, the Department of Legislative Services prepared a lengthy decision guide summarizing options for changing State employee and retiree health benefits; reducing the unfunded liability associated with Other Post-employment Benefits; changing employee and teacher pension benefits to reduce the unfunded liability associated with the overall system; and transferring a portion of teacher pension costs to the counties.

The Commission is expected to hold a voting session next week, to prepare recommendations for the General Assembly to take up for its January session. Many stakeholders expect a shift of teacher pension costs to be among those items the Commission recommends for legislative action.

The following sections outline the Commission’s discussion yesterday, using the staff-generated discussion document as a reference:

Health Benefits Changes

To align employee health benefits with those of peer states, the Commission discussed reducing program costs by 10% through changes to premiums, plan design, or a combination of the two.  Actuaries working with the Department of Legislative Services, estimated the annual impact on the average enrollee and examined the affects based on utilization and income.  A complete list of all options considered including project savings and annual costs to employees and retirees was provided.  All health benefit changes must be collectively bargained.

To reduce the unfunded liability associated with Other Post-employment Benefits (OPEB), the Commission discussed requiring an employee to work 15 years before qualifying to participate in the State health plan as retirees, providing the maximum health subsidy to retirees with at least 25 years of services with prorated amounts between 15 and 25 years of credit, requiring all service credit be earned from State employment, providing health benefits only to employees who retire directly from the State (including those who have already left State service with a deferred benefit), and beginning in 2020, requiring all Medicare-eligible retirees to participate in Medicare Part D for all prescription drug benefits.

Pension Benefits/Eligibility Changes

With respect to pensions, four plan options were presented for current and future members of the Employees’ and Teachers’ Pension Systems.

  • Cash Balance – convert to a cash balance plan with fixed 10.0% employer contribution, 5.0% employee contribution, and guaranteed 5.0% annual return on account balances; plan is fully portable
  • Stable Benefit (Current Vested Only) – Retain current defined benefit plan with an 8.0% employee contribution, of which 2.0% would be directed to paying down the unfunded liability
  • Stable Contribution – Select alternative defined benefit structure, with an employee contribution of 5.0%, 1.6% multiplier for service credit earned after June 30, 2010, and a cost-of-living adjustment (COLA) capped at 1.5% for all service credit
  • Basic Savings – Select alternative defined benefit plan with a 3.0% employee contribution, 1.4% multiplier for service credit earned after June 30, 2010, and no retirement COLAs

Additional considerations include:

  • Increase vesting for all new and nonvested members of all plans from 5 to 10 years
  • For defined benefit plans, change retirement eligibility for new and nonvested members from age 62 with 5 years or 30 years to age 62 with 5 years or the Rule of 95
  • Modify the DROP so participants earn 4% interest compounded annually on DROP account balances
  • Redirect savings generated by the benefit redesign in the form of additional employer contributions to achieve the 80% funding goal

The actuaries calculated the cost savings and system funding status for each proposal.  These changes would not be valuated until June 1, 2011 and therefore do not affect contribution rates until FY 2013.

Shifting Costs of Teacher Pensions

The Commission was presented with four transfer options.

  • 50/50 pension system split – State and local boards each pay 50% of pension system costs and local boards continue to pay 100% of Social Security costs; Board costs for one-year phase-in $489.4 million
  • 50/50 split of total retirement costs – State and local boards each pay 50% of total retirement costs, pension and social security; Board costs for one-year phase-in $247.1 million
  • SB 141 Proposal, 50/50 Share with Phase-in – Local boards contribute a percentage of salary base in fiscal 2012 to 2015, reaching 50% of total retirement costs (pension and social security) by fiscal 2016; Board costs in first year $63.3 million
  • 60/40 split of total retirement costs – State and local boards split total retirement costs, pension and social security, 60%/40%; Board costs for one-year phase in $100.7

The Commission was also presented with a wealth equalized option for the 50/50 split of total retirement costs.   The additional funding necessary to cover the local boards portion of pension costs would be distributed through the wealth equalized State funding formula for education and then the State would charge the local boards for pension costs.

Commission member and former Senator Barbara Hoffman commented that local school boards have the authority to negotiate teacher salaries, but they are not responsible for funding them. This responsibility is placed on the county.  She suggested that taxing authority for school boards, while not the charge of this group, is something to be discussed in an appropriate forum.  Mrs. Hoffman also commented that Maintenance of Effort (MoE) is a complicating factor when discussing the transfer of pension costs.  She further commented that the State Board of Education should consider whether a county has been exceeding MoE when determining if a waiver should be granted, expressing her concern about the current MoE laws serving as a disincentive.

The Commission will meet again on December 20 at 10 am to discuss these options in more detail and vote on items to be included in an interim report, due to the General Assembly in time for its 2011 session.

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