1. Pension Reform: What ’ s Next? September 30, 2011

2. 2 Today ’ s topics Current pension reform proposal Senate Bill S.2018 Pension reforms in other states Group discussion

3. Current reform proposal S. 2018: An Act Providing for Additional Pension Reform and Benefits Modernization

4. Affecting new members after 1/1/2012:  Increases salary average period from 3 years to 5 years  Increases minimum retirement age from 55 to 60  Members cannot retire before age 60  Review by Admin. & Finance every 5 yrs for new members  Increases age to reach maximum age factor from 65 to 67  Eliminates termination retirement allowance Senate Bill – S. 2018

5. Affecting new members after 1/1/2012:  Reduces age factors by.15% for each year below age 67  For members with at least 35 years of service, reduces age factors by.125% each year Senate Bill – S. 2018

6.  Reduces age factors*: Age Current Proposed Proposed Factor (1-34 yrs) (35+ yrs) 67.025.025.025 65.025.022.0225 62.022.0175.01875 60.020.0145**.01625 58.018 n/a n/a 55.015 n/a n/a * Factors subject to review by Legislature if normal retirement age for Social Security changes **Minimum age factor for in service death benefits would be.0145 instead of.015 Senate Bill – S. 2018

7. Benefit impact for new members after 1/1/2012 Examples:  Regular retiree w/ 30 years at age 60: Current:.020 x 30 = 60% of 3-yr average Proposed:.0145 x 30 = 43.5% of 5-yr average  Regular retiree with 35 years at age 60: Current:.020 x 35 = 70% of 3-yr average Proposed:.01625 x 35 = 56.875% of 5-yr average  R+ retiree with 34 yrs of service at age 58: Current:.018 x 34 = 61.2% + 20% = 80% Proposed: would not be eligible to retire! Senate Bill – S. 2018

8. Affecting new members after 1/1/2012:  Begins the R+ 2% add-on after 23 years rather than 24:  Member age 60 with 30 years:.0145 x 30 = 43.5% + 14% = 57.5%  Member age 60 with 35 years:.01625 x 35 = 56.875% + 24% = 80%  Reduces contribution rate for any member with at least 35 years of creditable service  Rate reduced to 4% for non-R+ members  Rate reduced to 6% for R+ members Senate Bill – S. 2018

9. Affecting current members:  Beginning on 1/1/2012, charges 8.25% interest (v. 4.125%) on refund buybacks made more than one year after member returns to service.  Grants up to 4 years of service credit to members who retired before 9/1/2000 and had a maternity leave before 1/1/75; benefit increase on 1/1/12.  Increases minimum survivor benefit from $250/month to $500/month beginning 7/1/2011.  Members subject to forfeiture pursuant to §15, must pay back any benefits received after the date of offense for which member was convicted. Senate Bill – S. 2018

10. Affecting current members:  Would increase COLA base from $12,000 to $13,000  Would amend c. 32, §28K to allow members on a part-time or full-time leave of absence for the purpose of acting as a representative of an employee organization to receive creditable service for such leave provided the member makes the full monthly retirement contributions (previously, this provision only applied to members on a full-time leave). Senate Bill – S. 2018

11. Affecting current members:  Would allow a member who:  retired on or before May 17, 2004,  chose Option A or Option B, and  married a same sex partner before 5/17/05 to change his or her option to Option C using the factors that were in effect on the member ’ s retirement date.  Change must be requested by 7/1/2012 Senate Bill – S. 2018

12. Affecting current members who retire after 1/1/2012: “ Anti-spiking ” provision #1:  The final salary average will exclude any increases that exceed the average of the prior two years by more than 10%... Senate Bill – S. 2018

13. Anti-spiking example - Administrator Affecting members who retire after 1/1/2012 Average of % diff Capped YearSalary prior 2 yrs (10% max) Amount 09-10$120,000 10-11$125,000 11-12$135,000 $122,500 10.2% $134,750 12-13$155,000 $130,000 19% $143,000 13-14$160,000 $145,000 10.3% $159,500 Ave:$150,000 $145,750 Senate Bill – S. 2018

14. Anti-spiking example - Teacher Affecting members who retire after 1/1/2012 Average of % diff Capped YearSalary prior 2 yrs (10% max) Amount 09-10$70,000 10-11$72,000 11-12$80,000* $71,000 12.7% $78,100 12-13$82,500 $76,000 8.6% $82,500 13-14$89,000** $81,250 9.5% $89,000 Ave:$84,667 $83,200 * 3% raise + $4,000 stipend + extra $2,000 longevity ** 3% raise + stipend, longevity + lane change (Masters + 60) Based on exemptions, the cap may not apply…. Senate Bill – S. 2018

15. Affecting current members who retire after 1/1/2012:  Anti-spiking provision – exemptions Does not apply to increases resulting from…  an increase in hours of employment  a bona fide change in position, excluding a modification in the salary or salary schedule negotiated for bargaining unit members under chapter 150E  the performance of additional services as described in c. 32, § 1.  Anti-spiking provision – retirement contributions  Any retirement contributions withheld on capped compensation will be refunded to the member with interest at the actuarial assumed rate (8.25%) Senate Bill – S. 2018

16. Affecting current members who retire after 1/1/2012:  “ Anti-spiking ” provision #2:  If the difference in annual regular compensation between any 2 consecutive years of the last 5 years of creditable service exceeds 100%, the retirement allowance will be based on the average of the last 5 years (instead of the last 3) Senate Bill – S. 2018

17.  Would require PERAC to develop regulations regarding the maximum earnings for post-retirement employment; goal appears to be to increase current limit by $15,000. Senate Bill – S. 2018

18. Pension Reform Pension Reforms in Other States

19.  39 states have adopted changes; mores states contemplating reforms  Intent of reforms were to Restore/Preserve sustainability of plans  Massachusetts reforms are to modernize and preserve plan sustainability Pension reforms passed nationally since 2010:

20.  Final Average Salary  Most changes increased FAS from 3 to 5 years; at least one increased from 1 year to 3 years; one from 5 to 8 years  Vesting Requirements  Most changes increased from 5 to 10 yrs.  Employee Contributions  Most of the changes were in non-Social Security states and increased from.5% to 5%  Age and Service Requirements  Most changes increased the age at retirement; reduced actuarial factors Types of pension reforms passed nationally:

21.  Service Purchases  Changes either increased the employee cost; eliminated certain types of purchases or capped the number of years purchased;  COLA Benefits  Most changes reduced COLA benefits or tied COLA changes to funded status or investment rate of return. When COLA ’ s were reduced they were reduced to a level that is more advantageous than Massachusetts COLA policy  Re-employment after retirement  Require employers to make a contribution to retirement fund; limit earnings in retirement Types of pension reforms passed nationally:

22.  Depending on state and type of change, the reforms were applicable to:  New members only;  Active and retired members;  Active members who had yet to vest;  Active members who were less than 5 years away from retirement;  Some of the changes were applied incrementally;  Some states tied their reforms, or retraction of the reforms to:  the funded status of the plan, or the investment rate of return of the system  Massachusetts proposed changes affect both active and retired members Employee and Employer Groups affected by the changes:

23. 2 Group discussion