Ron Snell National Conference of State Legislatures Pensions Issues and State Legislation in 2010 Denver University Strategic Issues Panel on the Future of State Government November 4, 2010

Public and Private Pensions in the US Two important differences:  Public employees are much more likely to be covered by any kind of employer-sponsored retirement benefit than private-sector employees.  Public employees are much more likely to have a guaranteed lifetime retirement income from their employer than private -sector workers.

Access to Retirement Plans: All Employees

Access to Retirement Plans by Compensation

Basic U.S. Pension Plans Two kinds of retirement plans in the US:  1. Traditional Defined Benefit (DB): Retired person receives a lifetime, guaranteed annuity (annual pension) based on earnings and length of employment. Increasingly limited to state and local government, but still found among large private sector employers.  2. Defined Contribution (DC). Often called 401(k):  Employee builds up a retirement account, usually with matching employer contributions. At retirement employee receives a lump sum or an annuity. Predominates in the private sector.

Basic U.S. Pension Policy A major difference between DB and DC plans is who is responsible for the retired person's pension. For DB plans, the employer. Contributions go into a trust fund. It is invested. Benefits are paid from the trust fund and are a legal obligation of the employer to the retired person. For 401(k) plans, the employee. Employer's legal obligation is to make contributions to the account.

Participation in Retirement Plans Bureau of Labor Statistics, March 2009

Public and Private Pensions Percent of Employees with a Traditional (Defined Benefit) Retirement Plan Bureau of Labor Statistics, March 2009

Public Employees Contribute to Retirement Plans Public Employee Contribution Rates, 2009 Wisconsin Legislative Council, 2010

Public Pension Fund Sources of Revenue National Association of State Retirement Administrators; U.S. Bureau of the Census 126 Large state and local government plans.

Colorado PERA Assets vs. Liabilities Market Value as of December 31 for each year 11 Source: Colorado Public Employee Retirement Association, 2010

Assets of State and Local Government Retirement Plans, estimates National Association of State Retirement Administrators; U.S. Federal Reserve Bank

Public Plan Unfunded Liabilities, Estimates for 126 Large State and Local Plans Boston College Center for Retirement Research Oct. 2010

What's Been Happening More states have enacted significant retirement legislation in 2010 than in any other year in memory. This reflects:  Concerns about the viability of retirement plan benefits and funding that date to the 2001 recession. Severe investment losses in the recent recession. State fiscal conditions.

Major Pensions Legislation in 2010: All Topics 20 states represented

Major Pensions Legislation : All Topics 30 states represented

Increase in Employee Contributions, 2010 Active Employees (7) Future Hires Only 4) MO, UT, VA, WY imposed contributions where plans had been noncontributory.

Higher Age & Service Requirement for Normal Retirement, states represented

Longer Period for Calculation of Final Average Salary, states represented

Reduced Post-Retirement Benefit Increase, 2010 People Already Retired (3) Future Hires Only (4) Some Active Employees (1)

Trends in 2010 Reduced benefits for new employees with the same service and compensation. Higher employee contributions as a percent of salary. More restrictions on retirement before normal age and on retired people returning to covered service Most changes occur within the framework of defined benefit (DB) plans. Replacement of DB plans with hybrid plans in Michigan and Utah.

Possible Consequences for Personnel Management in Government How will these changes affect future state employees and employment?  Are public employees being made a scapegoat for state fiscal problems?  Effect on employees' morale.  Issue of disparity of treatment.  Impact on recruitment of new employees.

Structural Change in Michigan in 2010 Michigan School Employees Retirement System  Includes K-12 teachers statewide.  Replaces a defined benefit (DB) plan for employees hired after July 1, 2010 with a hybrid plan:  A DB with higher age and service requirements and a lower benefit than the former plan. FAS based on 5 years (3 years in the closed plan).  Plus an opt-out defined contribution (401k) plan, with an employer match (4-year vesting) to employee contributions. Within limits, school districts may negotiate levels of employee contributions and employer match.  No post-retirement COLA for the DB portion.

Structural Change in Utah in 2010 The Utah Legislature also replaced a traditional defined benefit plan with an alternative structure in It provided choice for employees:  A defined contribution plan fully funded by employers with a contribution of 10% of salary or  A plan that combines features of a defined contribution and a defined benefit plan.

Structural Change in Utah in 2010 The Utah hybrid plan:  For DB component, employers will contribute 10% of salary.  When the 10% is insufficient to meet the actuarially required contribution to meet full funding, employees will make up the difference.  When the 10% is more than is required to keep the plan actuarially sound, the difference will be deposited in an employee 401(k) account.  Employees may but are not required to contribute to the 401(k).  DB benefit available at 65/4; 60/20; 62/10; any age with 35 years of service. Five-year FAS; DB benefit = 1.5% FAS for each year of service (presently 3-year FAS, 2% factor)

This report is based on NCSL's annual report on state pensions and retirement legislation. The 2010 report, covering legislation enacted through October 15, 2010, is available on the NCSL website at For further information: Ron Snell --