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Legislation

States take varied routes to solving pension woes

A hybrid DB/DC plan is one option that states are using to try and solve their underfunding woes. But it's not the only solution.

Several states recently have taken different approaches to fixing their pension problems, from spreading the pain between employer and employee, tapping the lottery and even tinkering with actuarial assumptions.

Here's what some states in addition to Pennsylvania have done this year to tackle statewide pension reform:

South Carolina Gov. Henry McMaster signed into law pension reform legislation on April 25 that will raise employer and employee contributions and lower the annual assumed rate of return of the $28.8 billion South Carolina Retirement Systems, Columbia.

The law, which went into effect July 1, increases the employer contributions to South Carolina's state pension fund 2 percentage points, to 13.56%. For employers contributing to the Police Officers Retirement System, the increase will raise the contribution rate to 16.24%.

Both employer contribution rates will increase after fiscal year 2018 by an additional 1 percentage point per year through the 2023 fiscal year.

The law also will increase and cap employee contributions to the South Carolina Retirement Systems through fiscal year 2023 to 9% from 8.66% and to 9.75% from 9.24% for employees in the police plan. The police plan represents $3.9 billion of total SCRS assets.

On July 4, New Jersey Gov. Chris Christie signed the fiscal 2018 budget, which includes a $2.5 billion state contribution to the $73.6 billion New Jersey Pension Fund, Trenton. That contribution includes an estimated $1 billion from the proceeds of the state lottery.

The state's contribution to the New Jersey Pension Fund for fiscal 2018 represents a 35% increase from the $1.86 billion for the 2017 fiscal year. By using lottery proceeds, the recently passed budget law means the contribution from general operating funds will be reduced to approximately $1.5 billion, assuming the lottery receipts meet projected totals.

In Illinois, the state's budget package, which was approved July 7, includes state-level pension changes, such as a hybrid retirement plan for new hires at the $47.3 billion Illinois Teachers' Retirement System, Springfield, the $15 billion Illinois State Employees' Retirement System and the $19 billion Illinois State Universities Retirement System, Champaign; a requirement that colleges and universities pick up the normal cost of certain employees' pensions; and smoothed actuarial assumptions at TRS, SERS, SURS, the $49 million General Assembly Retirement System and the $840 million Illinois Judges' Retirement System.

And in Michigan, Gov. Rick Snyder signed into law on July 13 pension reforms for the state's public school employees. Similar to Pennsylvania's, the law requires establishment of a new hybrid pension plan and new defined contribution plan for public school employees hired after Jan. 31, 2018. The new plans will be part of the $44.7 billion Michigan Public School Employees Retirement System.

"Every state is unique," said Jay V. Kloepfer, an executive vice president and the director of capital markets research at Callan Associates Inc. in San Francisco. "Some will choose to have DC as the only option for new employees. Some may choose to follow the Pennsylvania plan with offering part of one and part of the other.''