A brief from The Pew Center on the States, Washington, highlights the changes made by states to shore up their pension plans.
Nine reduced benefits — Arizona, California, Illinois, New Jersey, New Mexico, Michigan, Rhode Island, South Dakota and Utah.
Among the notable changes highlighted by The Pew Center:
• California raised contributions for current employees, raised the retirement age to 60 from 55 and banned pension spiking by employees seeking to inflate their final pay rate in order to get a bigger pension benefit;
• Illinois raised the retirement age for new employees to 67 from 60, capped the salary on which pensions can be based and eliminated double dipping;
• Michigan, which in 1997 became the first state to close its defined benefit plans to some new employees, expanded the program in 2010 to include newly hired public school teachers and will put those employees into a hybrid pension plan.
Among the seven states that reduced benefits and increased employee contributions, The Pew Center determined Colorado made some of the most sweeping reforms by raising the retirement age to 60 from 55 for new employees, increasing both employer and employee contributions, capping cost-of-living adjustments for current and future retirees at 2% (down from 3.5%), and freezing COLA payments for a year.
The Pew Center's research showed that 11 states did not enact any pension reforms in the past decade. They were Alabama, Florida, Idaho, Indiana, Maine, Montana, North Carolina, Ohio, Tennessee, West Virginia and Wisconsin.
One change that a number of public-sector pension fund sponsors have made or are contemplating — adopting a lower investment return assumption — could materially increase the need for both employer and employee contributions.
That is because “over time, investment earnings are a major driver of a public pension plan's funding condition: from 1982 through 2009, investment earnings accounted for 60% of all public pension revenue,” according to the 2010 Public Fund Survey from the National Association of State Retirement Administrators, Baton Rouge, La.
Lower investment returns require either an increase in contributions or a cut in benefits to avoid high long-term liabilities.
NASRA's analysis of data as of June 30, 2009, (the most recent year available) for 99 public pension plans showed that the median investment return assumption is 8% per year.
Keith Brainard, NASRA's director of research, has been tracking public plans that decreased their investment returns and provided the following list: Public Employees' Retirement Association of Colorado, 8% from 8.5%; District of Columbia Retirement Board, 7% from 7.5%; Illinois State Employees' Retirement System and Illinois State Universities Retirement System, 7.75% from 8.5%; Indiana State Teachers' Retirement Fund, 7% from 7.5%; Indiana Public Employees Retirement Fund, 7% from 7.25%; New York State Common Retirement Fund, 7.5% from 8%; Pennsylvania Public School Employees' Retirement System and Pennsylvania State Employees' Retirement System, 8% from 8.5%; San Diego County Employees Retirement System, 8% from 8.25%; San Francisco City & County Employees Retirement System, 7.75% from 8%; and Virginia Retirement System, 7% from 7.5%.
Also, the board of the California State Teachers' Retirement System, Sacramento, voted on Dec. 2 to reduce the plan's investment return assumption to 7.75% from 8%, as reported in P&I Daily.
