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March 07, 2011 12:00 AM

Many states look to ease pension funding with switch to DC plan

Arleen Jacobius
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    With a statewide pension fund liability of $54.3 billion Washington Gov. Christine Gregoire has proposed pension reforms to reduce costs.
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    Bloomberg
    With a statewide pension fund liability of $58.8 billion, Gov. Deval Patrick, Senate President Therese Murray and House Speaker Robert A. DeLeo, all Democrats, have proposed extensive changes that include:increasing the retirement age for virtually all state workers;eliminating early retirement subsidies; eliminating certain early retirement for all employees; pro-rating benefits based on employment history;introducing an anti-spiking rule; and eliminating the right to receive a pension while receiving compensation for service as an elected official.
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    With a statewide pension fund liability of $64.1 billion, Gov. Bob McDonnell recommended the resumption of employee pension contributions to the Virginia Retirement System. The House Appropriations Committee voted to require employees to contribute to the system but would give them a 5% salary increase to offset it.
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    With a statewide pension liability of $73.6 billion, the North Carolina Future of Retirement Study Commission recommends:allowing employees to choose between a defined benefit plan and a defined contribution plan, with new employees being defaulted into the DB plan if no choice was made within 60 days of employment;giving more flexibility to the trustees of local government retirement systems to grant cost-of-living adjustments;changing the way interest is calculated on employee contributions; andimplementing automatic enrollment in a supplemental DC plan.
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    With a statewide pension liability of $77.4 billion, the state has become the focal point of attention because of a proposal championed by Republican Gov. Scott Walker to end collective bargaining for state employees. However, other reforms also being considered include: increasing current employee pension contributions; and shifting employees to a mandatory defined contribution or hybrid plan.
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    With a statewide pension liability of $125 billion, New Jersey is facing competing reform proposals in the General Assembly. Both the Republican and Democratic plans generally follow Gov. Chris Christie's recommendations. Below are the highlights of the nearly identical plans:requiring all public employees to contribute 8.5% of pay to the fund;raising the retirement age to 65 for most workers;calculating benefits for most workers on a five-year average of their highest salaries, up from three years;rolling back a 9% pension increase approved in 2001 for current and future employees. The Democratic proposal, championed by Sen. Stephen Sweeney (left), seeks a greater rollback;shrinking the maximum benefit for police and fire department retirees to 65% of pay from 70%; andeliminating annual cost-of-living adjustments.
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    With a statewide pension liability of $129 billion, Gov. Rick Scott reportedly has called for changes including:shifting employees to a mandatory defined contribution or hybrid plan; andmaking employees contribute to the plan.
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    With a statewide pension liability of $148 billion, a Republican-sponsored bill in the Legislature includes the following reforms:reducing/freezing cost-of-living increases;increasing employee contributions; andincreasing vesting requirements or retirement ages.
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    Bloomberg
    With a statewide pension fund liability of $453.9 billion, Gov. Jerry Brown has proposed pension reform that includes:halting pension spiking and abuse;creating a two-tiered system and renegotiating retirement benefits for new employees;stopping retroactive application of benefit enhancements;increasing all employee contributions; andprohibiting pension contribution “holidays.”

    Nearly drowned out by the battle raging in several states over moves to eliminate public employees collective bargaining rights is a push to shift public employees to a defined contribution system.

    At the moment there is a defined contribution movement in 10 states — Arizona, California, Florida, Kansas, Kentucky, Nevada, New Hampshire, North Carolina, Virginia and Wisconsin, according to a National Conference of State Legislatures study and Pensions & Investments' research.

    In some states, such as California, there are bills both to eliminate or limit collective bargaining and to switch new employees to a defined contribution or hybrid system.

    “Unfortunately, politicians are using pension systems as a political weapon,” said Hank H. Kim, executive director for the National Conference on Public Employee Retirement Systems, Washington.

    The so-called budget repair bill being considered in Wisconsin — ground zero for the debate over eliminating public employees' collective bargaining rights — would direct the secretary of administration, the director of the Office of State Employee Relations and the secretary of employee trust funds to study whether new employees should be switched to a defined contribution system.

    In Virginia, a bill requiring a switch appears to be waylaid, while a bill that would create an optional DC plan for employees hired after Jan. 1, 2012, is moving through the Legislature.

    Not all mandatory defined contribution systems are successful. Pension systems in three states that made the switch to defined contribution systems later switched back: North Dakota State Investment Board moved back in 1977, but in 1999 the state added an optional defined contribution plan for non-classified state employees; Nebraska State Investment Council in 2000; and the West Virginia Teachers Retirement System in 2005, according to NCPERS. (Most recently, the North Dakota Legislature rejected two bills this year that would have created mandatory defined contribution plans for new public employees and teachers.)

    Once the defined contribution plan proposals are more seriously evaluated, state officials quickly find out the costs are higher than keeping employees in a defined benefit plan, Mr. Kim said.

    For example, the Segal Co. found that if the Nevada Public Employees' Retirement System, Carson City, shifts to a defined contribution system as proposed by Gov. Brian Sandoval, it would cost the system $1.2 billion more over the next two fiscal years than its obligation under its $24.7 billion defined benefit plan, according to a copy of the report on the system's website.

    A number of states are moving forward with bills that would mandate studying the switch as a first step. The Arizona Legislature is considering a pension reform bill that would require the board of investment to complete a study by Dec. 31 of the feasibility and cost of switching to a defined contribution plan. The study is a “key component” of pension reform, said Kirk Adams, speaker of the Arizona House, who sponsored the bill. The bill could be merged with a less extensive state Senate pension reform bill, but the defined contribution study is expected to be retained should the bills be consolidated, he said.

    Mr. Adams said that nationwide, pension liabilities represent a “major financial liability for state and local governments.”

    “We need to reduce costs and get it under control,” he said.

    “This is a big public policy change and as much as I'd like to switch immediately to a defined contribution plan, I think it should be studied,” Mr. Adams said.

    California has been featured in the defined contribution debate nearly every year since 2006 when pushes from the governor, Legislature and a ballot measure all failed to shift public employees into a defined contribution system.

    Currently, there is a bill introduced that would enroll new state workers into a defined contribution or hybrid system.

    That bill, sponsored by Republican state Sen. Mimi Walters, is part of a 10-bill package introduced by Ms. Walters that would also eliminate pension plans for part-time locally elected officials, eliminate collective bargaining on retirement benefits with the exception of employee contributions, and remove elected officials from the board of the $226.5 billion California Public Employees' Retirement System. It also would create fiscal and actuarial requirements for board membership, said Gina Zari, Ms. Walters' chief of staff.

    While not addressed in this bill package, current employees' pension benefits may be tackled next, such as changes to the kind of compensation that would be counted toward benefits, Ms. Zari said.

    Even if Ms. Walters' bill does not become law, there is at least one more effort waiting in the wings. Former Orange County Treasurer Chriss Street has come up with a plan he has dubbed the “SMART” plan that would create an optional defined contribution system. This plan was introduced and defeated last session, but Mr. Street said he fully expects a similar bill will be reintroduced in the next legislative session.

    Mr. Street said in an interview that adding a defined contribution system is the only way to save many states from bankruptcy.

    “This is the only viable idea that can impact state finances. Raising the employee contribution or implementing a new benefits tier will not cut costs,” he said. “Over the next four months, there will be lots of screaming by public employee groups, like (in) Wisconsin. This will backfire by inflaming the public to be even more angry about pensions.”

    California — like Wisconsin, Ohio and a number of other states — also will be determining whether to cut state workers' collective bargaining rights. According to a 2002 U.S. Government Accountability Office report, only 26 states give public employees the right to collectively bargain.

    A bill, sponsored by California Rep. Allan Mansoor, would eliminate collective bargaining for retirement benefits, including for pensions and post-retirement health care, said Saulo Londono, legislative director for Mr. Mansoor.

    He said eliminating collective bargaining for retirement benefits affects the state pension plans' unfunded liability because “in the future if the governor or Legislature wants to change the pension system, they will be able to do that without negotiating with the unions.”

    He added that Mr. Mansoor's bill does not include a defined contribution plan, but that would be the long-term goal.

    “At CalSTRS, neither unionized nor management-level members can collectively bargain for any aspects of their pension because CalSTRS pensions are set by statute,” Ricardo Duran, spokesman for the $147.6 billion California State Teachers' Retirement System, West Sacramento, wrote in an e-mail.

    “CalSTRS is studying the proposed legislation and has not come out with an official position. However, CalSTRS believes that the defined benefit pension is 46% more efficient than a DC (defined contribution plan) and is also a more secure way to offer retirement security to large pools of employees,” Mr. Duran wrote.

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    Slideshow: Public pension reform proposals
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