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Public employee groups, businesses and lawmakers all hotly debated a Nevada bill this week that would make major changes to the state’s pension system.
The measure under scrutiny is Assembly Bill 190, which would close off the state’s defined-benefit system and funnel all new government hires into a hybrid plan that more closely resembles a 401(k).
The bill was proposed in late February by Assemblyman Randy Kirner [R].
More on how the pension system would look under the bill, from the Review-Journal:
Kirner said there would still be a defined benefit element to the plan worth 6 percent of an employee’s salary that would be paid by the public agency. This piece of the plan is intended to account for the fact that Nevada public employees do not pay into Social Security, he said.
The remainder of the retirement plan would be a defined contribution plan, with 6 percent being provided by the state or local government agency and another 6 percent coming from the employee.
For police and fire, the defined contribution rate would be 9 percent each from the employer and employee.
At the hearing this week, state businesses were supportive of the measure.
But public employee groups argued against the bill, saying the changes would make it harder to recruit talented workers.
Tina Leiss, a top official at the Nevada Public Employee Retirement Systems, also spoke against the bill.
Photo credit: “Flag-map of Nevada” by Darwinek – self-made using Image:Flag of Nevada.svg and Image:USA Nevada location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Nevada.svg#mediaviewer/File:Flag-map_of_Nevada.svg
Starting on March 1, all new city hires will be placed into a pension plan that resembles a hybrid between a 401(k) and a traditional pension, as opposed to the defined-benefit plan currently in place.
Public safety workers are not affected.
The new plan, called a “cash balance plan”, will operate like a 401(k) in that its eventual payout will largely depend on the market.
But it does guarantee a minimum retirement benefit, much like a defined-benefit plan.
Current employees will keep their pension plan. But going forward, they will have to contribute a higher percentage of their paychecks to the system.
The pension changes, approved Tuesday by the Omaha City Council, mark a significant step in Mayor Jean Stothert’s goal of reducing employee costs and solving the city’s pension crisis.
And, Stothert said, the new plan will protect the city from future unfunded pension debt.
“We knew we could not just accept a contract that would fix the financial problem this year or the city’s budget this year,” Stothert said. “We had to look into the future to prevent those things from happening.”
These changes are intended to prevent the pension system from running out of money, which the civilian pension plan was previously projected to do within about 20 years.
Now, according to city estimates, it will be fully funded in that time frame.
Public safety workers aren’t affected by this change, because they work under different contracts.
But change could be coming soon: the city is currently in the midst of negotiating new contracts for police and firefighters.
Pennsylvania’s outgoing governor, Tom Corbett, made reforming the state’s pension system his top priority over the last year. But his plan – which would shift new hires into a “hybrid” plan with characteristics of a 401(k) – failed to enthuse most legislators.
Still, two pension bills are still sitting in the legislature, and they are likely to be brought up again in 2015. The first bill mirrors Corbett’s “hybrid idea”. As described by the Scranton Times-Tribune:
The hybrid plan, proposed by state Rep. Seth Grove, R-York, would maintain defined benefit plans for current employees and retirees and shift new hires into a plan that has features similar to 401(k) plans.
The proposal has several provisions to help municipalities reduce pension deficits, including guaranteeing a rate of investment return and allowing any excess earnings to be used to reduce the pension plan’s unfunded liabilities, said Rep. Grove.
The bill was introduced in the last legislative session, but never made it out of the Local Government Committee. Rep. Grove said he plans to reintroduce the bill in the next session.
The other bill takes a different approach. From the Times-Tribune:
The other bill focuses on reforming Act 111, which requires binding arbitration when a municipality is unable to reach a contract with its police or firefighters unions.
State Rep. Rob Kauffman, R-Chambersburg, introduced a bill last year that would, among other things, require an arbitrator to consider a municipality’s ability to pay when issuing an award. It did not make it out of committee, but is expected to be reintroduced this session, said Rick Schuettler, executive director of the Pennsylvania Municipal League, which supports the legislation.
Municipal officials statewide have long-complained that binding arbitration is stacked in favor of the unions, with arbitrators often issuing excessive awards.
How likely are these bills to gain any traction? The second one has the better chance, because incoming Gov. Tom Wolf is opposed to changing the pension system to a “hybrid” plan.
Memphis Mayor A C Wharton Jr.’s proposal [would] switch all new city hires in 2016 as well as city employees with less than 10 years of service to a hybrid pension plan that mixes a market-based retirement account with a defined contributions plan. City employees with 10 years or more of service would remain vested in the city’s existing private contributions plans.
An alternative by council member Myron Lowery to only include new hires in the change to the hybrid plan was amended two weeks ago, but no final vote was taken on the new alternative put forth by council member Wanda Halbert.
Halbert’s plan would include new hires in the switch to the hybrid plan as well as city employees with less than 7 1/2 years of service.
She made the proposal after saying city employees should be expected to make sacrifices toward making the liability sustainable for the city. Her proposal is based on detailed discussions with Segal Consulting, the Atlanta actuary hired by the council earlier this year to advise it. She also used numbers from PricewaterhouseCoopers, the actuary firm used by the Wharton administration.
Council members in the last month have been discussing whether the city should keep contributions unvested city employees made under the existing plan if they move to the hybrid. Some on the council have advocated a “sweep” of those contributions into a fund that would be available to unvested city employees when they retire.
Halbert’s plan to include those with less than 7 1/2 years of service in the switch had eight votes on the 13-member council two weeks ago. But a final vote was delayed.
Tuesday’s meeting is the last time the Council will meet until 2015.
One version is Memphis Mayor A C Wharton Jr.’s proposal that would move new city employees and those with less than 10 years of service to a separate retirement account that equals the unvested employees’ contributions in the existing pension plan plus a multiplier.
The second version, by council member Myron Lowery, would move new city employees only to a pension plan that is the “hybrid” plan Wharton proposed in October for new hires as well as unvested city employees. The hybrid is a combination of a cash balance plan and a defined contributions plan.
The motive behind the reform measures is simple: the city is looking to save money. In particular, it is looking to cut down on its actuarially required contribution, the annual payment it pays to the pension system. From Memphis Daily News:
The city’s target in the new plan is how it affects the city’s annual required contribution toward the pension liability. Joyner estimated that by applying a new pension plan to new hires only, the city saves an average of $2 million a year over 25 years.
There would be more savings on the ARC, as it is called, if the city includes unvested employees with five years or service or up to the 10-year mark, as Wharton has proposed.
“You would have additional savings, but that savings will all be generated by taking benefits from people who are not yet vested in those benefits,” Joyner said.
City Finance Director Brian Collins said the administration is sticking by its recommendation of including unvested city employees as well as new hires.
“If you just stuck with the mayor’s plan, that’s where you get the most savings of $10 million,” he said. “If you just looked at it with five years, it is closer to $3 million or $4 million a year off the status quo ARC.”
The council will hear final readings of the two reform measures during their December 2 meeting.
What the Plan Does 1. Shifts risk.
Under this plan, the future pension investment risk facing the state, school districts, and taxpayers will shift to members of the retirement plans as hybrid tier participation grows. The Commonwealth and its taxpayers would be more sheltered from risk, irrespective of market performance. 2. Delivers competitive benefits.
This plan provides new employees with retirement benefits that are every bit as competitive and desirable as those they would receive in the private sector. 3. Protects earned benefits.
The plan proactively works to protect the benefits that hard-working Pennsylvanians have already earned. Under this plan, no current employee or retiree would see any changes to his or her plan. 4. Demonstrates responsible spending.
This is the fiscally responsible thing to do; not a “quick fix” like we have seen in the past. We would be making a fundamental change to ensure we can responsibly meet our statutory obligation to the retirement systems moving forward. 5. Stops the bleeding.
The projected debt associated with our current pension systems is expected to be eliminated by fiscal year 2044 as we meet our annual payment obligations. We can eliminate the unfunded liability years sooner by putting savings back into the systems. 6. Safeguards Pennsylvania’s credit rating.
The Commonwealth’s credit rating has already suffered from the pension crisis. Our approach protects taxpayer money by helping to avoid inflated interest rates on our credit.
Pennsylvania Gov. Tom Corbett has spent the first week of August touring the state as part of his re-election campaign, and he’s using the opportunity to hammer home Pennsylvania’s need to lower the costs of its retirement system, and tout his policy ideas on the subject.
One idea that Corbett has frequently proposed is shifting some state workers from their defined-benefit plans into 401(k)-style plans. Nearly every state burdened with pension obligations has considered this policy option. Many have even implemented it. From PennLive:
Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan, our pal Deb Erdley at The Tribune-Review reports.
Corbett’s repeated harping on the pension issue has gotten him, to some extent, what he wanted back in June: a debate. Even if state lawmakers remain on vacation, many experts have been weighing in on the issue.
Richard Johnson, director of the Washington-based Urban Institute’s Program on Retirement Policy, makes this note on the switch from DB to DC:
“These defined-benefit plans work very well if you’re going to stay for 30-35 years, but they require a pretty large employee contribution, and they don’t work very well for the shorter-term worker,” Johnson tells the newspaper.
Stephen Herzenberg of the Keystone Research Center points to the experiences of other states as an argument against switching to a 401(k)-style plan:
In fact, when Florida created this choice, its traditional pension was overfunded. In a decade-plus since, the investment returns of Florida’s traditional pension have been 10 percent higher than the return on individual accounts. Over the 30 years that typical retirement contributions grow, this difference would become a one-third gap in savings available for retirement.
Alaska and Michigan did shift all new hires into 401(k)-style plans but the switch did not, in fact, work. Pension debt in both states grew.
Rhode Island did save some money but only because of deep cuts in traditional pensions, including for current retirees. The state then wasted some savings on a “hybrid plan” for new employees that included 401(k)-type accounts with low returns and high fees.
Guaranteed pensions need sound management and can get in trouble if politicians fail to make required contributions. But long term, there’s no beating the high returns of professional managers and the low costs of pooled pension assets. That’s why Pennsylvania’s current pension design is the best deal, long term, for taxpayers and retirees.
Herzenberg claims that reforms moving state workers to a 401(k)-style retirement plan in other states have “failed” because their traditional, non-401(k) pension funds lost value during the most recent recession. Huh?
Every state¹s pension fund lost value when the stock market fell, including Pennsylvania’s, which went from being fully funded to today having more than $50 billion (and growing) in unfunded liabilities. That’s about $10,000 per household in the state.
Now here’s the rub. States like Michigan and Alaska would have lost more from their pension funds had they not started to convert new employees into a 401(k). In fact, without reform, Michigan’s unfunded liability would be upwards of $4.3 billion more.
Thankfully, because lawmakers in the Wolverine state acted early, they saved taxpayers those additional costs. Pennsylvania would have also had substantial savings had we followed Michigan’s lead.
Corbett has tried desperately to make pension reform a campaign issue. It has worked. He’s gotten the media, thought leaders and everyday citizens talking about Pennsylvania’s retirement system and the policy options to address the issues Corbett foresees.
That’s healthy for the state—but make no mistake, it’s probably just as healthy for Corbett’s election chances.
He’s been gaining ground on challenger Tom Wolf in recent weeks.