From a report titled, “Sustaining State Retirement Benefits: Recent State Legislation Affecting Public Retirement Plans, 2005-2009,” prepared by National Conference of State Legislatures, Ron Snell, January 2010.

Since 2007, investment losses and the weakness of state and local government revenues have produced extraordinary stress for public retirement funds in the United States. This stress magnified the funding issues retirement funds encountered because of the recession at the turn of the century.

Policy makers’ responses are occurring in the context of an additional issue, that of providing for the commitments state and local governments have made for retiree health insurance and other post-employment benefits.

These obligations have accumulated gradually for many years. Current accounting rules now require recognition of them. State government liabilities, aside from any local government amounts, have recently been estimated to be as much as $560 billion.

Legislatures and governors began to address pension system issues while the economy was still strong; the recession added urgency to their endeavors to strengthen the funding streams and reduce the long-term costs of their public retirement systems. This report summarizes the most significant features of state public retirement plan changes in 18 states from 2005 through 2009. In general, states have made a broad range of relatively minor changes to plans, rather than undertaking fundamental change.

Their goal has been to adjust rather than radically alter their retirement plans. Several of the states listed in this report have made a number of the following changes at once:

• Increases in employee contributions
  
• Extending the period over which salary is calculated for the purpose of determining retirement benefits
  
•  Increases in the age or service requirement, or both, for eligibility for retirement benefits
  
• Anti-spiking provision • Reductions in or greater controls over post-retirement cost-of-living adjustments As an example, these are the changes that Kansas enacted in 2008 for newly-hired state employees and teachers in the Kansas Public Employee Retirement System:
  
• Employee contribution increased from 4% to 6% of salary
  
• Future cost increases, in the old plan the employer’s responsibility, will be shared equally by employees and employers in the new plan.
  
• The base for calculating final average salary increased from the four highest years to five highest years.
  
• Age and service requirements were increased to allow retirement at 60 only with 30 years of service and to encourage retirement at 65.

Included benefits employees had requested, including immediate membership for all members (in place of a six-month wait); vesting in five years (as opposed to 10 years) and a guaranteed post-retirement benefit increase of 2% a year for retirees over age 65.

Although the Kansas legislation included the widest range of policy changes reported here, the kinds of changes in that legislation and the general approach of changing a number of features of the plan in a relatively moderate degree are typical of the state legislation of the period.

Kansas acted in another way typical of most states in the period in choosing to preserve and reform a traditional defined benefit retirement plan (which provides a guaranteed life-time annuity) rather than fundamentally restructure the kind of benefit it provides. Two states in this period did carry out fundamental restructuring of their retirement provisions: Alaska and Georgia.

They replaced traditional defined benefit (DB) plans with alternatives. Alaska created defined contribution (DC) plans for teachers and public employees. Georgia enacted a hybrid plan that combines a traditional defined benefit plan with a 401(k) in which all new employees are automatically enrolled. In recent years, many legislatures have considered replacing a DB plan with a DC plan. Defined contribution plans provide each member with an individual account to which the member and the employer make contributions throughout the member’s employment at some percentage of the employee’s salary. The member’s retirement benefit depends upon the accumulation of contributions and investment earnings in the account when the member retires. The general practice is for the employee to control the investment of his or her account.

At present, DC plans are the basic state retirement plan only for state employees in Michigan, public employees and teachers in Alaska, and state employees in Nebraska, which now uses the variant of a cash balance plan. The District of Columbia also has a DC plan as its primary pension coverage.

West Virginia’s retirement plan for teachers was a defined contribution plan from 1991 to 2005, when it was closed to new enrollment. Otherwise, and except for higher education, their use in state government takes two forms:

• An alternative to a defined benefit plan that employees may choose to join if they wish to. Examples are Colorado, Florida, Ohio, Montana and South Carolina. A few additional states sponsor DC plans for elected officials, as in Utah and Virginia. In these jurisdictions, a new employee is enrolled in the defined benefit plan unless he or she makes an explicit decision to join the DC plan.
  
• A component of a mandatory hybrid plan, in which the general practice is for employee contributions to support a defined contribution account and employer contributions to support a defined benefit program.

Such plans, with various plan designs, exist in Georgia, Indiana, Oregon and Washington. In 2005, Alaska became the first state to close statewide DB plans and enroll all new employees in DC plans since Michigan had done so for state employees in 1997. In 2008, Georgia became the first state to enroll all new employees in a hybrid plan since Washington had created hybrid plans for its teachers and state employees in 1998-2000. Its DB component is funded by both employers and employees but with the employee contribution and potential benefit reduced from the previous state DB plan.

All new members will also be enrolled in a401(k) with a provision for self-directed levels of employee contributions and a limited employer match. Employees may withdraw from the 401(k) plan if they wish to do so.

The complete reports are available on the NCSL website at www.ncsl.org/default.aspx?tabid=13399 or by searching on the NCSL website for “Pension and Retirement Plan Enactments.”