State employees would be exposed to an increased market risk under Senate amendments made to a House plan to reduce pension costs. Supporters of the bill hope to move it through the Senate on Thursday, October 14 – the last scheduled session day for the Senate – and back to the House.
But its fate in the House is uncertain as the Senate Appropriations Committee linked the pension bill to the creation of an independent fiscal office. Some House Democrats called the move unconstitutional. The shared risk section allows for comparing the expected investment returns with the actual returns, and splitting any losses between the state and the employee.
An employee’s contribution could not increase by more than an additional 2 percentage points – for a maximum of up to 9.5 percent of salary for teacher retirement state plan participants (PSERS), or 8.25 percent for state employee retirement plan participants (SERS).
The House approved the pension reform measure, HB 2497, in June, 2010. On the bill’s arrival to the Senate, leaders there said the bill didn’t go far enough to cut costs, which are staggering.
The unfunded liabilities of both systems will explode in two years. The retirement system for state workers, SERS, for example, will have an unfunded liability of $10.6 billion in 2011, which means for fiscal year 2012/13 the state's costs under the current laws would increase from $489 million to $1.68 billion, or more than 245 percent.
The exploding unfunded liabilities have two causes: the state could afford to reduce its contribution rates to the systems in the 1990s due to robust returns from the financial markets. Those returns have disappeared; in 2001, the General Assembly made the pension systems more lucrative, and so more expensive. Some of the changes enacted in 2001 are erased for new hires under the House bill.
HB 2497 defers future pension obligation for the state and school districts, and reduces future costs through changes in the pension laws covering new hires.
In one change in the House bill, a multiplier used in calculating a state employee’s pension will drop from 2.5 to 2.0. The multiplier for lawmakers will drop from 3.0 to 2.0. In another change, state employees will be vested after ten years not five. The bill also ends the practice of allowing retirees to take all their contribution money out upon retirement.