State Pension Reform Revisited

State pension reform has been the topic of much discussion since 2009, when the effects of the economic downturn on state and local governments forced an examination of all aspects of their finances. Employee pensions, which are heavily dependent upon investment returns to fund benefits, have been under intense scrutiny ever since, and the result has been that more than 40 states have passed reforms to their public pension programs.

Most states that have adopted pension reforms have modified their existing defined benefit programs. Some changed their plan design from defined benefit to a combination of defined benefit and defined contribution, known as a hybrid.

The ability of a state government to reform its pension system depends on the nature of the issue that needs addressing and the political feasibility of passing reforms. In some cases, states have enacted pension reforms only to go on and address the same or another issue later on.

New York State

New York changed employee contributions and eligibility twice in two years.

In 2009, New York passed a law creating Tier V, which represented significant changes to the pension benefits system for state and local employees. It increased contributions, reduced benefits, and increased retirement ages for members hired on or after January 1, 2010.

In 2012, New York passed legislation creating a new tier (Tier VI) of pension benefits for employees hired on or after April 1, 2012.

Tier VI made further adjustments to each of these provisions and locked in Tier V provisions for those employees hired between January 1, 2010, and March 31, 2012.

Tier V Tier VI
Contributions 3% 3%-6% depending on employee salary
Benefits 1.66% for the first 20 years of service; 2% for years 21-30 1.75% for the first 20 years of service; 2% beginning in the 21st year
Eligibility 62 with 10 years of service 63 with 10 years of service

Thus, the second round of reforms increased benefit levels, offset by corresponding increases in contribution rates, and the age for retirement eligibility.

Oregon

In 2003, Oregon moved from a defined benefit pension to a hybrid pension system for employees hired on or after August 29 of that year. The new Oregon Public Service Retirement Plan combined a traditional defined benefit pension with an individual account (defined contribution) component to make up the full retirement benefit.

Oregon went without further pension reform until 2013, when the state passed a law reducing COLAs for OPERS retirees. In this case, the state chose a different area of the overall benefits package to reform, rather than building on the 2003 reforms, which altered plan design.

Michigan

The state of Michigan has undertaken the pension reform process twice for employees of the state’s Public School Employees’ Retirement System.

In 2010, the state passed a law that created a hybrid (DB/DC) plan for new hires. Newly hired employees were given the same benefit multiplier as the defined benefit plan, but were required to contribute more toward the funding of their benefits as well as participate in a mandatory defined contribution plan.

In 2012, another round of pension reform built on the earlier reforms passed, asking employees to accept reduced benefits or a change in plan design.

The reforms targeted two groups of Public School Employees: participants in the defined benefit plan (those hired between 1990 and 2010) and participants hired after 9/26/12. (Employees hired between 2010 and 2012 who participate in the hybrid plan were not affected.) Specifically:

Employees hired between 1990-2010 had two options:

  • keep their current contribution rates benefits and have their benefits frozen at a 1.5 percent multiplier (with 1.25 percent accrual for future years of service)
  • move into the DC plan and receive contributions of 4 percent from employers for future service (with variable employee contributions)

Employees hired after 9/26/2012 could choose between the hybrid plan and the defined contribution plan.

The examples presented in this article demonstrate that pension reform is an issue that is iterative and state-specific. Different benefit programs are targeted for reforms in different ways and, in a few cases, multiple rounds of reform aim to correct prior reforms, build upon new benefit designs, or target different areas entirely.