Location:
PUBLIC EMPLOYEES - STATE - RETIREMENT; TEACHERS - RETIREMENT;
Scope:
Connecticut laws/regulations; Program Description;

OLR Research Report


July 1, 2010

 

2010-R-0268

STATE EMPLOYEES AND TEACHERS' RETIREMENT SYSTEMS

By: Jennifer Campbell, Budget Analyst,

Christina Gellman, Principal Budget Analyst, and

John Moran, Principal Analyst

You asked for information on the state employees and teachers' retirement systems including: (1) an overview of each, including the different state employee tiers; (2) annual contribution requirements; (3) unfunded liability compared to other states; and (4) benefit protections for retirees.

The information addressing you questions follows in four separate parts.

OVERVIEW

The State Employee Retirement System (SERS) and the Teachers' Retirement System (TRS) are the two largest public employee pension and benefit systems in Connecticut. SERS is administered by the Office of the Comptroller and TRS by the Teacher's Retirement Board. The membership of each is shown in Table 1.

TABLE 1: SERS AND TRS MEMBERSHIP

 

SERS*

TRS**

Active

49,522

53,961

Retired

38,893

30,142

Inactive

1,618

10,281

Total

90,033

94,384

*Office of the Comptroller as of June 30, 2009

**TRS Administrative Report, 2009

SERS and TRS are each defined benefit plans, which means retirees receive a fixed pension benefit that is determined by the number of years the employee worked and his or her final average salary (FAS). Since the 1970's, the terms of SERS have been agreed to through collective bargaining between the state and a coalition of state employee unions, known as SEBAC (State Employee Bargaining Agents Coalition). The terms of the TRS are controlled by state statute.

SERS has three different tiers that divide state employees into groups based on when they were hired. TRS is one unified plan with everyone getting the same benefits and making the same contributions.

SERS Tier I employees are all those who were hired by the state before July 1, 1984. Tier II encompasses those hired on or after July 1, 1984 to June 30, 1997. Those hired on or after July 1, 1997 are in Tier IIA.

The tiers are a result of the state negotiating with SEBAC. Tier I provides the most generous pension and has an employee contribution toward those benefits. Tier II has a less generous pension but there is no employee contribution (except for hazardous duty employees). Tier IIA has the same pension benefit as Tier II, but the all employees must make a contribution, with hazardous duty employees making larger contributions.

The table below compares major aspects TRS and the three SERS tiers.

Table 2: Comparison of the Teachers' Retirement System (TRS) and the three tiers of the State Employee Retirement System (SERS)

PLAN COMPONENT

TRS

SERS Tier I

SERS Tier II

SERS Tier IIA

Members

Public school employees who (1) must hold a teaching certificate, (2) must hold appropriate certification for the position, and (3) are employed at least half-time.

State employees hired before July 1, 1984.

State employees hired between July 1, 1984 and June 30, 1997.

State employees hired after June 30, 1997.

Social Security Coverage

No

Yes

Yes

Yes

Vesting Period

10 years

5 years

5 years

5 years

Employee Contribution

6%

Regular – 2% Hazardous duty -4% (employees not paying into Social Security contribute 5%)

Regular - 0

Hazardous duty - 4%

Regular – 2%

Hazardous duty – 5%

State Normal Cost Contribution as % of Member Payroll* (excluding unfunded liability)

4.4% of member payroll

Regular – 14.3%

Hazardous duty - 12.6%

Regular – 10.1%

Hazardous Duty – 14.8%

Regular –4.6%

Hazardous Duty – 7.6%

Types of Retirement

Normal, early, and

proratable

Normal, age 70,

Early, and

Hazardous duty

Normal, age 70,

Early, and

Hazardous duty

Normal, age 70,

Early, and

Hazardous duty

Retirement Qualifications

(Age/Years of Service)

Normal: 60/20; Any/35

Early: 55/20; Any/25

Proratable: 60/10

Normal: 55/25, or 65/10;

Age 70: 70/5;

Early: 55/10;

Hazardous duty: any/20

Normal: 60/25 vesting; 62/10 vesting; 62/5 actual

Age 70: 70/5 vesting

Early: 55/10 vesting

Hazardous Duty: Any/20

Normal: 60/25 vesting; 62/10 vesting; 62/5 actual

Age 70: 70/5 vesting

Early: 55/10 vesting

Hazardous Duty: Any/20

Final Average Salary (FAS)

3 highest-paid years

3 highest-paid years

3 highest-paid years

3 highest-paid years

Annual COLA

Yes

Yes

Yes

Yes

Normal Benefit Formula

2% x FAS x Years of Service

2% x FAS x years

35 years or less: 1.33% x FAS + .5% x FAS above annual breakpoint** x years

More than 35 years: add 1.625% x FAS x years over 35

35 years or less: 1.33% x FAS + .5% x FAS above annual breakpoint** x years

More than 35 years: add 1.625% x FAS x years over 35

*As determined by the respective 2008 actuarial valuations for TRS and SERS.

**If an employee's salary is above the annual breakpoint number, the difference between the salary and the breakpoint becomes an additional part of the retirement formula.

SEBAC 2009

Last year, in response to the state budget crisis, the governor and the state employee unions renegotiated certain aspects of the 20-year SEBAC contract governing employee health and pension benefits. The concession deal called for higher employee health insurance contributions, higher prescription co-pays, and mandatory unpaid furlough days for state employees, among other measures, in exchange for a two-year, no-layoff promise from the governor.

It also included a new requirement on some state employees: the contribution of 3% of their pay to a retirees health insurance fund until they reached 10 years of state service. This new requirement was imposed on all new state hires as of July 1, 2009. Existing state employees who, as of July 1, 2010, did not have five years of state service are also required to make the 3% contribution until they reach 10 years of state service. Although this mechanism will help fund retiree health insurance in the future there are two additional aspects of this that limit its impact. First, under SEBAC 2009 the money can be diverted from retiree health insurance fund and placed in the General Fund to reduce payments for retiree health care until July 1, 2013. Furthermore, any employees paying the 3% who leave state service before they are vested for retiree health insurance (i.e., 10 years) can have their contributions refunded to them.

ANNUAL REQUIRED CONTRIBUTIONS (ARC)

Connecticut's pension systems have an annual required contribution (ARC) that is comprised of the normal cost plus the portion of the unfunded actuarial liability amortized for that year. Normal cost is the annual cost assigned to current and subsequent plan years and is often referred to as “current service cost.” The unfunded actuarial liability is the bill for past years' liabilities that were not funded. Usually the unfunded liability cost is amortized, spread out in yearly payments over a schedule.

The ARC is an amount that is actuarially determined so that, if paid on an ongoing basis, it would be expected to provide sufficient resources to fund both the normal cost for each year and the amortized unfunded liability. Although normal cost contributions have remained relatively steady with increases primarily reflecting payroll growth, unfunded liability increases are typically a result of interest and expected benefit payouts which are not entirely offset by contributions made to the fund.

SERS

Under the provisions of CGS 5-156a, SERS is funded on an actuarial reserve basis. Actuarial valuations are prepared at least every two years to determine the state's annual contribution. The most recent valuation was prepared as of June 30, 2008.

Special Act 09-6, SR 28, and HR 31 incorporated the terms of an agreement between the state and SEBAC (i.e., SEBAC 2009), which resulted in labor concessions over the 2009–2011 biennial budget.  The concessions included the deferral of $50 million in FY 09 and $64.5 million in FY 10 in contributions to SERS, with the option to defer an additional $100 million upon meeting certain triggers for further action. The additional $100 million was deferred earlier this year. 

The impact to the state's pension obligations from funding levels below the actuarially determined contribution level as well as the 2009 Retirement Incentive Program (RIP) will not be officially determined until the next actuarial valuation is completed on June 30, 2010 (the report is usually issued in December). However, any funding below the actuarially recommended contribution level will increase unfunded liabilities.  Similarly, the increase in retirements caused by the 2009 RIP will increase the unfunded liability. Other factors, such as the expected pension fund investment losses in 2008 and 2009, due to the dramatic drop in the markets, will also increase the unfunded liability. According to figures released by the State Treasurer's Office, the value of the SERS portfolio dropped by 17.14% in FY 09.

To gauge the impact of the 2009 RIP on the pension fund, it can be helpful to look at the experience from our 2003 Early Retirement Incentive Program (ERIP).  The ERIP had 4,725 participants.  As a result, the SERS long-term unfunded liability increased by over $500 million.  This cost was amortized over 29 years, resulting in a first year cost of $27.5 million.

The state's normal cost decreased significantly in the short-term, resulting in a first-year savings of $45 million. The reason for this is that the size of the state workforce was reduced and the normal cost associated with new hires was less than those of the more senior employees they replaced.

The state's schedule of contribution to SERS from FY 99 to the present is shown below in Table 3.

TABLE 3: SERS – STATE CONTRIBUTIONS ($ MILLIONS)

Fiscal

Year

Annual Required Contribution

Actual Contribution

Percent Funded

1999

$315.6

$315.6

100.0%

2000

$342.7

$342.7

100.0%

2001

$354.2

$375.6

106.1%

2002

$415.5

$415.5

100.0%

2003

$425.9

$421.5

99.0%

2004

$474.0

$470.3

99.2%

2005

$516.3

$518.8

100.5%

2006

$623.1

$623.1

100.0%

2007

$663.9

$663.9

100.0%

2008

$716.9

$711.6

99.3%

2009

$753.7

$703.7

93.4%

2010

$897.4

$732.9

81.7%

2011

$944.1

TBD

TBD

Source: SERS June 30, 2008 valuation, Biennial Budget 2009-2011

TRS

The state established an actuarial funding program for the TRS in 1979. PA 79-436 required a gradual phase in of the funding schedule which reached 100% of the normal cost and amortization of past service liabilities in 1992. Despite the law's requirement, “notwithstanding” language in budgets over the years has allowed funding at a lower than actuarially required level. PA 07-186 authorized the sale of state general obligation (GO) bonds to fund $2 billion of the unfunded liability of the TRS. The act specifies that for each year in which bonds are outstanding, the state is required to appropriate the actuarially required annual state contribution to the TRS. The state's schedule of contribution to TRS from FY 99 to the present is shown in Table 4.

TABLE 4: TRS- STATE CONTRIBUTIONS ($ MILLIONS)

Fiscal Year

Annual

Required

Contribution

Actual Contribution

Percent

Funded

1999

221.6

188.3

85.0%

2000

240.5

204.4

85.0%

2001

252.5

214.7

85.0%

2002

210.7

204.5

97.1%

2003

221.2

179.8

81.3%

2004

270.5

185.3

68.5%

2005

281.4

185.3

65.9%

2006

396.2

396.2

100.0%

2007

425.3

412.1

96.9%

2008*

518.6

2,518.6

485.7%

2009

539.3

539.3

100.0%

2010

559.2

559.2

100.0%

2011

581.6

581.6

100.0%

Sources: Connecticut State Teachers' Retirement System Valuation 6/30/08

Biennial Budget 2009-2011

* During FY 2008, bond proceeds amounting to $2 billion were deposited into the fund, in addition to the normal state contribution.

UNFUNDED LIABILITY COMPARED TO OTHER STATES

The unfunded liability of a pension system is the difference between the actuarial accrued liability (i.e., the system's pension commitments) and the valuation of assets available to meet the liability. The funded ratio is the ratio of a pension plan's assets to its liabilities. This is one indicator of the fiscal strength of a pension fund's ability to meet its obligations to its members. The unfunded liabilities and funded ratios of SERS and TRS from FY 2000 to FY 2008 are shown in tables 5 and 6 below.

TABLE 5: SERS UNFUNDED LIABILITY ($ BILLIONS)

Actuarial

Valuation

Date

Actuarial

Value

Of Assets

(a)

Actuarial

Accrued

Liability

(b)

Unfunded

Liability

(b)-(a)

Funded

Ratio

(a)/(b)

6/30/00

7.2

11.4

4.3

63%

6/30/02

7.9

12.8

4.9

62%

6/30/04

8.2

15.1

6.9

54%

6/30/06

9.0

16.8

7.9

53%

6/30/08

10.0

19.2

9.3

52%

Source: State Employees Retirement System Valuations 6/30/04, 6/30/06, and 6/30/08

TABLE 6: TRS UNFUNDED LIABILITY ($ BILLIONS)

Actuarial

Valuation

Date

Actuarial

Value

Of Assets

(a)

Actuarial

Accrued

Liability

(b)

Unfunded

Liability

(b)-(a)

Funded

Ratio

(a)/(b)

6/30/00

9.6

11.8

2.2

81%

6/30/02

10.4

13.7

3.3

76%

6/30/04

9.8

15.1

5.2

65%

6/30/06

10.2

17.1

6.9

60%

6/30/08

15.3

21.8

6.5

70%

Source: Connecticut State Teachers' Retirement System Valuation 6/30/08

Table 7, from Connecticut Economy, Summer 2010, displays Connecticut's unfunded public pension liability compared to other states. The table shows the combined unfunded liability of the TRS and SERS (it also includes the smaller state pension plans such as the one for judges). It also shows the cost for unfunded retiree non-pension benefits, mainly health insurance. These are referred to as “Other Post-Employment Benefits” or OPEB.

Table 7: Funding of All Public Pensions & Retirement OPEB FY 08, Selected States ($000 except for %)


The actuarial contribution for Connecticut is larger on this table than it would be in a typical year primarily because it was the year that the state added $2 billion in bond proceeds to the TRS.

BENEFIT PROTECTIONS FOR RETIREES

Existing law, collective bargaining contracts, and constitutional considerations all provide significant legal protection for accrued pension benefits. Over the years, states have developed various means of protecting state employee pension plans. (State pension plans are exempt from the federal Employee Retirement Income Security Act, which governs private sector pension plans.)

Some states have explicit protections in their constitution (Connecticut does not) while others have statutory protections. The TRS is set in statute, while the law provides that retirement and health benefits for state employees are subject to collective bargaining. Currently SEBAC has a 20 year retirement and health insurance contract (mentioned previously regarding its renegotiation in 2009) with the state that expires in 2017.

The legislature has never tried to change the benefits of retired employees and we could not find any Connecticut case law on this point. From time to time the state legislature has tried to make changes to SERS without first negotiating with the union. In subsequent legal proceedings, arbitrators or judges usually have ruled against these actions (see OLR reports 2008-R-0360 and 2002-R-0961).

There are also constitutional issues to consider. Often the question is whether the state action amounts to a contract violation and hence a violation of the contracts clause of the U.S. Constitution (see OLR report 2004-R-0150 for a discussion of constitutional issues related to revoking pension benefits for convicted state employees).

Colorado

While a number of states are changing retirement plans to require new employees to either contribute more or work more years to earn a full retirement, Colorado recently passed a law that would reduce the cost of living increases promised to current retirees. It is the only state that is cutting benefits to current retirees in order to help shore up its pension plan. In response, a number of retired state employees filed a lawsuit that has yet to go to trial.

JC:CG:JM:tjo