Location:
PUBLIC EMPLOYEES - STATE - COMPENSATION; PUBLIC EMPLOYEES - STATE - RETIREMENT;
Scope:
Other States laws/regulations; Program Description;

OLR Research Report


February 20, 2013

 

2013-R-0139

STATE EMPLOYEE BENEFITS IN NORTHEASTERN STATES

By: Lee R. Hansen, Legislative Analyst II

You asked for a comparison of state employee benefits in northeastern states regarding (1) employee pension contribution rates, (2) the number of years used to determine pension benefits, (3) whether overtime pay is included in pension benefit calculations, and (4) prescription drug co-payments.

SUMMARY

All of the nine northeastern states' governments provide their employees with pension and health benefits, although the states vary widely in how they administer these benefits. Regarding state employee pension systems, required employee contributions range from 0% for Connecticut's Tier II and New York's Tiers I and II employees, to 12% of employee salaries for Massachusetts employees hired after July 1, 1996. (This report does not examine state pension benefit rates, which may reflect differences in employee contribution rates, or the relative fiscal health of each state's respective pension fund.)

Until recently, all of the northeastern states used an employee's three highest paid years to determine the final average salary (FAS) used to calculate an employee's retirement benefits. Over the past three years, six of the nine states, including Connecticut, began requiring that the FAS for newer employees be determined using the employee's five highest paid years. In general, lengthening the FAS time frame could lower an employee's FAS and subsequent benefit amount, by helping to mitigate the effects of a salary spike at the end of an employee's career.

Three of the nine states (Massachusetts, New Jersey, and Rhode Island) do not include overtime earnings as part of the salary used to calculate an employee's FAS, which can also mitigate the effects of “salary spiking” at the end of an employee's career. The six states that include overtime in FAS calculations all have additional “anti-spiking” provisions to prevent salary increases or overtime earnings beyond certain limits from being used in FAS calculations.

All nine of the states provide three-tiered prescription drug benefit plans for their employees. These provide three levels of co-pays for different types of medications (generic, preferred, and non-preferred). For a 30-day supply of medication, the co-payments range from $3 for generics under one of New Jersey's available plans to $60 for non-preferred drugs under one of New York's plans. Co-pays for a 90-day supply of medication range from $1 for generics in New Hampshire to $125 for non-preferred drugs in New York.

STATE EMPLOYEE PENSION CONTRIBUTIONS

Eight of the nine northeastern states have defined benefit pension systems for their state employees. These guarantee eligible retirees a set benefit amount, generally based on an employee's final average salary and years of service. The systems are funded through a combination of employee and employer contributions and the pension fund's investment returns.

One state, Rhode Island, provides state employees with a hybrid plan that combines a defined benefit system and a defined contribution system. In a defined contribution system (e.g. a 401K), the retiree's benefit amount ultimately depends on the amount in his or her retirement account. The employer typically contributes to that account, but does not assume the risk of increased costs or investment losses.

How employee contribution rates are determined varies by state. In some, like Connecticut, they are collectively bargained, while in others, (e.g. Massachusetts, New York, and Rhode Island) retirement benefits are explicitly prohibited from state employee collective bargaining.

Table 1 shows state employee contributions in the nine northeastern states. The contributions listed are for “general” state employees and do not include specialized employees (e.g. “hazardous duty”) who typically pay higher contribution rates or have separate retirement systems from other state employees. Several states, like Connecticut, have different classifications of employees based on the employees' hiring date.

Table 1: Employee Pension Contributions

State

Employees

Employee Contribution as Percent of Salary

CT

Tier I (hired before July 2, 1984)

Tier II (hired July 2, 1984 - June 30, 1997)

Tier IIA (hired July 1, 1997 - June 30, 2011)

Tier III (hired after June 30, 2011)

2%

0%

2%

2%

ME

General employees

7.65%

MA

Hired before January 1, 1975

Hired January 1, 1975 – December 31, 1983

Hired January 1, 1984 – June 30, 1996

Hired after July 1, 1996

5%

7%

8%

12%

(All employees hired after January 1, 1979 pay an additional 2% of compensation that exceeds $30,000)

NH

General employees

7%

NJ

General employees

6.64%*

NY

Tier 1 (joined before July 1, 1973)

Tier 2 (joined July 1, 1973 – July 26, 1976)

Tier 3 (joined July 27, 1976 – August 31, 1983)

Tier 4 (joined September 1, 1983 – December 31, 2009)

Tier 5 (joined January 1, 2010 – May 31, 2012)

Tier 6 (joined after June 1, 2012) (contribution varies depending on title and annual wage)

0%

0%

3% for 10 years

3% for 10 years

3%

3% - 6%

PA

General employees

6.25%**

RI

General employees

Defined benefit plan

Defined contribution plan

3.75%

5%

VT

General employees

6.4%

* Contribution will increase 0.14% annually until it is 7.5% in 2018.

** Employees hired after January 1, 2011 pay an additional actuarially determined “shared risk contribution” if the retirement fund's actual rate of investment return falls below the assumed rate of return over a three-year period.

FINAL AVERAGE SALARY CALCULATIONS

Defined benefit plans typically base a retiree's benefit amount on the retiree's final average salary (FAS) and number of years worked. Until recently, all of the northeastern states determined FAS by averaging a retiree's three highest paid years. Over the past three years, however, six of the nine states, including Connecticut, have increased this time frame to the five highest paid years for newly hired employees. The change can limit the effect a spike in an employee's annual earnings has on his or her benefit amount.

Defining what compensation will be included when determining a retiree's FAS also affects the retiree's benefit amount. Six of the nine northeastern states, including Connecticut, include an employee's overtime earnings; Massachusetts, New Jersey, and Rhode Island do not. All of the states that include overtime earnings as part of a retiree's FAS also have “anti-spiking” provisions that generally seek to limit drastic increases in an employee's earnings from being considered in the FAS.

Table 2 shows the number of years used to calculate state employees' FAS and if overtime earnings are included in the calculation.

Table 2: Final Average Salary Calculations

State

Employees

FAS Years

Includes Overtime

CT

Tier I (hired before July 2, 1984)

Tier II (hired July 2, 1984 - June 30, 1997)

Tier IIA (hired July 1, 1997 - June 30, 2011)

Tier III (hired after June 30, 2011)

Anti-spiking provision: no one year's salary used to determine FAS can be more than 30% greater than the average of the two preceding years. Mandatory overtime earnings are not currently subject to this cap, however, starting in 2014, they will be subject to a similar 50% cap.

3

3

3

5

Yes

Yes

Yes

Yes

ME

General employees

Anti-spiking provision: increases in compensation greater than 5% per year or 10% over the three highest years are not included in FAS calculations.

3

Yes

MA

Hired before April 2, 2012

Hired after April 2, 2012

3

5

No

No

NH

Vested before January 1, 2012

Vested on or after January 1, 2012

Hired after June 30, 2011

Anti-spiking provision: final FAS year is limited to a 50% increase over the next highest paid year.

3

5

5

Yes

Yes

Yes

NJ

Eligible to enroll in system before May 21, 2010

Eligible to enroll after May 21, 2010

3

5

No

No

NY

Tier 1 (joined before July 1, 1973)

Tier 2 (joined July 1, 1973 – July 26, 1976)

Tier 3 (joined July 27, 1976 – August 31, 1983)

Tier 4 (joined September 1, 1983 – December 31, 2009)

Tier 5 (joined January 1, 2010 – May 31, 2012)

Tier 6 (joined after June 1, 2012)

Anti-spiking provisions:

Tiers 1 & 2: none

Tiers 3,4,5: no single year's increase can exceed the average of the two previous years by more than 10%

Tier 6: no single year's increase can exceed the average of the four previous years by more than 10%

Tier 5 overtime included in FAS is limited to $15,914 in 2012 (limit increases 3% annually).

Tier 6 overtime included in FAS is limited to $15,000 in FY13 (future limit increases are indexed to consumer price index).

3

3

3

3

3

5

Yes

Yes

Yes

Yes

Yes

Yes

PA

General employees

3

Yes

RI

10 years of service by July 1, 2005 and either age 60 or 28 years of service by October 1, 2009

Hired before July 1, 2012, and less than 10 years of service by July 1, 2005

All others

Not eligible to retire by July 1, 2012, over half of service time was working less than 30 hours per week, and average compensation includes at least three years when the employee worked over 30 hours

3

3

5

10

No

No

No

No

VT

General employees

Anti-spiking provision: the hours used to determine FAS are limited to 20% more than the average annual hours worked in the five years preceding the three FAS years

3

Yes

PRESCRIPTION DRUG BENEFITS

All of the northeastern states provide three-tiered systems of prescription drug benefits to their state employees. Under these systems, employees typically pay different co-payments for generic, “preferred,” and “non-preferred” drugs. “Preferred” drugs are generally brand name drugs that the insurance carrier has discounted for various reasons, while “non-preferred” drugs are more expensive brand names. Co-payment amounts in these systems also vary if the prescription is short-term (up to a 30-day supply) or long-term (up to a 90-day supply).

Table 3 shows state employees' prescription drug co-payments for up to a 30-day supply of medication.

Table 3: Prescription Drug Co-Pays (30-day supply)

State

Generic

Preferred

Non-preferred

CT

$5

$20 plus the cost difference between the brand name and the generic, if applicable

$35 plus the cost difference between the brand name and the generic, if applicable

$20 if physician certifies as medically necessary

ME

$10

$30

$45

MA

$10

$25

$50

NH

$10

$25

$40

NJ*

$3 - $7

$10 - $18

$25 – 46

NY*

$5 - $10

$15 - $30

$30 - $60

PA

$10

$18 plus the cost difference between the brand name and the generic, if applicable

$36 plus the cost difference between the brand name and the generic, if applicable

RI

$5

$20

$40

VT

10% of cost

20% of cost

40% of cost

* These states offer different plans and prices vary among them.

Table 4 shows state employees' prescription drug co-payments for up to a 90-day supply of medication.

Table 4: Prescription Drug Co-Pays (90-day supply)

State

Generic

Preferred

Non-preferred

CT

$5

$10 plus the cost difference between the brand name and the generic, if applicable

$25 plus the cost difference between the brand name and the generic, if applicable

$10 if physician certifies as medical necessary

ME

$15

$45

$70

MA

$20

$50

$110

NH

$1

$40

$70

NJ*

$5 - $18

$15 - $40

$40 - $92

NY*

$7.50 - $20

$22.50 - $75

$50 - $125

PA**

$15 - $20

$27 - $36 plus cost between brand name and generic, if applicable

$54 - $72 plus cost between brand name and generic, if applicable

RI

$10

$40

$80

VT

10% of cost

20% of cost

40% of cost

*These states offer different plans and prices vary among them.

** Prices vary by pharmacy in Pennsylvania.

SOURCES

We compiled information for this report from a number of sources. For Connecticut we used the following documents from the comptroller's office:

http://www.osc.ct.gov/empret/tier1summ/index.html;

http://www.osc.ct.gov/empret/tier2summ/index.html ;

http://www.osc.ct.gov/empret/tier3spd/tier2asumm/index.html;

http://www.osc.ct.gov/empret/tier3spd/index.html; and

http://www.osc.ct.gov/empret/healthin/2012hcplan/Active%20Employee%20Health%20Care%20Options%20Planner.pdf.

For Maine we used the following documents from the state's Public Employee Retirement System and Division of Employee Health Benefits:

http://www.mainepers.org/PDFs/handbooks/State_Booklet_web.pdf;

http://www.mainepers.org/PDFs/other%20publications/CAFR12.pdf; and

http://www.maine.gov/deh/docs/pdf/NEO%2007012012%20DRAFT%20without%20CanaRx.pdf.

For Massachusetts we used the following documents from the state's Public Employee Retirement Administration Commission, treasurer, Executive Office for Administration and Finance:

http://www.mass.gov/perac/guide/retirementguide.pdf ;

http://www.mass.gov/treasury/docs/retirement/retguide.pdf; and

http://www.mass.gov/anf/employee-insurance-and-retirement-benefits/employee-health-and-other-insurance-benefits/health-plans/active-state-employees/drugs.html.

For New Hampshire we used the following documents from the New Hampshire Retirement System and the state's Department of Administrative Services Division of Personnel:

http://www.nhrs.org/documents/Legislative_Changes_2007_2012.pdf;

http://www.nhrs.org/Members/avgFinal.aspx;

http://www.nhrs.org/documents/earnable_comp_insert.pdf;

http://www.nhrs.org/PlanAdministration/Details.aspx;

https://admin.state.nh.us/hr/documents/Summary%20of%20Benefits%20and%20Coverage%20HMO%20Plan.pdf; and

https://admin.state.nh.us/hr/documents/Summary%20of%20Benefits%20and%20Coverage%20POS%20Plan.pdf.

For New Jersey, we used the following documents from the state treasurer:

http://www.state.nj.us/treasury/pensions/pers1.shtml;

http://www.state.nj.us/treasury/pensions/pdf/handbook/persbook.pdf;

http://www.state.nj.us/treasury/pensions/coltr11.shtml#contribratecp;

http://www.state.nj.us/treasury/pensions/pdf/factsheets/fact54.pdf; and

http://www.state.nj.us/treasury/pensions/pdf/handbook/hb0505.pdf.

For New York, we used the following documents from state's comptroller and Department of Civil Service Employee Benefits Division:

https://www.osc.state.ny.us/retire/publications/vo1878.htm;

https://www.osc.state.ny.us/retire/publications/vo1504/final_average_salary/index.php;

https://www.osc.state.ny.us/retire/publications/vo1509/final_average_salary/index.php;

https://www.osc.state.ny.us/retire/publications/vo1522/final_average_salary/index.php;

https://www.osc.state.ny.us/retire/publications/vo1523/final_average_salary/index.php;

https://www.osc.state.ny.us/retire/publications/vo1530/final_average_salary/index.php;

https://www.cs.ny.gov/sbc/settled/index.cfm; and

http://www.cs.ny.gov/ebd/ebdonlinecenter/gold/epglance/mc/mc_aag_13.pdf.

For Pennsylvania, we used the following documents from the state's State Employee Retirement System and Employee Benefit Trust Fund:

http://www.portal.state.pa.us/portal/server.pt?open=514&objID=594039&mode=2;

http://www.portal.state.pa.us/portal/server.pt?open=514&objID=594046&mode=2;

http://www.portal.state.pa.us/portal/server.pt?open=514&objID=594771&mode=2#RetirementCoveredEarnings; and

https://www.pebtf.org/RxBenefitManager/PEBTF%20Member%20letter%20FINAL%20PRINTER%27S%20PROOF.pdf.

For Rhode Island, we used the following documents from the state's defined contribution plan administrator (TIAA-CREF), the Employees' Retirement System of Rhode Island, and the state's Department of Administration Office of Employee Benefits:

http://www1.tiaa-cref.org/ucm/groups/content/@ap_ucm_p_mcr_auth/documents/document/tiaa04044517.pdf;

https://www.ersri.org/public/eLearning/StateRetirementBenefitsPresentation.pdf;

https://www.ersri.org/public/documentation/ERSRIEmployerHandbook_Sept2010.pdf#Page=1; and

http://www.employeebenefits.ri.gov/Documents/2008%20Active%20PPO%20Plan%20H%20%20Extl%20Ben%20Sum%203-1-13.pdf

For Vermont, we used the following documents from the state's treasurer and Department of Human Resources Agency of Administration:

http://www.vermonttreasurer.gov/retirement/state-group-f; and

http://humanresources.vermont.gov/salary/benefits/prescription_drugs

LH:ro