Modify State Employee Retiree Benefits

Connecticut and many other states face a wide gap between the retirement promises made to employees and the money put aside to pay those bills.

As the Hartford Courant has urged, “The state’s Cadillac benefits have to be retooled to put them in line with what the state can afford.”

Negotiating retiree health and pension benefits to make them more sustainable also would go a long way to renewing private-sector confidence in Connecticut.

Changes to healthcare and pension benefits negotiated with state employee unions in 2011 included an increased penalty for early retirement, increased years of service to be eligible for regular retirement, mandatory contributions to the retirement healthcare trust fund, and a decrease in the minimum cost of living adjustment (COLA) from 2.5% to 2% for retirements after Oct. 1, 2011. There are more steps Connecticut could take.

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Pension Reforms

Facing similar crises over long-term obligations, many states have modified their pension programs:

Most frequently, says the Connecticut Institute for the 21st Century, states have either raised employee contribution rates or adjusted state contributions. The changes mostly affect newly hired state workers, but some states are exploring higher contributions and benefit changes from current employees.

Many states have changed the income-averaging period from a three-year average to a five-year average. Some states have also raised threshold retirement ages and frozen cost-of-living adjustments.

Other states have moved away from a defined benefit plan (which provides a monthly benefit to participants at retirement) to a defined contribution plan similar to 401(k) plans offered by private-sector employers. The state plans are either replacing or co-existing with traditional defined benefit plans.

Best Practices:

  • Utah: Utah has taken a moderate approach while eliminating the defined benefit pension for all new employees. New hires may choose between a hybrid plan, where the government contributes up to 10% divided between a defined benefit and defined contribution plan, or a transferrable defined contribution 401(k)-style plan. This brought the plan back to near-full funding, and depending on retirement trends, could save the state up to $10.5 million.(The Utah Pension Model; The State Adopts 401(k)s for New Employees” Wall Street Journal, Jan. 19, 2011
  • Rhode Island: In a similar approach to Utah’s, Rhode Island has switched to a hybrid plan and required higher employee contribution to funds. They went a step further, however, in raising the retirement age (to match Social Security), suspending COLAs for all government employees, preventing pension funds from being used for other purposes, and other debt restructuring measures. The plan is estimated to save taxpayers $3 billion over the next decade.
  • Florida: Florida also saved nearly $1 billion by increasing employee pension contributions and eliminating COLAs for new retirees.
  • Virginia:In addition to increasing employee contributions and creating a mandatory hybrid pension plan, Virginia reduced benefits and eliminated COLAs for those already retired.47

Many other states have adopted various types of pension reform.

Healthcare Benefits

Connecticut’s unpaid obligation to provide healthcare benefits for current and future state and teacher retirees totals just under $21 billion. Paying off the current liability would require $5,820 from every man, woman, and child in the state.

Connecticut’s pay-as-you-go system means that instead of setting aside money to pay for health benefits promised to future retirees, the state pays only the current costs each year. This system ignores a much more significant long-term price tag as demographic shifts drive up the number of retirees and associated healthcare costs.

Some states are abandoning pay-as-you-go to implement a system that funds benefits in advance through dedicated trust accounts. The idea has been recommended, but not adopted, in Connecticut.

Actions being taken to reduce retiree healthcare obligations include requiring current state employees (and in some cases those who have already retired) to contribute or increase their contributions to the funds.

Eligibility requirements are also being tightened to call for a longer employment tenure before retirees gain access to benefits. In some cases, states are encouraging early retirements in order to increase the number of new hires, and therefore, people contributing to their benefits systems.

Connecticut modified its retiree health eligibility rules in 2009 to require new hires to contribute 3% of pay for the retiree medical plan for their first 10 years of service. They also must have at least 10 years of service (or based on age and service, meet the rule of 75) in order to qualify for the benefits.

In other states:

  • Georgia raised health insurance premiums on most of its 225,000 state employees and teachers.
  • Michigan requires public school teachers and other state employees to contribute 3% of compensation into an irrevocable trust created for the purpose of holding, investing, and distributing assets for retiree healthcare benefits. The state is also using a defined contribution model and has modified its obligations to certain tiers within the system.
  • Pennsylvania reduced its contribution to the state healthcare benefits fund by 20% over the next 15 months.
  • Utah raised state employee contributions to health insurance from 2% to 5%.
  • Vermont implemented a new tier in 2010 that provides for no subsidy of the insurance premium for employees with fewer than 15 years of service.

Discussion