PERS Study Commission Recommendations

• The PERS Board should reconsider lowering its investment return assumption from 8 percent to 7.5 percent as recommended by PERS’ own actuary, Cavanaugh MacDonald. Over the last ten years, PERS has achieved a 5.41 percent investment return. Many states are lowering their investment return assumptions to more accurately reflect market conditions.
• The Legislature and/or PERS Board should continue studying the issue of adding a defined contribution component in the state’s overall retirement program. There is no recommendation that PERS be converted to a defined contribution plan.
• The Legislature should consider revising the make-up of the PERS Board to include more financial subject matter experts and include non-participant taxpayer members.
• While the ultimate determination of the legality of any changes to PERS will rest with the state judicial system, the legal subcommittee believes the following modification tiers are allowable: new hires are subject to any new standards of retirement; current employees are subject to changes for future accruals but no changes to benefits already earned for previous service; and retirees are only subject to changes in future accruals of the COLA.

RETIREMENT AGE AND TIERS FOR DRAWING BENEFITS

• The Legislature should provide that 62 is the normal retirement age with the following tiers for drawing retirement:
  
  • Eligible to draw full retirement at age 62 if vested;
  • Eligible to draw full retirement at age 55 with 30 years or more of service, but with no cost-of-living adjustment until age 62; or
  • Eligible to draw an actuarially reduced benefit before age 55, after completing 30 years of service.
• Implementing these changes (effective for current members’ future service and all new hires) would
  
  • Decrease the employer contribution rate by 1.61 percent
  • Increase the plan’s funded status to 64 percent
  • Produce a cost-savings of $92.8 million

COST-OF-LIVING ADJUSTMENT

• The COLA is one of the costliest benefit provisions in the PERS plan, accounting for an estimated 25 percent of the plan’s payout during a single year. The current COLA is 3 percent simple until age 55; the COLA is compounded after age 55.
• A statutorily fixed cost-of-living adjustment does not provide a mechanism for ensuring COLA payments track inflation. 
  
  • For example, PERS beneficiaries received at least a 9 percent (or higher) COLA from 2008-2011. During this same time period, inflation rose half that amount (4.54 percent) based on the latest Consumer Price Index (CPI) data available. 
  • Additional study by the actuarial consulting firm GRS found that PERS pays out approximately $10 million more in COLA benefits each year than it would if the COLA program were indexed to the CPI. This means that some members are, on average, receiving more in COLA than they actually lost through inflation.
• The Study Commission did not recommend elimination of the COLA or any changes to the current option to take the COLA as a lump sum payment.
• The Commission recommends freezing the COLA for three years and thereafter tying the COLA to the CPI with a cap of 3 percent. (For retirees, COLA payments would continue but just not increase for three years. For individuals not yet retired, no COLA would be received for three years after retirement.)
• Implementing these changes for future accruals of current members and retirees, as well as all new hires, would result in:
  
  • Reduction in contributions by 2.12 percent
  • Estimated funded status of 67 percent
  • Reduction in first year employer contributions of $122.2 million

Other recommendations include lowering the vesting period from eight to four years and continued study of SLRP (since the Legislature must address the question of whether it’s appropriate to have an additional benefit for members of the Legislature and the Lieutenant Governor).