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House Co-Sponsorship Memoranda
House of Representatives
Session of 2013 - 2014
Regular Session
MEMORANDUM
| Posted: | July 22, 2014 11:16 AM |
|---|---|
| From: | Representative Scott A. Petri |
| To: | All House members |
| Subject: | Pension Reform - Option 4 |
| Throughout 2014, the debate regarding pension reform has remained at the forefront. There is good reason for legislative and public attention to this issue. Both SERS and PSERS have combined unfunded liabilities of $50 billion. Concerns regarding the impact of this pension debt on taxpayers, the financial stability of both funds and the systems’ ability to sustain benefits that have been earned by teachers and state employees are driving ongoing efforts to reform these two statewide pension systems. We understand that pension reform is complex and that we don’t have a “silver bullet” at this time. Both benefit and funding reforms have been part of the discussion over the past several months. I believe that it is time to revisit and reconsider a concept that was discussed in 2013. As you might recall, there had been review and consideration of a number of benefit changes applicable to future benefits earned by current employees. Among these concepts was a proposal to end the subsidy that currently applies to the Option 4 lump sum and annuity. Otherwise known as the “Option 4 neutrality” provision, this proposal makes the lump sum and resulting annuity actuarially neutral. I believe that this is a common sense reform that should be reexamined in light of the ongoing pension reform debate and the search for reform options that produce additional savings. My legislation would apply to pre-Act 120 state and school employees because Act 120 eliminated the lump sum option for post Act 120 employees. The proposal would make the lump sum and annuity attributable to future service only (on or after Jan. 1, 2015 for SERS and on or after July 1, 2015 for PSERS) actuarially neutral. In other words, the lump sum and annuity attributable to service before these dates would be calculated with the subsidy and the lump sum and the lump sum and annuity attributable to service on or after these dates would be calculated without the subsidy. You may wonder how we have ended up with a current calculation that is not actuarially neutral. Currently, when a SERS or PSERS member elects to withdraw his or her contributions plus accrued 4 percent interest compounded annually, the amount of his or her monthly annuity is reduced by the statutory interest rate of 4 percent, rather than the applicable system’s assumed rate of return. Thus, while the applicable system, with the withdrawal of a lump sum, is losing assets on which it could be earning 7.5 percent (the current assumed rate of return), the annuity resulting from the lump sum withdrawal is calculated based on a 4 percent reduction, not a 7.5 percent reduction. Actuarial notes on the current versions of House Bill 1352 and House Bill 1353 indicate that Option 4 neutrality provisions have the potential to produce about $4.3 billion in savings. Given this potential, I encourage you to consider cosponsoring my legislation. |
Introduced as HB2421