Legislators balked early this year when the governor suggested a new plan for public pensions that would be aimed at saving $400 million in two years. They worried that it risked underfunding the new retirement plans in the same way the old plans have been shortchanged by at least $5.9 billion.
But the budget finalized by the Democratic majority last weekend still manages to wring $429 million in general fund savings from pensions.
Here’s how they did it, in four steps:
• Refinance the unfunded liability of the older plans – $296.9 million.
The oldest plans were underfunded, meaning the state has to keep putting in extra money to cover the costs of retirement benefits. The new budget says the Plans 1, as they are called, no longer must be fully funded by 2024, when the last member is expected to retire.
Instead, the state will put in about one-third as much as the Office of the State Actuary had recommended over the next two years. But it plans to pay at a higher rate in the future, and for longer – beyond 2024.
State Actuary Matt Smith, who monitors the pension funding, said that’s a better plan than simply skipping payments on the liability, which the Legislature did in the previous recession. But he warned that the Legislature really does have to pay more in the future.
“That’s the shutoff. You have to have some way of shutting it off, and the shutoff in this system is the higher minimum rates,” he said. “This could be the last refinancing option available for the Plans 1.”
• Suspend the floor on contribution rates – $50.3 million.
In 2006, the Legislature established a new “floor” on contribution rates to the pensions, saying they would not drop below a certain amount again, starting this year. Tearing out that unused floor allows less money to be put into the funds, and allows other changes, such as refinancing the unfunded liability in the oldest plans.
• Ignore longer life spans – $45.3 million.
State workers and other public employees have defined benefit plans, meaning the state is required to pay a set amount each month for as long as the retiree lives. The Pension Funding Council voted to add improvements in the average life expectancy to the calculation of how much workers and the state should be paying into the fund.
The final budget skips that idea for two years.
A two-year delay is acceptable, Smith said, but longer life spans will have to be accounted for eventually.
“If we did not recognize it in the future, I would say that is not a good assumption,” Smith said. “I think it’s indisputable that there’s going to be some form of mortality improvement in the future.”
• Assume public employees will get less in raises – $36.4 million.
The amount being paid into the pensions assumes the workers are receiving the equivalent of 4.5 percent annual pay increases. Smith recommended lowering that number to 4.25 percent; the Legislature went lower, to 4 percent.
“It’s not an unreasonable assumption, but it takes out some of that conservatism I like to have built into the assumptions,” Smith said. “If the assumption is not right, you’re more likely to have the plans in a less healthy position.”
Smith said it’s important to remember that benefits to workers are a contracted obligation. The amount of money put in now is meant to be invested for the future, lessening the burden on taxpayers who fund the system.