Senate Pension Plan Step in Right Direction

Yesterday the Senate passed, by an overwhelming margin, much needed changes to government employee retirement benefits. One Republican, Senator Stewart Greenleaf, joined all Democrats in voting against the measure.

Senate Pension Plan a Step in the Right Direction

Senate Bill 1 (SB 1) makes a number of significant changes to the pension system. First, new employees will not be eligible for the pension system as it currently exists. Instead, new employees will enter a defined contribution plan, similar to a 401k. These changes will apply to state workers, teachers, members of the general assembly and the judiciary. In addition, if (or when) a current member of the general assembly is re-elected they will be considered a new employee and automatically move into the defined contribution plan.

New hires will also have the option to enroll in a "cash balance" plan. Cash balance plans are similar to a savings account with a guaranteed interest rate. In this case, new employees would contribute 3 percent of their salary to the plan and receive interest equal to the 30-year US Treasury Bond. The current rate on a 30-year treasury is under 2.3 percent. The legislation caps the annual interest rate for the cash balance plan at 4 percent to guard against a spike in interest rates.

While CAP would have preferred to see a defined contribution plan only, the cash balance component is far less risky for taxpayers and retirees than the current defined benefit plan.
SB 1 also makes a number of important changes to the defined benefit program for current government employees. One significant change prevents employees from maxing out on overtime during their last three years of employment in order to spike their pension rate. Another is a change to how future benefits are calculated for current employees who are enrolled in the pension system and require increased employee contributions.

According to the Senate fiscal note on the legislation, the changes to the pension system will save tax-payers over $1.7 billion over the next four years. (The fiscal note also states that taxpayers will reap a total savings of $18 billion, but there is no time frame listed and the supporting documentation was unavailable at the time of this post)

This legislation now moves over to the House, which is also considering its own changes to the pension system. It is CAP’s understanding that the House is less inclined to make changes to current government employees’ future benefits. While the House’s proposal to move new employees into a 401k style system is welcome, failing to address current employee benefits would drastically reduce the budgetary impact in comparison to the Senate plan.

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