With many states struggling to set aside enough money to follow through on their pension promises to government employees, Tennessee officials have decided it’s time to revise the pension plan here.
State lawmakers appear to be on board with launching a plan that creates a hybrid between the state’s current plan that features a defined benefit with one that requires more people to contribute to their eventual retirement, reducing government costs and unfunded pension liabilities.
The plan comes from the offices of Treasurer David Lillard, a numbers guy who has spent the past year drafting potential changes to the Tennessee Consolidated Retirement System.
Under the current system, state employees, workers at higher educational institutions and teachers can now calculate their retirement payout by multiplying he number of years on the job by their average salary over their five highest-paid years by a multiplier of 1.575 percent. K-12 teachers also contribute 5 percent of their salary to the pool.
The new system folds in a defined contribution element. The multiplier would change to 1 percent, and workers would make up the rest through aligning with state investments or use programs like a 401(k).
Under the changes, employees would largely have to wait until 65 to cash in on their benefits, or until their total years of service added to their age equals at least 90. Currently, retirement benefits can kick in after 30 years of service or after the worker reaches age 60, although the timeline is shorter for public safety workers.
The “Hybrid Retirement Plan for State Employees and Teachers” is aimed at new employees hired after June 30, 2014 — meaning the 122,000 current retirees and the 217,000 public employees now in line for pension benefits are grandfathered into the current system. Local governments can also opt into the plan for new hires.
Compared to other states, Tennessee is in good shape on the pension front. A study by the Pew Center found a $1.38 trillion gap across the country between promises of a pension and the money states have put away to pay those bills in 2010.
The system in Tennessee was 90 percent funded that year, well above an 80 percent threshold used to determine whether programs are fiscally sustainable. Wisconsin was the only state to fully fund its pension plan in 2010, and almost three dozen states fell below the 80 percent threshold.
The cost to taxpayers for supporting government employee pensions is on the rise, according to the treasurer’s office. Taxpayers were spending about $264 million a year to support the system a decade ago, which has since climbed to $731 million last year.
“Based on projections we have seen, the cost could go up by one-third or more over the next 10 years if changes aren’t made, which would push the taxpayers’ total annual expense above $1 billion,” Lillard said.
The pension changes are popular on Capitol Hill, so far. The governor’s office is comfortable with the bill, and the Senate voted almost unanimously this month to usher in the new program. Sen. Thelma Harper — a Nashville Democrat representing large swaths of North Nashville and downtown — cast the lone vote against the plan in her chamber.
As of press time, the House was expected to follow suit, although there will likely be more opposition from Democrats, who argue the changes are premature.
“I don’t see the need for it at this stage of the game,” said House Minority Leader Craig Fitzhugh (D-Ripley) who argues the current pension system is on solid financial ground.
“I’m concerned about the quality of our workforce that we’ll get in the future. Especially with teachers, because teachers generally don’t do it for the pay. They do it for a lifetime, and I think we should give them the expectation of having a certain sum of money available for them to sustain them when they retire,” said Fitzhugh.
His problem is similar to big-picture concerns Gov. Bill Haslam and his department commissioners have voiced in the past: that state government is something of a training ground that loses quality employees lured to the private sector with attractive financial incentives.
“If you start diminishing the value of the pension system and have not yet fixed the low salaries, you’re going to have a hard time bringing in the best people,” said Robert O’Connell, executive director of the Tennessee State Employees Association.
Representing some 40,000 state employees — with almost 14,000 dues-paying members — the TSEA is opposed to the bill, although the treasurer has edited parts of it to make the plan more pleasing to the group, said O’Connell.
“We can’t say his plan is awful,” he said, “but we’re really given heartburn by some aspects of it.”
“We would have liked to continue forever to tell state employees this certain sum is what you can expect to receive as a benefit when they retire after 30 years, but we can’t do that anymore,” said O’Connell.