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Friday, August 30, 2013

Ind. Gov't. - "State board cuts public pensions"

Excellent story by Niki Kelly of the Fort Wayne Journal Gazette, from yesterday. It is a must read if you are in PERF or TRF.

Recall this ILB post from April 28th, which noted that Eric Bradner (then of the C&P, now at Politico) had given coverage to:

... an important development not mentioned in other stories, except in passing:
[Bradner reports] Among the last-day developments in the budget, Republican lawmakers dropped a proposal to cut Indiana public employees’ retirement benefits.

The benefit cut was vaguely referenced in a previous draft of the spending plan approved by the Senate, but was only specifically spelled out in the version legislative leaders unveiled on Thursday – and the idea was short-lived.

The Indiana Public Retirement System currently allows retired teachers and state workers to receive monthly annuity payments – an option about 60 percent of retirees choose, but that the spending plan nearly blocked.

Senate Appropriations Chairman Luke Kenley was pushing a plan to require those who leave their jobs after 2013 to shift their money into private plans, which offer a 3 percent interest rate on those annuities – much less generous than the state’s 7.5 percent rate.

The state is “paying a richer benefit than they can afford. So we just put language in there that says they can’t do that,” said Kenley, R-Noblesville. “The purpose is to avoid creating any unfunded liabilities.”

However, supporters of the current system say the state can afford better benefits because it does not have to earn a profit. So Kenley’s plan was dropped.

House Speaker Brian Bosma, R-Indianapolis, said he asked – and Senate budget-writers agreed – that the retirement benefit cut be eliminated from the final budget so that the change could be publicly aired and debated.

“There wasn’t adequate discussion about it,” Bosma said. “I requested that that be removed from the final conference committee report so it could be discussed in a public meeting at a future date.”

These proposed changes can be seen in the first CCR draft, available here, from pp. 127-138. The changes do not appear to apply to legislators' pensions, or those of other elected officials.
Well, Kelly's story yesterday could be labeled "Part 2." She writes:
INDIANAPOLIS – The state’s top pension official on Tuesday stood behind a move to cut Indiana public employees’ retirement benefits despite concern from affected employees and several Democratic lawmakers.

Legislators briefly considered a similar change to the Annuity Savings Account program on the last day of the session, when it was inserted in a final draft of the budget.

But after last-minute negotiations, House Speaker Brian Bosma removed the provision, saying there wasn’t adequate discussion about it beforehand and it needed to be considered in future public meetings.

Instead, the Indiana Public Retirement System used its authority in July to unilaterally alter the system without consulting the Pension Management Oversight Commission.

“This is a big decision that affects a lot of people,” said Sen. Karen Tallian, D-Portage, a member of the legislative oversight panel. “I don’t know what the fiscal impact is. I thought (the Pension Management Oversight Commission) would vet it.”

In Indiana, members of the Public Employees’ Retirement Fund and Teachers’ Retirement Fund have a hybrid system that consists of a defined benefit plan and an annuity savings account component.

When someone retires, the person can take the money built up in the ASA and cash out for a lump sum or annuitize it with the Indiana Public Retirement System to receive monthly annuity payments calculated with a 7.5 percent interest rate.

About 50 percent of retirees take the annuity option.

The interest rate is generous compared with the open market. But legislative fiscal leaders expressed concern.

Steve Russo, executive director of the Indiana Public Retirement System, said it doesn’t make sense to have a guaranteed interest rate on annuity payments that is higher than the rate of return for the fund’s assets.

So the Board of Trustees decided instead to privatize the annuity system with a third-party vendor using market-based rates. This reduces the risk for the state and public employers and places the risk on employees.

According to state pension staff, the current market rate would be in the range of 4.0 percent to 4.5 percent. That means a typical PERF member who chooses to annuitize an ASA would receive about $77 a month less; the typical TRF about $180 less a month.

This is a loss in expected income of between $924 and $2,100 a year.

But the change won’t affect current retirees who have chosen the annuity route.

The new system would go into effect July 1, 2014, meaning some public employees might be forced to retire earlier than expected to keep the more generous state rates.

Other less onerous options were on the table, but the pension board voted unanimously to make the transition to an outside vendor. Russo said the decision came after months of study and discussion by the board in several public meetings.

“We have and will continue to operate with full transparency,” he said.

Minutes from the June meeting where it was discussed showed unease by several unnamed board members. The vote was taken in July and those minutes are not yet available.

The Indiana State Teachers Association sent a letter to Bosma recently expressing concern that the change was made without legislative hearings, as was the understanding during the final hours of budget negotiation.

“In some cases, the difference is likely to be in the tens of thousands of dollars over the course of one’s retirement,” the letter said. “The annuity change is particularly troublesome and seemingly arbitrary.”

The teachers union also said the move by the pension board is effectively retroactive for teachers. That’s because they have already begun the school year, and even if they were going to retire at the end of the school year, their effective retirement date by law is July 1.

This means teachers could not avoid the annuity change.

Russo acknowledged the technical issue and said the board will change the effective date to Aug. 1.

Sen. Phil Boots, R-Crawfordsville, said he would accept public testimony at the September meeting of the Pension Management Oversight Commission.

But he repeatedly said the pension board acted within its authority – “my feeling is we should let (them) do their work.”

The Indiana Public Retirement System already put out a Request for Proposal for an annuity vendor and received only two official responses by the deadline. Russo said the board will reissue another RFP in the coming months.

“I recognize that something needed to take place,” said Rep. David Niezgodski, D-South Bend. “I don’t see why more time could not have taken. The legislature held back for greater transparency. You took it away from the realm of the legislature.”

Here is the website of the Pension Management Oversight Commission. They include the minutes of the August 27th meeting, which state this on p. 2:
Director Russo outlined recent changes that the INPRS board has made in regard to the annuitization of PERF and TRF members’ ASA balances upon or after retirement. Prior practice was to calculate these annuities using a 7.5% interest rate and outdated mortality tables. The INPRS board adopted a resolution in July 2013 to provide members ASA annuities at marketbased rates through a third-party annuity provider effective July 1, 2014. Director Russo indicated that he will ask the INPRS board to change this effective date to August 1, 2014, in order to accommodate retirement time frames under TRF.

Representative Niezgodski, Senator Tallian, Senator Boots, and Director Russo discussed this recent change to ASA annuitization. It was determined that this issue will be more thoroughly examined by the Commission and will include public testimony at the second Commission meeting.

Here is the meeting notice for the next meeting, set for Sept. 23rd.

[More]
Here is Tom LoBianco's AP story in the IndyStar:
Indiana lawmakers grilled the head of the state’s pension system Tuesday on a decision to push future retirees into a market-based system that could almost halve the amount they earn from annuity plans.

The Indiana Public Retirement System voted unanimously last month to change how much new retirees earn from their annuity savings accounts, or ASAs. The state currently allows retirees to return a lump-sum amount earned over their time working for the government to the pension fund, in return for guaranteed monthly payouts based on 7.5 percent of that lump sum.

More than half of the roughly 425,000 retirees enrolled in Indiana’s major pension plans, the public employee retirement fund and the teacher’s retirement fund are enrolled in the annuity plan. But employees who retire after July 1, 2014, would have to look to market-based rates and a sharp drop in that guaranteed money.

INPRS Executive Director Steve Russo told the panel the new payout would likely drop from 7.5 percent to a figure equaling the 10-year Treasury Note rates plus another 1.5 percentage points. The 10-year Treasury yield on Tuesday was listed at 2.75 percent, making the new payout likely 4.25 percent.

The pension board’s July vote followed a last-minute push by the Senate’s lead budget-writer, Luke Kenley, to end the annuity payouts over concerns the state could not afford them. But lawmakers, including House Speaker Brian Bosma, R-Indianapolis, said the decision needed a public vetting and pulled it from the state budget.

Democrats on the panel said they were caught off guard by the changes.

“This is a big decision that affects a lot of people” said Sen. Karen Tallian, D-Portage. “Frankly, I had expected that this was something that would be vetted before PMOC, at one or two meetings, rather than have you just come back and say, ‘Well, this is what we did.’”

But Russo pointed out the pension board’s meetings are open to the public and they have been discussing the change for more than a year.

“I have no doubt in my mind there was complete and utter transparency,” he said.

Russo said the board was concerned about the long-term viability of paying out 7.5 percent on the annuity plans when the state’s pension funds are only expected to earn 6.75 percent interest. However, according to the General Assembly’s legislative analysts, they are 100-percent funded.

Posted by Marcia Oddi on August 30, 2013 05:13 PM
Posted to Indiana Government