Connecticut union deal creates a new retirement plan, but is it a “hybrid” in name only?
One of the major selling points of the union concessions agreement negotiated between Gov. Dannel Malloy and state union leaders is a new Tier IV hybrid retirement plan, which combines a 401(k) style retirement account with a pension.
Under the terms of the concessions deal, new state employees would only contribute 1 percent of their pay toward the defined contribution portion and 5 percent toward the pension portion of the plan. The state will match the 1 percent DC contribution.
The pension part of the retirement plan will be similar a Tier III pension, although employees will have to make a higher contribution and be limited in the amount of overtime that can be used to calculate their pension payout.
Proponents claim that this move will save the state money and help stabilize the state employee retirement system, but questions remain as to how the retirement payout would be calculated between the two different plans.
Anthony Randazzo of the Reason Foundation and author of a study about Rhode Island’s transition to hybrid retirement plans, says Connecticut’s proposed hybrid lacks a balance between the defined benefit and the defined contribution portion of the plan. ”
“Insofar as the proposed plan has a defined benefit and defined contribution elements, it conceptually could be called a hybrid. But it is not a hybrid of DB and DC plans in the classical sense where there is a balance between the two benefits,” he said.
A 2017 study of Connecticut’s pension problems outlined a number of potential fixes for Connecticut’s pension problems, including switching new hires to a hybrid plan. But the hybrid plan outlined in the study differs significantly from what is proposed in the concessions deal.
“The primary benefit of such hybrid approaches is to balance the amount of liabilities that taxpayers carry, while also setting the DB portion low enough that using appropriate actuarial assumptions is not cost prohibitive,” the authors of the study wrote.
Randazzo also says there is too little information to tell how the hybrid plan will affect Connecticut’s pension situation because the concessions deal does not outline how a retiree’s pay would be determined between the two plans.
“Ultimately, when thinking about a hybrid plan’s defined benefit component, the employee contribution rate isn’t the important point of measurement. What’s important is: what is the balance between the defined benefit and defined contribution portions in providing retirement income?” Randazzo said.
The SEBAC contract does not say what the payout ratio will be in calculating a retirement benefit but it does change some of the pension benefit calculations to lower the potential pension payout.
Average pay will include overtime over the employee’s full 25 years of service rather than the highest five years of pay for a Tier III retirement plan. Overtime can only be included up to 60 percent over base pay.
Part of how a pension is calculated depends on the multiplier, which is a percentage of an employee’s salary multiplied by the number of years of service. For the standard Tier III plan, the multiplier is 1.4 percent. For the new hybrid plan it is 1.3 percent.
By contrast the hybrid plan for federal employees uses a 1 percent multiplier.
Technically, Connecticut already has a hybrid plan, which is only available to professors and professional staff in the state higher education system. The “hybrid” plan is actually still considered a defined benefit plan but allows a lump sum cash out option once the employee retires with the state matching 100 percent.
Connecticut also has an Alternative Retirement Plan, which is a more traditional defined-contribution plan, but is only available to state higher education employees.
The ARP plan is currently the subject of a grievance, and the state is awaiting a ruling from the Internal Revenue Service. Following the recession of 2008, SEBAC filed the grievance to allow professors to switch from the ARP to the state’s pension plan. So far, 1,872 college professors in the ARP have switched to the traditional pension benefit.
Professors continue to switch into the pension plan, which costs the university system more money. In 2015 alone, 288 professors switched, costing the state university system $9 million in added pension costs.
Under the terms of the 2017 concessions agreement, employees in the ARP will have to contribute more toward their retirement and the state will lower its matching rate.
The Office of Fiscal Analysis estimates that this lowered matching rate will save the state $5 million in 2019, but the changes could make the ARP plan less attractive and drive more higher education employees into the pension plan.
Rhode Island successfully transitioned its employees into a hybrid retirement plan, but Rhode Island requires a more significant employee contribution go to the 401(k) portion of plan and, like the federal government, uses a 1 percent multiplier
In 2010, Rhode Island faced a pension fund shortfall of $6.8 billion and that figure was growing. Rhode Island switched all their employees, including teachers, into a hybrid plan in 2011. Within two years, the unfunded liability had fallen to $4.5 billion and the pension fund went from 56 to 72 percent funded, according to Randazzo.
State and local contributions toward pensions fell from $689 to $415 million, according to a report by the National Council of State Legislatures.
Under Rhode Island’s plan, state employees contribute 3.75 percent of pay to the defined benefit plan and 5 percent of pay to the defined contribution plan.
Under the terms of the Connecticut concessions deal, state employee would contribute 5 percent toward the pension plan and 1 percent toward the defined contribution plan.
Rhode Island’s change affected both current and new employees, whereas the hybrid plan outlined in the concessions deal would only affect new employees. Current employees will retain their retirement plan but have to pay 2 percent more toward their pensions.
The OFA estimates that the combined savings from the concessions deal will lower Connecticut’s unfunded pension liability from 21.7 billion to $20.4 billion, meaning Connecticut’s pension fund will be 36.9 percent funded by 2019.
Unlike Rhode Island, Connecticut’s yearly contribution toward its pensions will continue to grow from $1.3 billion to $2.2 billion by 2027 – the same year the SEBAC contract will expire if the concessions deal is approved by the legislature.
The SEBAC contract controls the retirement benefits for state employees. Under the terms of the concessions deal the contract would be extended another 5 years to 2027, making it a 30 year labor agreement.
The original contract was signed in 1997 by Gov. John Rowland.