November 3, 2010
OLR BACKGROUNDER: RETIREMENT INCENTIVES IN THE 2009 SEBAC AGREEMENT
By: Veronica Rose, Chief Analyst
RETIREMENT INCENTIVE PROGRAM (RIP)
On May 15, 2009, the legislature approved an agreement between the state and the State Employees Bargaining Agent Coalition (SEBAC), which included a RIP. Generally, RIPs give incentives to employees close to retirement age to encourage them to retire earlier than they had otherwise planned. They are usually designed to reduce salary expenses, although critics question their effectiveness in realizing this goal, especially in the long run.
The SEBAC RIP applied to unionized employees. On May 15, 2009, the legislature passed SA 09-6, which provided the same retirement incentives to nonunion employees and also required the administrative services commissioner, in consultation with the comptroller, to report on the savings realized from implementing the RIP. Most employees had six weeks in which to decide whether to retire. More than 3,800 employees retired.
This is the first of three reports summarizing the major provisions of the SEBAC agreement. This report summarizes the RIP provisions. The other two reports will address the health insurance provisions and miscellaneous issues.
PEOPLE ELIGIBLE FOR RIP
The 2009 RIP was available to full- and part-time state employees age 55 or older on or before June 30, 2009 and who had at least 10 years of actual state service in Tier 1, Tier II, or Tier IIA of the State Employee Retirement System (SERS). Full-time hazardous duty employees who had at least 20 years of actual hazardous duty state service in SERS were also eligible, regardless of age. The RIP was also available to members of the Teachers Retirement System (TRS) and Alternate Retirement Program (ARP) on the same eligibility terms as provided to SERS members. But TRS members did not have to meet the minimum service requirement. (SERS and TRS are defined benefit plans that provide a guaranteed pension. The ARP is a defined contribution plan that functions like a 401(k) plan commonly used in the private sector.)
Only state employees were eligible for the RIP. Thus, employees of state-aided institutions (American School for the Deaf, Newington Children's Hospital, and Oak Hill School for the Blind); vending stand operators; E.O. Smith School teachers; elected officials; and employees of the U.S. Purchasing and Finance Office were not eligible. And, employees of quasi-public agencies were not eligible even if they were SERS members, except for Connecticut Lottery Corporation employees who used to be classified Division of Special Revenue employees.
Employees had to (1) be on the state payroll and working on the day before the effective date of their retirement, unless they were laid off from state service and retired, and (2) retire on early, normal, or hazardous duty retirement benefits. Employees who retired on disability or who were eligible for terminated vested retirement benefits were excluded from the program.
Under the agreement, eligible SERS and TRS employees could add up to three years of service to their credited service for the purpose of calculating benefits. The additional years of service could not be deemed service for any other purpose. Participating ARP employees were eligible for a $6,000 payment (prorated for part-time employees) in three equal annual installments.
Actual, not projected, wages had to be used to calculate retirement benefits. Accrued vacation days had to be credited as increased service time. Furlough days or the equivalent had to be treated as voluntary schedule reductions and counted as part of the employee's service.
Employees were eligible for payment of accrued and unused vacation, sick leave, or both in accordance with existing rules, but paid over three years as follows: one-third in July 2012, one-third in July 2013, and one-third in 2014. The agreement allowed the state to make the payment in one installment or before July 2012 if the amount was less than $2,000. Also, the state higher education units could, on a case-by-case basis, make the payment in one installment at any time.
The RIP did not eliminate the benefit reduction for early retirement. This means that if the additional three years did not put an employee into normal retirement for his or her tier, the benefit would be reduced, based on the existing early retirement formula appropriate for the tier.
Impact of Adding Three Years of Service to Pension Calculation
Credited state service is a key factor in determining an employee's retirement benefit. The pension formula for SERS Tier I employees is years of service times 2% times the employee's final average salary. Below is an example of the annual pension for Tier I employees with 30 years of service and a final average salary of $60,000 before the three years of additional service are factored in:
30 years of service multiplied by .02 multiplied by $60,000 final average salary = $36,000 annual pension.
When the extra three years are added under RIP, the benefit increases in this example as follows:
33 years of service multiplied by .02 multiplied by $60,000 final average salary = $39,600 (which is 10% higher than $36,000).
For Tier II and IIA employees, the added three years of the retirement incentive increase the pension benefit in a similar way, but the base formula for Tier II and IIA is less generous than Tier I.
EFFECTIVE RETIREMENT DATES
With exceptions, employees had to retire by July 1, 2009. The retirement date for eligible employees on active military duty was deferred for 90 days after their discharge form active military service. The extended service could be credited provided the employee purchased the military service credit by the deferred retirement date. The retirement date for judicial marshals or supervising judicial marshals who needed additional service to meet the minimum 10-year service requirement was extended to August 1, 2009.
Employees of the Comptroller's Office who had certain responsibility related to employee and retirement benefits could defer their retirement to June 1, 2010. And Legislative Management employees deemed critical to the legislative process could defer their retirement to September 1, 2009. (SA 09-6 extended the retirement deadlines for a number of different groups of employees. For more on this, see link at the end of this report.)
SA 09-6 required the administrative services commissioner, in consultation with the comptroller, to report on the savings from the RIP. According to the report, the total gross savings from the program was $336,862,492. But this amount was offset by $211,826,306 (the cost of increased retiree health insurance benefits, retirement fund costs, RIP-related hires, and temporary hires). When the total gross savings and quantifiable offsets were taken into consideration, the RIP savings totaled $125,036,186, as of October 15, 2009.
RELATED LINKS AND ATTACHMENTS
● Report on 2009 RIP Savings (Attachment)
● SEBAC 2009 Agreement (http://www.ct.gov/opm/lib/opm/pensioncommission/2009_sebac__signed1_(2).pdf)
● SA 09-6 (2009SA-00006-R00HB-06718-SA.HTM)
● SA 09-6 Analysis (http://cgalites/2009/BA/2009HB-06718-R01-BA.htm)