Location:
PUBLIC EMPLOYEES - STATE - RETIREMENT;
Scope:
Connecticut laws/regulations; Program Description;

OLR Research Report


December 8, 2010

 

2010-R-0454

OLR BACKGROUNDER: CONNECTICUT STATE EMPLOYEES RETIREMENT SYSTEM

By: Janet L. Kaminski Leduc, Senior Legislative Attorney

SUMMARY

This report provides information about the State Employees Retirement System (SERS), including a description of the three benefit tiers, membership totals by tier, and a benefit comparison by tier. It shows how each new tier is less costly to the state than the previous one. Finally, the report describes a new retiree health insurance contribution that certain state employees must now pay as a result of negotiations with the state employee unions in 2009.

STATE EMPLOYEES RETIREMENT SYSTEM

SERS is Connecticut's primary state employee pension system. It is administered by the Office of the Comptroller and is a defined benefit pension plan that has three different tiers: Tier I, Tier II, and Tier IIA. Employees fall into different tiers based on when they were hired. Each tier has different terms for the pension benefits it provides. Tier II offers a lower level of benefits than Tier I and Tier IIA requires a greater employee contribution than Tier II.

Tier I includes employees hired before July 1, 1984. It provides the most generous benefits. Tier II encompasses employees hired on and after July 1, 1984 and before July 1, 1997. Tier II benefits are more modest than Tier I benefits. Tier IIA covers employees hired on or after July 1, 1997. Tier IIA provides the same benefits as Tier II, but unlike Tier II, Tier IIA requires employees to make a contribution toward their pensions.

State employee retirement benefits are collectively bargained with state employee unions. Whenever the state has sought a change in benefits or employee contributions, it has had to negotiate with the State Employee Bargaining Agents Coalition (SEBAC). The state employee bargaining law requires retirement benefits to be bargained with the employee union coalition (CGS 5-278(f)(1)).

SERS Membership by Tier

Table 1 shows the SERS membership by status (active, retired, inactive) and tier (I, II, IIA) as of June 2010.

There are about 93,500 members in SERS. Of this, Tier I accounts for the largest membership, but its members are mostly retired and already receiving pension benefits. Tier IIA, the least costly plan to the state, has the fewest members, but the highest group of actively employed members.

Table 1: SERS Membership by Tier as of June 2010

 

SERS Tier I

SERS Tier II

SERS Tier IIA

SERS Total

Active

4,441

19,487

26,136

50,064

Retired

30,222

10,849

839

41,910

Inactive*

324

1,130

144

1,598

Total

34,987

31,466

27,119

93,572

* Former state employees entitled to, but not yet receiving, benefits.

Source: Office of the Comptroller

Benefit Comparison by Tier

Table 2 compares various aspects of the three SERS tiers for pension benefits. The table compares such things as employee contributions, the state's contribution, final average salary (FAS), the age and service requirements to qualify for retirement, and the benefit formula for each tier.

The table shows some distinctions between the tiers, such as:

1. the Tier I benefit formula results in a more generous annual pension benefit than the Tier II or Tier IIA benefit formula,

2. Tier IIA members contribute more than Tier II employees, and

3. Tier I members can retire at an earlier age than Tier II or Tier IIA members (e.g., at age 55 with 25 years of service as compared to age 60 with 25 years of service).

Table 2: Comparison of the Three SERS Tiers Pension Benefits

Plan Component

SERS Tier I

SERS Tier II

SERS Tier IIA

Members

State employees

hired before July 1, 1984

State employees hired between July 1, 1984 and June 30, 1997

State employees hired after June 30, 1997

Vesting Period

10 years

5 years

Same as Tier II

Employee

Contribution

● Regular: 2%

● Hazardous duty: 4%

● Employees not paying into Social Security: 5%

● Regular: 0

● Hazardous duty: 4%

● Regular: 2%

● Hazardous duty: 5%

State Normal Cost Contribution as % Of Member Payroll*

(excluding unfunded liability)

● Regular – 14.3%

● Hazardous duty – 12.6%

● Regular – 10.1%

● Hazardous duty – 14.8%

● Regular – 4.6%

● Hazardous duty – 7.6%

Types of Retirement

● Normal

● Age 70

● Early (reduced benefit)

● Hazardous duty

Same as Tier I

Same as Tier I

Retirement

Qualifications

(Age/Years of Service)

● Normal: 55/25 or 65/10

● Age 70: 70/5

● Early: 55/10

● Hazardous duty: any/20

● Normal: 60/25, 62/10, or 62/5

● Age 70: 70/5

● Early: 55/10

● Hazardous duty: any/20

Same as Tier II

Final Average

Salary (FAS)

3 highest paid years

Same as Tier I

Same as Tier I

Annual COLA (cost of living adjustment)

Yes

Yes

Yes

Benefit Formula – Hazardous duty

(50% x FAS) + (2% x years of service over 20 x FAS)

Same as Tier I

Same as Tier I

Benefit Formula-Non-hazardous duty

2% x FAS x years of service

((1.33% x FAS) + (0.5% x FAS above breakpoint**)) x years of service up to 35 + (1.625% x FAS x years over 35)

Same as Tier II

* As determined by the 2008 actuarial valuation for SERS.

** If an employee's salary is above the annual breakpoint number, the difference between salary and breakpoint becomes an additional part of the formula. The breakpoint equals $10,700 plus 6% each year since 1982, but not greater than Social Security compensation (e.g., in 2005, the breakpoint was $40,900).

Pension Benefit Differs Based on Tier

To illustrate how the differences between Tier I, Tier II, and Tier IIA affect the cost of state employee retirement benefits to the state, Table 3 provides an example. In the example, assume a non-hazardous duty state employee is retiring on July 1, 2005. Also assume the person's FAS equals $70,000 and years of service equals 30.

Under Tier I, the member receives an annual pension of $42,000. Under Tier II and Tier IIA, the member receives an annual pension of $32,295. The Tier II and Tier IIA pension is lower than the Tier I pension despite being for the same Final Average Salary and years of service.

Although calculating the pension benefit under Tier II and Tier IIA results in the same annual pension, the Tier IIA member is less costly to the state because he or she contributes more to the system than the Tier II member (see Table 2).

Table 3: Example of Pension Benefit Difference Between Tiers

 

SERS Tier I

SERS Tier II

SERS Tier IIA

Benefit Formula

2% x FAS x years of service

((1.33% x FAS) + (0.5% x FAS above breakpoint)) x years of service

Same as Tier II

Calculation

(.02 x $70,000) x 30

$1,400 x 30

((.0133 x $70,000) + (.005 x $70,000-40,900)) x 30

(931 + (.005 x 29,100)) x 30

(931 + 145.5) x 30

$1,076.5 x 30

Same as Tier II

Annual Pension

$42,000

$32,295

Same as Tier II

SEBAC 2009 – RETIREE HEALTH INSURANCE CONTRIBUTION

In 2009, the governor and SEBAC renegotiated certain aspects of the contractual agreement currently governing employee health and pension benefits. As part of the concession package, certain Tier IIA employees—those hired on and after July 1, 2009 and existing state employees who, as of July 1, 2010, did not have five years of state service—must contribute 3% of their pay to a retirees health insurance fund until they reach 10 years of state service.

This fund will help pay for retiree health insurance in the future, but its impact is limited in two ways. First, under SEBAC 2009, money can be diverted from the retiree health insurance fund to the General Fund to reduce retiree health care costs until July 1, 2013. Second, any employee paying the 3% retiree health insurance contribution who leaves state service before completing 10 years of state service can have his or her contributions refunded. This refunding option is available because employees do not vest for retirement health insurance until they reach 10 years of state service.

ADDITIONAL INFORMATION

For more details on SERS retirement plans, see the state comptroller's website at http://www.osc.state.ct.us/empret/.

For further information on SERS and an overview of the teachers' retirement system, see OFA/OLR Research Report 2010-R-0268.

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