OFA Bill Analysis

RESOLUTION PROPOSING APPROVAL OF AN AGREEMENT BETWEEN THE STATE OF CONNECTICUT AND THE STATE EMPLOYEES BARGAINING AGENT COALITION.

SUMMARY:

The State Employees Retirement System (SERS) is currently funded on an actuarial reserve basis whereby the normal cost and annual payment for any past service liability are calculated in order to determine the state's actuarial determined employer contribution (ADEC, formerly known as the actuarial required contribution (ARC)) (CGS 5-156a). Until the late 1970's, early 1980's SERS was managed as a pay-as-you go system which funded annual retirement benefit payments and did not pre-fund future benefit.

Since 1981, SERS has been a mandatory subject of collective bargaining and is currently provided in accordance with a collective bargaining agreement negotiated between the state and State Employees' Bargaining Agent Coalition (SEBAC) effective until 2022. The proposed agreement makes modifications to actuarial cost methods and assumptions used to calculate the state's ADEC. Provisions pertaining to current employee retirement benefits are unchanged by the proposed agreement and remain governed by the agreement in place until 2022.

The provisions of the proposed agreement are outlined below.

1. Unfunded liability will be computed using entry age normal (EAN). Currently, SERS uses projected unit credit (PUC). In general,

a. EAN creates level contributions throughout an employee's career; and

b. PUC attempts to fund benefits as they accrue, creating lower costs at the beginning of an employee's career and increasing contributions as the employee nears retirement and presumably salary increases.

2. Pension funding method will be level dollar (LD). This method will be phased in over five years. Currently, SERS uses level percentage of payroll (LPP). In general,

a. LD requires equal dollar amounts to be paid over a given number of years (the amortization period/payoff term); and

b. LPP calculates amortization payments as a constant percentage of projected payroll over a given number of years (the amortization period/payoff term).

3. Unfunded accrued liability (UAL) as of 1984 will be paid off by the end of the current amortization period in 2032.

a. The UAL as of 1984 is approximately $4.3 billion; and

b. The total SERS UAL is $14.9 billion as of 6/30/14.

4. The balance of the UAL, approximately $10.6 billion, will be paid off in 2047.

a. An additional 15 years is being added to the current amortization period for the portion of the UAL attributed to the period after 1984.

5. Actuarial gains and losses will be amortized using a 25 year layered amortization approach.

6. Recommend the Retirement Commission adopt an investment rate of return assumption of 6.9%.

a. The Retirement Commission voted to adopt 6.9% at the commission meeting on 12/15/16.

b. The SERS investment rate of return was previously 8%.

COMMITTEE ACTION

Appropriations Committee

Senate Favorable

Yea

10

Nay

2

(01/24/2017)