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Re: “Cutting future pensioners

I agree that future benefit changes have been made here in Arkansas. The changes here have not been for the “accounting trick” that the article addresses. The changes generally have not been to cut basic benefits to the bone for new hires. Arkansas has occasionally changed benefits for new employees that were costly and had little justification in public policy. Just as often, the change apples to all service after the law is effective, not just to new hires. Examples can be found in almost every one of the state supported systems. The changes are usually not material to the basic benefit structure of the average member.

The general benefit structure is based on three elements, years of service, final average salary, and a multiplier. Generally the multiplier has one level for members who are contributory (at ATRS it is .0215) and one for members who are noncontributory (at ATRS it is .0139). The benefit is calculated by multiplying “years of service” times “final average salary” times “cumulative multiplier.“ The final issue is when a member can begin to receive benefits. The earlier members can retire, the more costly the benefits.

How each element is determined has a lot of detail. For instance, ATRS has an anti-spiking law to prevent a “bonus” or a court ordered salary from being added on top of regular salary to establish a major increase to a reasonable final salary calculation (ATRS uses the best 3 years). These are important provisions to prevent manipulation even if it has the effect of reducing future liabilities. Arkansas has not undertaken changes to make the “accounting” work.

Usually the changes made to benefits to new hires in Arkansas are on the add-on benefits. Examples at ATRS are the stipend at ATRS and the death benefit at ATRS. The stipend at ATRS adds $75 per month to members with 10 years of service at ATRS. At one time it was given to members with 5 years of service. The change was made to have it apply to reward long service and not just to vested members. The same change was made to the $10,000 death benefit ($6,667 to totally noncontributory members). At one time, members with 5 years of service qualified, now it takes 10 years. It did reduce costs but encourages longer service.

Arkansas’ retirement systems have occasionally adjusted the multiplier, how many days are required to earn service credit, how final average salary are calculated, and when retirement is allowed. Generally these changes apply to ALL members, not just to new hires For instance, ATRS is looking to increase the number of days worked to earn service credit, Now, a member earns a year of service credit for 120 days worked. This means a member working 5 days a week can earn a year of service credit between July 1st and December 31st. ATRS is considering extending the days required to between 160 and 172 days. If adopted, the law would apply to ALL working members, not to new hires. It would apply to all service earned AFTER the effective date of the law, but not to prior service accruals. The law would be a cost savings measure and at the same time recognize that the school year is now longer than in 1971, the last time the service credit provision was lengthened.

Arkansas has created a second tier retirement benefit structure for new hires in the past. Examples are the second tier in the Judicial Retirement System (eliminated full benefits with 10 years of service) and the second tier for State Police Retirement System (increased the multiplier but eliminated a very costly survivor benefit for spouses). Both of these new tiers were established in the late 1990s. Neither of these should be viewed as just benefit cuts for new hires to balance the books, but more as long term benefit restructuring.

Arkansas’ retirement systems have a duty to look at costs and address the unfunded liabilities that exist. Creating new tiers that just cut benefits to the bone for new hires is not a good long-term solution. Poor retirement benefits could discourage qualified people entering the teaching field. A second tier also faces pressure at each legislative session to equalize the new benefits with the old benefits anyway. The best results may be just make justified changes that apply to all members earning future benefits. Arkansas has not cut benefits to balance the books. Arkansas has undertaken restructuring when the circumstances justified the chance, regardless of the funding status at the time.

Posted by Ghop on 09/18/2010 at 10:39 AM


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