States Turn to Hybrids, New Formulas to Manage Funding

Kansas, Louisiana and Virginia replaced defined benefit plans with cash balance or hybrid plans for new employees. Michigan has added an optional defined contribution plan for public school employees. Several states have implemented a longer period for calculating final average compensation.  

Alabama will close its existing retirement plan for most state and local government employees December 31, 2012, and replace it with a new defined benefit tier that includes higher age and service requirements for retirement, a longer period for calculating final average compensation, a lower multiplier for calculating benefits and, uniquely in 2012, a reduced mandatory employee contribution.  

Louisiana will close its defined benefit plan for most state government employees and employees of higher education July 1, 2013, and plans to replace it with a cash balance plan.  

Michigan will offer new members of the Public School Employees’ Retirement System a defined contribution plan option in addition to the hybrid plan that has been mandatory for new members since July 2010. Members of previously-closed defined benefit plans will be required to choose between higher contribution rates or lower future benefit accrual rates, along with an option to move to a defined contribution plan. The state also terminated retiree health insurance coverage for members of the plan, replacing it with employer matches for employee contributions to deferred compensation plans plus a lump-sum termination payment.  

New York closed its latest retirement tier for state and local employees, including most New York City employees, March 31, 2012, and replaced it with a Tier 6 plan that increases the age of retirement and provides a longer period for calculating final average compensation and a lower multipliers for calculating benefits. The legislation will increase employee contribution requirements with an unusual plan of scaling contributions to the amount of employees’ salary.  

Virginia enacted legislation to require local government plan members to begin contributing 5% of salary to retirement plans, contributions that for many years have been picked up by employers. Local government employers will provide an offsetting salary increase. Separate legislation will close defined benefit plans for most state and local government employees at the end of 2013, and replace them with a hybrid plan with defined benefit and defined contribution components. Legislation also limited future cost-of-living increases.  

Wyoming created a new defined benefit plan tier applicable to state and local government employees as of August 31, 2012. The new tier includes higher age and service requirements for retirement, a longer period for calculating final average compensation and a lower multiplier for calculating benefits. Contribution requirements are unchanged. Separate legislation provides that cost-of-living adjustments will be granted in the future only when the retirement system is fully funded.  

NCSL said the goal of its report is to help researchers and policy makers know how other states have addressed issues that could arise in any state. In keeping with that goal, the report excludes most clean-up legislation, cost-of-living adjustments, administrative procedures and technical amendments.