Officials are calling the legislation the first of its kind in the nation, and credit rating agency Fitch Ratings said in a statement, “The law could serve as a model for other states pursuing means to ensure the sustainability of public employee pension plans.”
The Public Employee Defined Benefit Financial Security Act of 2014 requires local government entities to submit to the state a pension funding policy for fiscal years beginning after June 15, 2015. An entity not fully funding its actuarially determined contribution (ADC, under the new GASB Statement 68) must increase the funding over five years, per a prescribed formula. If an entity is unable to meet the annual funding increases, the state will consider a plan of correction from the local entity to achieve 100% funding by June 30, 2020. Failure to comply with the prescribed funding of ADC would result in the state withholding state-shared taxes, on a first-charge basis, and directing the necessary amount to the local government’s pension plan.
The law also prescribes phasing in of certain updated actuarial assumptions. Actuarial value of assets will be calculated with a maximum of 10 years of smoothing, and smoothing periods greater than five years are required to use a maximum 20% market corridor. Investment assumptions are limited to no more than 50 basis points above the rate used by the state retirement plan (currently 7.5%). Fitch said it believes the implementation of more unified assumptions will improve comparability of plans within the state over time.
According to The Chattanoogan, previously-existing law has required the approximately 500 local government entities in the Tennessee Consolidated Retirement System (TCRS) to pay 100% of the yearly ADC or be subject to possible state intercept of funds. The new law applies these same rules to local government pension plans that are not already in TCRS.
“This legislation is something all states should consider,” says Charles E.F. Millard, managing director, head of pension relations for Citigroup and a former director of the United States Pension Guaranty Corporation, according to the news report. “The health of public pensions depends upon their investment returns and plan structures, of course. But the key determinant of the health of our public plans is whether the public employer makes its full annual contribution. If everyone did this, public pensions would be far healthier than they are today.”
Text of the law is here.