Exciting isn’t usually used to describe pensions, but for those who like to get deep into the weeds of pension policy, this was an interesting and exciting session.

Those who have been following pensions know that for many years public employers who pay into the PERS 2 system have had to pay an additional surcharge to cover the unfunded liability in the PERS 1 system. The unfunded liability formally known as the Unfunded Actuarially Accrued Liability (UAAL) is the result of the underfunding in the now closed PERS 1 system and not keeping up with the cost of providing the promised pension benefits. Public employers have been paying the 3.5% surcharge since it was established in 2009 and was projected to sunset in 2025.

SB 5294, passed this session, formally begins the process of phasing out the UAAL surcharge and establishes a new minimum rate of 0.5%. For FY 2024 the surcharge will drop to 2.5% and continue to be reduced until it reaches 0.5% in 2027.

The bill makes similar changes to the teachers’ retirement system, TRS1, which faced a similar unfunded liability.

The rationale behind phasing out the UAAL surcharge was that if it continued at the current rate, the PERS 1 pension would end up overfunded. That is also not ideal because once the funds are in the pension account, they can’t be used for anything else unless or until the pension program is sunset. This new surcharge plan will still address the outstanding unfunded liability without creating an overfunding scenario.  It will also result in significant savings ($172 million in the 23-25 biennium) for local government employers currently paying the surcharge.

The other pension bill of note continues the recent trend of providing ad hoc cost of living adjustments (COLAs) for PERS 1 retirees. SB 5350 provides for another one-time 3% COLA and directs the Select Committee on Pension Policy to once again go back and study the possibility of ongoing automatic COLAs.  PERS 1 wasn’t designed or funded with ongoing COLAs in mind and previous looks at ongoing COLAs were incredibly expensive for a program that is already underfunded. On the bright side, for those of us who think pension policy is exciting, this means more thrills over the next year.