Companion bills to institute another one-time, ad hoc cost of living adjustment (COLA) for PERS 1 retirees are both scheduled for hearings this week in the House and the Senate. Another bill creating a permanent PERS 1 COLA has been scheduled for a hearing as well.

As a reminder, PERS Plan 1 did not account for cost-of-living adjustments while most PERS 1 participants were still working, so neither public employers nor employees contributed enough to PERS 1 to pay for automatic COLAs. Over the years, the purchasing power of PERS 1 benefits have gone down due to inflation, and the Legislature has tried to ease that impact in recent years by authorizing one-time ad hoc COLAs for PERS 1 retirees. Those ad hoc COLAs are completely funded by employers (since PERS 1 retirees are no longer contributing to the system) through the unfunded actuarially accrued liability surcharge (UAAL).

HB 1057 and SB 5350 are companion bills submitted at the request of the Select Committee on Pension Policy. They authorize a one-time ad hoc 3% COLA for PERS 1 retirees, capped at $110 per month. The bills include legislative findings that PERS 1 retirees have lost purchasing power due to inflation, but that an automatic COLA could be cost prohibitive until the UAAL is reduced or no longer required. We wrote about the Select Committee’s recommendation back in November. At that time, the committee decided to recommend the 3% ad hoc COLA for PERS 1 and then commit to considering a PERS 2/3-style permanent COLA for PERS 1 after the unfunded liability surcharge was paid off.

However, several other bills have been introduced in the legislature this year as part of this conversation, including a bill to sunset the UAAL that we wrote about last week, and a new bill introduced late last week to create a permanent PERS 1 COLA starting in July 2023: HB 1459. Sponsored by Rep. Drew Stokesbary (R–Auburn), HB 1459 establishes an automatic annual COLA for TRS 1 and PERS 1 retirees capped at 3% and $110 per month starting in July 2023. It also reduces the statutory investment rate of return assumption to 7.2% (down from 7.7%). The bill makes legislative findings that reducing the investment rate of return assumption, coupled with expected extraordinary investment returns, will balance the benefit increases with PERS 1’s future funding needs.

AWC supports ending the UAAL, but we have concerns about the costs to cities’ contribution rates associated with incorporating either ad hoc or a permanent COLA in PERS 1, especially since that plan never contemplated regular COLAs and the cost of COLAs is borne by public employers and current taxpayers, taking valuable resources away from current city budgets and services. The ad hoc Plan 1 COLA in HB 1057 / SB 5350 alone is expected to cost local governments $148.7 million over the next 10 years. A fiscal note is not yet available for HB 1459’s automatic COLA, though it would likely build in pension cost increases for cities permanently to cover the increased benefits.

Dates to remember

SB 5350 is scheduled for a public hearing in the Senate Ways & Means Committee on Monday, January 23 at 4 pm.

HB 1057 and HB 1459 are both scheduled for a public hearing in the House Appropriations Committee on Thursday, January 26 at 4 pm.