Senate plan for “glide path” away from unfunded liability surcharge gaining lift

With the release of budget proposals from the House and Senate, we are starting to get a picture of what bills legislative leadership consider “necessary to implement the budget” (thus exempt from cutoff deadlines). One bill AWC is happy to see get some budget attention is SB 5294, a bill aiming to reduce the added-on costs to city pension contributions. The Senate Budget incorporates the bills changes to the unfunded liability surcharge into the new public employer pension contribution rates effective in July of this year.

SB 5294 sunsets the existing unfunded actuarially accrued liability (UAAL) surcharge that is currently added to PERS 2/3 employer contribution rates in July 2023. That surcharge exists to pay for underfunding in the PERS 1 system, which is partially driven by one-time, ad hoc cost-of-living adjustments adopted by the Legislature in recent years. The burden of paying for these COLAs falls entirely on public employers like cities, to the tune of hundreds of millions of dollars over time.

The bill replaces the current UAAL surcharge (3.85%) with a gradually reduced UAAL schedule. The House Appropriations Committee adopted an amendment on March 23 that slightly adjusts the schedule and extends it to 2028. You can see the changes in the chart below. The amendments also lower the minimum UAAL rate to 0.25% (from 0.5%), which will only be applied when the PERS 1 account is less than 100% funded. The committee passed the amended bill out and sent it to the full House for consideration.

In the bill’s fiscal note (drafted prior to the House’s committee amendments), the Office of the State Actuary (OSA) predicts that PERS 1 will be fully funded by 2026 and that given the lag in the pension rate adoption process, PERS 1 is likely to be significantly overfunded before the current law UAAL would go away. OSA estimates that SB 5294 will save local government PERS employers around $172 million in the 2023-25 biennium, and over $1 billion by 2029.

Cities should look to see how much of a savings they could see with the reduced employer contribution rates. If passed, the bill would effectively reduce the new rates that will apply in 2023-25 biennium from 10.21% down to 8.86% for PERS, and from 10.45% to 9.10% for PSERS.