Legislature passes bills impacting PERS costs

Two bills that impact city pension costs have passed the Legislature and are on their way to the Governor. The bills include a one-time, ad hoc cost-of-living adjustment for PERS 1 retirees and a schedule to reduce and end the unfunded liability surcharge.

Ad hoc PERS 1 COLA

The House and Senate agreed on the Senate’s version of SB 5350 to provide an ad hoc, one-time COLA for PERS 1 retirees. The Senate originally passed its version of the bill in late February. The House amended it on April 12, delaying the impact of COLA costs on contribution rates until 2027 and specifying that a supplemental contribution would not be charged, but the Senate refused to concur. The House agreed to remove its amendments on April 19 and passed the Senate’s version of the bill with a unanimous vote. It now goes to the Governor’s desk for signature.

The final version of the bill provides a one-time 3% COLA for PERS 1 retirees, capped at $110 per month, starting July 1, 2023. The Select Committee on Pension Policy is also directed to study and make recommendations on an ongoing, automatic annual COLA for PERS 1 retirees. Since the House’s amendments were not adopted, the COLA will be funded through the traditional method of the unfunded actuarially accrued liability (UAAL) surcharge. According to the fiscal note, the additional cost to the UAAL is expected to cost local governments an additional $148.7 million over the next 10 years.

This marks the fourth time since 2018 that the Legislature has voted on a one-time, ad hoc COLA for PERS 1.

UAAL sunset

The Legislature also settled on the Senate’s version of SB 5294 as the final bill that aims to phase out the unfunded actuarially accrued liability (UAAL) surcharge. The Senate originally passed its version of the bill in late February, and the House amended it on April 5 to add an additional year to the schedule and readjust the rates to phase out the UAAL while lowering the final default rate to 0.25%. The Senate rejected the House’s amendments and the House agreed to recede, passing the Senate’s version of the bill with a unanimous vote.

The final bill gradually reduces the UAAL rates according to the schedule below and establishes a new minimum UAAL rate of 0.5% for PERS 1, but that rate is only triggered if PERS 1 is less than fully funded.

The Office of the State Actuary expects PERS 1 to be fully funded in 2026. The fiscal note anticipates that the bill will save local governments $348 million in the 2023-25 biennium. It is unclear how the passage of SB 5350 changes those expectations. It now goes to the Governor’s desk for signature.