New employer contribution rates adopted to reflect changes to unfunded liability surcharge

One of our favorite bills to come out the 2023 legislative session was SB 5294, which creates a schedule for lowering the unfunded liability surcharge (UAAL) that impacts local government pension costs to the tune of hundreds of millions of dollars in savings. The changes put in place by the bill begin impacting city employer contribution rates on July 1 of this year.

In response to this bill, the Department of Retirement Services gave notice to all PERS and PSERS employers in late May about the new total employer contribution rates for fiscal year 2024 that will be going into effect on July 1, 2023 to reflect the lowered UAAL. The new rates (including DRS’s administrative fees) are below

The newly lowered UAAL rates are anticipated to save local governments around $180 million in the 2023-25 biennium alone. Local governments are expected to save over $1 billion in UAAL-related pension costs between 2023 and 2029 compared to what the previous law was. Cities should recalculate their own pension costs using these new rates to see how the bill will impact their own pension costs.

A little history refresher, the UAAL is intended to pay for historical 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. PERS 1 was not originally designed to include regular COLAs like Plans 2 & 3 are, so one-off COLAs increase the liability of Plan 1 without additional revenue to cover it. Because most PERS 1 employees are already retired (and no longer contributing to the PERS 1 system), the burden of paying for these ad hoc PERS 1 COLAs falls entirely on public employers like cities. The Office of the State Actuary anticipates the PERS 1 system to finally be fully funded around 2026.