What makes some pension reforms more successful than others?

Author:Barkley, Rachel
Position::Best Practices
 
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Of the many states making pension reforms in recent years, few have been able to both decrease their annual pension contributions and increase their funded levels. Maine and Tennessee are two that managed it.

Most states have made pension reforms in recent years, but between 2010 and 2014, few of them were able to both decrease their annual pension contributions and increase their funded levels. This article examines two states that accomplished just that--Maine and Tennessee--to see how they were able to achieve this feat, looking at what reforms were enacted, the effects, and how these reforms compare to those implemented in other states.

MAINE

The State of Maine passed pension reform in 2011, to be effective at the beginning of fiscal 2012. For new hires and for current members with less than five years of service, the normal retirement age was increased from 62 to 65. The state froze cost of living adjustments (COLAs) for a period of three years with future COLA increases of 3 percent, to be indexed in future years. COLA benefits will only apply to the first $20,000 in benefits. Nonpermanent COLAs may be awarded on an ad hoc basis. Reforms affect state employees, with the exception of public safety personnel. The state has since passed several one-time COLAs.

The state's pension contribution decreased by 25 percent from a high of $334 million in fiscal 2011 to $252.8 million in fiscal 2012, after the reforms were implemented. Since then, contributions have gone up but remain roughly 20 percent lower than fiscal 2011 levels. The aggregate funded ratio has also begun to increase from the recent low of 201 l's 77 to 81 percent for fiscal 2013 and 2014. This was despite a decrease in the assumed investment return for the state's pension plan to 7.125 percent in 2014 from 7.75 percent in 2010 and 7.25 percent in 2011, which offset a portion of reform's effect on funded levels.

State-level pension benefits for Maine are consolidated in one plan, the State Employees' and Teacher Pension Plan.

TENNESSEE

Tennessee was able to achieve the largest decrease in state contributions among the three states, a reduction of approximately 50 percent from 2010 levels. The decrease in state contributions has been even greater in recent years, as contributions peaked in fiscal 2012 at $731.4 million, equal to a still modest 3.8 percent of spending and a full 60 percent higher than fiscal 2014 levels. Fiscal 2014 contributions equaled a quite low 1.5 percent of general...

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