INDIANAPOLIS (WISH) — A proposed Statehouse compromise on plans to privatize part of Indiana’s public retirement system is creating a new debate over rates. Some say it could cause thousands of public employees to face more immediate cuts to their benefits than first thought.
For the last decade, Indiana’s Public Retirement System (INPRS) has guaranteed workers a 7.5 percent rate of return on every dollar they re-invest from their annuity savings account (ASA). For instance, a public employee who invests $100,000 upon retirement would earn $7,500 each year. But, I-Team 8 found INPRS isn’t earning that money back like it’s supposed to.
Since the economy slipped into recession five years ago, market rates have hovered closer to an average of 4 percent. Those lower rates are used to calculate a return on the worker’s principal, which remains with INPRS. I-Team 8 found that’s left the system paying out more than it’s taking in.
So, INPRS announced it was seeking bids last month to privatize its public annuity system starting Oct. 1 in order to keep the system solvent.
But, I-Team 8 also found INPRS’ planned “shift” to those lower market rates on Oct. 1 could leave thousands of public servants — like teachers, police officers and firefighters — facing cuts of 25 percent or more from if they chose to annuitize, unless they retire before the Oct. 1 switch to the new rates.
That didn’t sit well with House lawmakers, who voted unanimously earlier this month on House Bill 1075, which would delay privatization of Indiana annuities until at least 2019.
PRIVATIZATION THROWN OUT
On Wednesday, HB 1075 went before Senators for the first time, and many quickly agreed that allowing privatization was the wrong move for both taxpayers and workers.
“This was on the INPRS board,” said Sen. Phil Boots (R-Crawfordsville), chairman of the Senate Pensions and Labor Committee. “I do feel they should’ve taken action sooner. And, I understand their motive: they didn’t want to reduce the benefit to their retirees. I commend them for that. But, their responsibility is to maintain the fund in an actuarially positive manner. And, they weren’t doing that when they were paying out 7.5 percent. The 7.5 percent was out of line. It was over the top. It never should have been that high in this interest rate environment.”
HB 1075, written by Rep. Woody Burton (R-Whiteland) and Rep. David Niezgodski (D-South Bend) would block INPRS from privatizing annuities until Oct. 1, 2019. Boots said Wednesday that the proposal doesn’t go far enough.
“We need to keep this in-house, for good,” he said.
“I think members feel more comfortable, those who choose this option, that it be done in house to an entity that’s more directly accountable to them than a company might be,” said Gail Zeheralis, Government Relations Director at the Indiana State Teachers Association.
Boots’ amendment would remove INPRS authority to enter into any outsourcing agreements with private vendors altogether, making Burton and Niezgodski’s five-year delay a moot point. But, because Boots said he’s concerned about the system paying out at a rate nearly double the prevailing market rate, the amendment also makes a radical change to payout rates.
Boots’ plan goes a step further, by tying Indiana’s new guaranteed payout rates to 10-year U.S. Treasury notes. Any money annuitized from an ASA would be guaranteed at current interest rates on 10-year U.S. Treasury notes, plus 1.5 percent. Those rates would reset on April 1 and Oct. 1 each year. Boots said that will help guarantee the system isn’t caught off guard again paying out higher than market rates.
“Treasury notes are a known amount. It’s something you can look up on the Internet at any point. It’s transparent, and it reacts to the economy. It fluctuates with the economy. So, therefore, I think it’s a very good indicator of what the economy is doing,” Boots said.
The amended bill passed through the committee by a 9-0 vote.
But, critics say the new amendment would essentially bring the same result as privatization for workers.
The current Treasury note rate is fluctuating between 2.5 percent and 2.75. Add 1.5 percent to that formula, and you come up with around 4 percent — the very market rate that had so many public workers worried.
“It’s not far from what INPRS has said they would get on the open market,” said Zeheralis during her testimony. “For every 1 percent less than the current rate, a member stands to lose about 8 percent. So, going from 7.5 percent to 4.25 percent is about a 25 percent cut.”
“I’ve got a little heartburn with the amendment,” agreed American Federation of State, County and Municipal Employees (AFSCME) Assistant Director Richie Halfacre. “We thought the interest rate would be somewhere more around 6 percent. We knew from the beginning there was going to have to be a compromise. That’s what we asked INPRS to do with it. We’re digesting this new development. I don’t want to say I can live with that, but our main goal was to keep it in-house.”
But, Burton argues — with Boots’ amendment — nothing would be set in stone.
“[The rate] can go up too. By October, it could be 6 or 7 percent, or 8 percent. We just don’t know,” he said.
MORE RATE DEBATE AHEAD
One thing is certain: without a drastic rate adjustment, and fast, the system’s debt will only grow.
In a letter obtained by I-Team 8, INPRS Board Chairman Ken Cochran told lawmakers that payouts at the 7.5 rate have already created $143 million in unfunded liabilities.
“A continuation of this practice adds another $343 million of additional unfunded liabilities,” Cochran wrote.
Debate over how whether Boots’ plan is the right way to prevent that is now headed to the Senate floor. And, the clock is ticking. Boots’ plan would shift rates to tie in with Treasury bonds on Oct. 1, the same day INPRS has said it plans to put its privatized annuity system online.