INDIANAPOLIS (WISH) Thousands of Hoosier public workers are taking a new road toward retirement by opting out of Indiana’s public pension system. Some are now concerned that move will end up costing taxpayers in the long run.
It’s all due to a loophole in state law that allows local units of government and state run colleges and universities–known as “political subdivisions”–to create their own pension plans. So far, the provision has only been used for some new hires. But, some believe it could be used to withdraw entire groups of employees from the Public Employees Retirement Fund—or PERF.
Without those employees enrolled, some worry the system could face drastic changes ahead.
Just three weeks after getting her first job as a teacher in Greenfield, retirement is the furthest thing from Katie Sangiorgio’s mind.
“I’m excited,” Sangiorgio told 24-Hour News 8, with a wide smile. “It sounds like the kids and parents have high expectations for me, which I think is good.”
There’s a good reason for Sangiorgio to put the issue out of mind, at least for now: state law says teachers must enroll in the state run Teachers Retirement Fund—or TRF.
But, pension plans for others her district employs are much more flexible. Like university professors, public health workers, and snow plow drivers , they are enrolled in PERF.
And, they’re suddenly being watched very closely.
“We are seeing some new hires leave,” said Indiana Public Retirement System Executive Director Steve Russo. “It’s a question of fairness and equity amongst the different employers that are participating in the plan. I think the concern is being sure that when certain employers are deciding to leave the plan, that they’re not unfairly moving their share of the unfunded liabilities onto other plans.”
At a meeting of the General Assembly’s Pension Management Oversight Commission—or PMOC–on Tuesday, Russo told lawmakers that move has already started.
Last year, Indiana University and Purdue University stopped enrolling new hires in PERF, in favor of their own 401(a) style retirement savings plans—known as defined contribution plans. Ivy Tech Community College and the University of Southern Indiana followed suit this year, along with Tri-County School Corporation in Wolcott, and Health and Hospital Corporation of Marion County. HHC runs Eskanazi Hospital, Indianapolis EMS and the Marion County Health Department.
Russo said those decisions have already dropped PERF’s total enrollment by 13 percent this year.
They’ve also created a shortfall of $170-million in promised payments—known as unfunded liabilities. And, there is concern that number will continue to grow.
“If all local units of government were to stop new hires coming into the plan, there would be a shift of burden on to the state, potentially by hundreds of millions of dollars,” Russo said.
THE MONEY FLOW
It’s a complicated system, but it all comes down to supply and demand.
For decades, new hires have kept money trickling into PERF, as payments to retirees trickled out. The contributions from employers for current workers help pay for those who have already retired.
If that flow is reduced—or stopped—the system’s reserves can quickly dry up.
“We’ve created a monster that feeds on itself,” said Rep. Woody Burton (R-Greendwood), chairman of the PMOC. “We have to have new people coming in the front end here to take care of people going out the back end. So, when you stop that money coming in the front end all of a sudden–where is that money going to come from?”
The answer comes down to simple math, Russo said.
“The fewer employees that are a member of the plan, the smaller base in percentage of income that will be calculated on,” he said.
The additional unfunded liabilities are put onto the back of the remaining employees. All are publicly funded, meaning the net result is a shifting of tax money, and a potential shortage for hundreds of other state agencies and local units of government.
“They’re getting stuck with the bill,” said Rep. David Niezgodski (D-South Bend). “Those unfunded liabilities should not fall just on their shoulders when another group has decided to be the ones who pulled out.”
If the trend continues, and all local units and political subdivisions separated from PERF, the total cost could balloon to $512 million, Russo told lawmakers.
SEARCH FOR SOLUTIONS
Some on the Commission want penalties attached.
“Maybe we should consider that–since they were members of PERF for so long–that we should [offer] a little bit more of an enticement,” Niezgodski said. “If they are going to choose to remove themselves from PERF, maybe their existing members should be the ones responsible for paying the unfunded liabilities of the new hires that would have been paying, so it wouldn’t needlessly fall on the shoulders of all the members.”
“There’s going to be some real restrictions there on what they do when they opt out to make sure they cover their bases,” agreed Burton. “No more free rides.”
Burton stopped short of calling for mandatory enrollment in PERF, as many other states require. Instead, he wants committee members to begin drafting a plan for “opt out fees” when it meets again next month.
The PMOC will also debate another hot topic at that time: a proposed shift away from traditional pension plans—known as defined benefits. All current PERF and TRF enrollees would instead be enrolled in an defined contribution program, similar to the private sector’s 401(k) plans.
Burton called the move “inevitable.”
But, not all lawmakers are sold.
“I think it should be an option,” Niezgodski said. “Some want it. Some don’t.”
It’s an equation that’s been complicated by a 25 percent jump in public employee retirements in 2014 due to a change in Indiana’s pension calculation formula, sparked in part by an I-Team 8 investigation. The resulting move to a lower annuity rate could cost some public employees nearing retirement age up to 20 percent of their retirement savings unless they retire before October 1.
The rate change is estimated to save the state millions in additional unfunded liabilities, and Burton remains convinced it was the right move.
“We did the best we could under the circumstances,” he said. “We were losing $145 million a year on that thing.”
But, it also came at a cost that some are still calculating.
“The people who are near retirement have all that wealth of knowledge,” Niezgodski said. “How do you replace that? How on earth do you measure the loss of that knowledge that we’re losing all in one great bulk? The real impact on that remains to be seen.”