INDIANAPOLIS (WISH) — Indiana lawmakers took the first step Tuesday to begin tying up a loophole in state law that threatens to leave public employers on the hook for hundreds of millions of dollars in pension debt.
The loophole allows local units of government and state run colleges and universities — known as “political subdivisions” — to create their own pension plans. Last month, Indiana Public Retirement System Executive Director Steve Russo told the General Assembly’s Pension Management Oversight Commission that move has already started.
In late 2013, Indiana University and Purdue University stopped enrolling new hires in the Public Employees Retirement Fund — or 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 Sidney & Lois Eskenazi 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.
Current state law allows the INPRS Board of Directors to implement a waiting period of up to two years for the withdrawal of existing members from PERF. But, the law does not prevent phased out enrollment in PERF through new hires.
They can be enrolled in a private retirement plan without any formal notification to INPRS. That saves their employers from paying into PERF — and from paying down on its unfunded liabilities.
It also places additional burden for the unfunded liabilities onto the backs of the remaining employees left in the PERF system. 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.
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 last month.
To prevent that from happening, Senator Phil Boots (R-Crawfordsville), chairing the Pension Management Oversight Commission Tuesday, presented a preliminary draft bill that would require employers to pay that money back — including the six public employers who have already stopped enrolling new hires into PERF.
Under the proposal, INPRS would take a “snapshot” of a political subdivision’s finances on the day it closes PERF to new hires. That snapshot would show retirement system administrators how much liability that entity holds with PERF through its existing members.
The political subdivision would then be required to contribute funding for those existing members on a fixed repayment schedule — known as amortization.
The idea would operate much like a mortgage or car loan, and could allow payments to be amortized as far out as 30 years. It would also require any private pension plans for new hires to be approved by INPRS.
Lawmakers at Tuesday’s PMOC meeting called the proposal a way to ensure all public employers pay their “fair share.”
The draft bill will be reviewed and discussed further at the PMOC’s final interim session hearing next month. If it passes there, it could be introduced for consideration by lawmakers during the next legislative session in January.