Senate Bill 3231: PERS Changes

May 20, 2024May 22, 2024 Bill Tracker

Latest Action

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On May 9, SB 3231 became law without the Governor’s signature. 

Explanation of the Bill

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Once approved by the Governor, Senate Bill 3231 will increase the PERS employer contribution rate by 2.5% over five years, starting with a 0.5% increase on July 1, 2024. SB 3231 will also require the Legislature to approve any major policy changes by the PERS Board of Trustees going forward. The PERS Board will only be authorized to make a “recommendation” to the Legislature on adjustments to the employer contribution, and any recommendation must be accompanied by at least two independent actuarial assessments. Finally, SB 3231 states that “it is the intent of the Legislature” to create a new retirement tier for new PERS employees during the 2025 legislative session, though this particular language is not legally binding.

SB 3231 is an effort by the Legislature to simultaneously address fiscal concerns about PERS and assert legislative power over the PERS Board. Importantly, these changes will not reduce or eliminate benefits that current PERS members have accrued or that PERS retirees are currently receiving. However, the intended creation of a new retirement tier for new PERS employees will almost certainly involve cutting benefits for future PERS members who join the system after July 1, 2025.

Reduce PERS Decision-Making Power

The PERS Board of Trustees is currently empowered to establish policy to administer the PERS system. Significantly, this includes the authority to unilaterally (i.e., without approval of the legislature) pursue additional funding for the PERS system by increasing the employer contribution rate, which is the contribution that employers of PERS members (e.g., school districts, state agencies, etc.) contribute into the PERS system. (We should note that there are currently certain actions, such as reducing PERS benefits, that do require legislative approval).

Once approved by the Governor, SB 3231 will grant the legislature “sole authority” regarding “additional funding sources for the plan, including employer contribution increases.” Rather than being authorized to unilaterally increase the employer contribution rate—as is currently their prerogative—the PERS Board will only be authorized to “make recommendations.” Additionally, any recommendations by the PERS Board will have to be “accompanied by at least two assessments from actuaries who are independent from each other and the retirement plan.” This represents a significant reduction in the decision-making power of the PERS Board.

Employer Contribution Increase

SB 3231 simultaneously rescinds a planned increase to the employer contribution rate and replaces it with a separate rate increase.

The PERS Board of Trustees previously voted in August 2023 to increase the employer contribution rate by two percentage points each year until the rate “reaches the amount recommended by the actuary and approved by the Board.” The first increase, from the current rate of 17.4% to 19.4%, was slated to go into effect on July 1, 2024. The Board estimated that 27.4% would be the target rate (an increase of 10 percentage points over the current rate), meaning there would have been possible rate increases for the next five fiscal years.

SB 3231 replaces this planned increase with a separate plan to increase the rate by 0.5% each fiscal year until FY29, starting on July 1, 2024. Under this plan, the employer contribution rate will increase from 17.4% to 19.9% by FY29. Increasing the employer contribution rate by any amount will result in a financial burden on employers such as state agencies, municipalities, and school districts. For example, a school district employing a teacher earning the current average salary of $53,354 would contribute $10,617 under a 19.9% contribution rate, up from $9,284 under the current rate of 17.4%.

These rate increases are part of an effort to address concerns about the long-term fiscal health of PERS, often represented by the system’s “funded ratio” (i.e., current PERS assets as a percentage of its estimated payments to current and future retirees, known as pension “liabilities”). However, it should be noted that some of these concerns are the result of accounting changes, in particular how PERS calculates its pension liabilities—which are, in effect, an estimated amount of future payments to an estimated number of retirees in an estimated time frame.

In August 2023, PERS lowered its assumed rate of return from 7.55% to 7%, meaning that, for the purpose of estimating its ability to make payments decades in the future, PERS is now assuming that its investments (its primary source of revenue) will grow at a lower rate. At the time, PERS set an estimated contribution rate target of 27.4%, which was based on the new assumed rate of return of 7%, which is notably lower than historical rates (as of June 30, 2023) over the past one year (7.76%), three years (9.36%), five years (7.63%), ten years (8.47%), fifteen years (7.51%), and twenty years (7.82%). Setting the assumed rate of return lower than what we might, in practice, expect in most years comes at significant cost: by assuming lower investment returns going forward, PERS must collect additional revenue elsewhere—in this case, increasing the employer contribution rate. In other words, concerns about the fiscal health of PERS are in part the result of PERS taking a more cautious approach to estimating pension liabilities.

New Retirement Tier

Though SB 3231 makes no definitive changes on this matter, it contains language stating that “it is the intent of the Legislature that, in the 2025 Regular Session, a law be enacted to create a new tier for future members of the system.” There are currently four retirement “tiers,” depending on when a PERS employee was hired, that determine how they accrue benefits (see page 25 of the PERS Member Handbook for more details). Each successive tier has negatively impacted how PERS employees accrue benefits: for example, employees hired on July 1, 2011 or later were moved into a new tier (“Tier 4”) that increased the years of service required for full retirement eligibility from 25 years to 30 years.
It is unclear exactly what a new “Tier 5” might entail, but a recommendation passed by the PERS Board in October 2023 provides insight into what could be included: The proposed Tier 5 would have eliminated the guaranteed cost-of-living adjustment (COLA) that current PERS employees/retirees either receive or are slated to receive upon retirement. The proposal would have decreased the employer contribution and vesting period for future PERS employees (both favorable changes), but this would have come at the cost of potentially keeping their future retirement benefits stagnant (i.e., not increasing benefits to match inflation, as is the case for current PERS employees and retirees). However, it should be noted that, according to actuarial projections made by PERS at the time, the proposed Tier 5 would have resulted in negligible improvements to the long-term fiscal health of PERS. This is because any savings to the PERS system from eliminating the guaranteed COLA for new employees would not be realized until these employees reach retirement—meaning no savings for at least three decades.