There have been a number of stories in the media lately about the future of employee pensions at Northwest Airlines and Delta Airlines. What will happen to employee pensions when the employer goes broke? When an employee dedicates their working life to a company and that company fails to live up to its pension obligations, tragedy is not too strong a word for that.
While it hasn’t grabbed quite as many headlines, the State Legislature took steps this past legislative session to shore up the strength of Minnesota’s public employee retirement association, more commonly known as PERA. Actually, there are two PERA’s. One for Police & Fire employees called the “Police & Fire Plan”, and one for everyone else in municipal, county, and state government called the “Coordinated Plan”.
Both plans had been slipping a bit in financial soundness since the boom of the 1990’s and were in need of changes to their contribution schedules. Currently, in the Police & Fire Plan, the employer contributes 9.3% and the employee contributes 6.2% of their gross pay for a total contribution of 15.5%. For the Coordinated Plan, the percentages are 5.53% for the employer and 5.10% for the employee for a total contribution of 10.63%. The Police & Fire contributions are higher on both sides of the equation because their benefits are different than those offered through the Coordinated Plans. For example, Police & Fire PERA members can retire at an earlier age than Coordinated Plan members.
The State Legislature approved annual incremental increases in the contributions for both the employee and the employer starting in January 2006 and running through January 2010 on the Coordinated side and through January 2009 on the Police & Fire side. When the phase-in of the new contribution percentages in completed, Coordinated Plan employees will pay 6.00% and their employers will pay 7.00% of gross pay into the Plan. For Police & Fire, the employee will ultimately pay 9.4% and the employer will pay 14.10%.
We have calculated that this change in PERA contribution rates will increase our pension costs in 2006 by about $100,000. It’s a cost for us, so it’s a cost for our taxpayers. But it’s a necessary cost of doing business and of keeping our pension commitments to our employees.
Question: So how do you cure a pension deficit disorder?
Answer:
1. Do not expand or liberalize the plan’s eligiblity criteria.
2. Have a conservative investment policy.
3. Keep benefit levels stable.
4. And last, but certainly not least: Add money to it.
