What Happened
When Madeline Rogero was elected mayor of Knoxville, Tennessee, six months ago, she pledged to address the city’s $138 million unfunded pension liability, and the risk it presented to taxpayers and the government. Last week, she unveiled a “hybrid” pension plan for new employees, which may be of interest to other Gov1 readers.
What’s a Hybrid Plan?
Introduced in the private sector in the mid-80s, hybrid plans appear to be gaining steam as municipalities look to shift away from defined benefit plans. Broadly speaking, hybrid plans combine more than one type of compensation plan, often a defined benefit and a defined contribution plan. Typically, volatility risk and investment risks are lower in hybrids.
The Details
The Mayor Rogero’s hybrid plan in Knoxville includes the following components:
- Annual Cap: A cap of $40,000 on the annual amount that can be received upon retirement;
- Benefit Calculation: The benefit calculations will use five years of average highest pay, instead of two;
- Vesting: The pension vesting period will be doubled from five to 10 years; employees have to work a minimum of 10 years before vesting;
- Cost of Living Increases: COLA increases will be tied to the Consumer Price Index and capped at 3 percent annually;
- Retirement: Retirement age increases from 62 to 63 for non-public safety employees, and from 50 to 56 for public safety workers;
- Contributions: The new 401k plan will include an 8 percent city contribution, while employees will contribute 6 percent on all pay;
- Totals: The Total Employee Retirement benefit will be the greater of either the defined benefit (capped at $40,000) or the annual value of the 401(k).
Who Cares?
In almost every state across the country, pensions are top of mind, and officials are seeking creative ways to address long-term fiscal issues. According to The Wall Street Journal, hybrid plans can be “a cost-cutting measure for states seeking to pare back the guaranteed-retirement payments considered a bedrock benefit for government workers.” Hybrid plans are in place in Utah, Michigan, Oregon, Washington, and other states.
Will it Work?
Opponents of the plan claim that taxpayers will still be on the hook for much of the risk. But, while there is still significant risk for taxpayers, the hybrid scheme mitigates future risk significantly more than for current employees and retirees. Voters will decide whether the plan makes sense this coming fall when they go to the polls.
Research
A chart that illustrates the proposed pension changes is available. Recently, Towers Watson, one of the leading compensation firms in the U.S., published a lengthy article on hybrid plans. While the report is focused on private sector applications, it has some relevant municipal information.
The National Conference of State Legislatures also published a report on state hybrid pension plans. It details the few states that are utilizing hybrid plans and how they define benefits within defined compensation plans.
Another report from the Employee Benefits Research Institute details the six leading types of benefit plans, including hybrid plans. While a few years old, it is one of the better comprehensive pension playbooks we have seen.
Marin County recently began studying what it terms “less-expensive hybrid plans.” This plan would be supported by unions, taxpayers, and government officials. Currently, Marin is facing an unfunded liability ranging from anywhere between $700 million and $2.4 billion. Part of the study would include having to hire an actuary that could cost the county $150,000.