INDIANAPOLIS — The state’s top pension official on Tuesday stood behind a move to cut Indiana public employees’ retirement benefits despite concern from affected employees and several Democratic lawmakers.
Legislators briefly considered a similar change to the Annuity Savings Account program on the last day of the session, when it was inserted in a final draft of the budget.
But after last-minute negotiations, House Speaker Brian Bosma removed the provision, saying there wasn’t adequate discussion about it beforehand and it needed to be considered in future public meetings.
Instead, the Indiana Public Retirement System used its authority in July to unilaterally alter the system without consulting the Pension Management Oversight Commission.
“This is a big decision that affects a lot of people,” said Sen. Karen Tallian, D-Portage, a member of the legislative oversight panel. “I don’t know what the fiscal impact is. I thought (the Pension Management Oversight Commission) would vet it.”
In Indiana, members of the Public Employees’ Retirement Fund and Teachers’ Retirement Fund have a hybrid system that consists of a defined benefit plan and an annuity savings account component.
When someone retires, the person can take the money built up in the ASA and cash out for a lump sum or annuitize it with the Indiana Public Retirement System to receive monthly annuity payments calculated with a 7.5 percent interest rate.
About 50 percent of retirees take the annuity option.
The interest rate is generous compared with the open market. But legislative fiscal leaders expressed concern.
Steve Russo, executive director of the Indiana Public Retirement System, said it doesn’t make sense to have a guaranteed interest rate on annuity payments that is higher than the rate of return for the fund’s assets.
So the Board of Trustees decided instead to privatize the annuity system with a third-party vendor using market-based rates. This reduces the risk for the state and public employers and places the risk on employees.
According to state pension staff, the current market rate would be in the range of 4.0 percent to 4.5 percent. That means a typical PERF member who chooses to annuitize an ASA would receive about $77 a month less; the typical TRF about $180 less a month.
This is a loss in expected income of between $924 and $2,100 a year.
But the change won’t affect current retirees who have chosen the annuity route.
The new system would go into effect July 1, 2014, meaning some public employees might be forced to retire earlier than expected to keep the more generous state rates.
Other less onerous options were on the table, but the pension board voted unanimously to make the transition to an outside vendor. Russo said the decision came after months of study and discussion by the board in several public meetings.
“We have and will continue to operate with full transparency,” he said.
Minutes from the June meeting where it was discussed showed unease by several unnamed board members. The vote was taken in July and those minutes are not yet available.
The Indiana State Teachers Association sent a letter to Bosma recently expressing concern that the change was made without legislative hearings, as was the understanding during the final hours of budget negotiation.
“In some cases, the difference is likely to be in the tens of thousands of dollars over the course of one’s retirement,” the letter said. “The annuity change is particularly troublesome and seemingly arbitrary.”
The teachers union also said the move by the pension board is effectively retroactive for teachers. That’s because they have already begun the school year, and even if they were going to retire at the end of the school year, their effective retirement date by law is July 1.
This means teachers could not avoid the annuity change.
Russo acknowledged the technical issue and said the board will change the effective date to Aug. 1.
Sen. Phil Boots, R-Crawfordsville, said he would accept public testimony at the September meeting of the Pension Management Oversight Commission.
But he repeatedly said the pension board acted within its authority – “my feeling is we should let (them) do their work.”
The Indiana Public Retirement System already put out a Request for Proposal for an annuity vendor and received only two official responses by the deadline. Russo said the board will reissue another RFP in the coming months.
“I recognize that something needed to take place,” said Rep. David Niezgodski, D-South Bend. “I don’t see why more time could not have taken. The legislature held back for greater transparency. You took it away from the realm of the legislature.”