WASHINGTON – Nearly three-quarters of state pension plans and more than half of local plans cut benefits and/or raised employee contributions to combat rising employer costs since the financial crisis, a research group concluded in a paper released Tuesday.
The paper, written by the Center for Retirement Research at Boston College (CRR), found that 74% of state pension plans as well as 57% of large local plans made such pension reforms between 2009 and 2014.
Plans with larger pension cost burdens and lower initial employee contributions were more likely to enact these changes, the paper's authors said. The CRR said that this is not surprising because plans with higher annual required contributions as a percentage of revenue put more pressure on government sponsors' budgets, leading to more reform than less expensive plans.
Increasing employee contributions often avoids running afoul of legal protections of benefits, the authors wrote.
"The most common change is to increase employee contributions, but reductions in COLAs (cost of living adjustments) and pushing out the age and tenure eligibility for retirement have been used as well," they wrote.
The greatest factor, CRR found, was the cost of the plan relative to the total revenue of its sponsoring government. The strength of state legal protections for benefits, it said, is the greatest factor related to reforms for current employees.
According to the center, 17% of state plans made employee contribution benefit changes to current employees in the five-year period, compared with 12% of local plans.
For new employees, the most common change, at 60% at the state level and 36% at the local level, was to increase the age and tenure required to claim benefits, the analysis found. CRR also said that 9% of state plans and 13% of local plans made COLA benefit changes during the same period.
The study analyzed all 114 state pension plans and 46 local plans from the Public Plans Database as well as an additional 86 local plans. The local plans included 102 cities, 22 counties and eight school districts.
The paper's authors said that state plans experienced more reform than local plans due in part to the fact that local plans are likely to cover emergency responders who are part of unions with strong political influence.
Caroline Crawford, a research associate at CRR and co-author of the paper, told The Bond Buyer that limited information on local pension plan changes was an impetus to producing the report.
"Prior to our brief, little research had been done on reforms at the local level due to the difficulty in getting the data, which is one of the reasons we felt focusing on this topic would be valuable," Crawford said.
Despite the recent reform activity to state and local pension plans, Crawford said she does not expect the trend to continue as long as the economy continues to stabilize.
"Our sense is that the flurry of reforms we've seen since the financial crisis should be slowing down," Crawford said. "The big wave has passed. We may see more reforms in the coming years, but barring any huge economic downturn, or specific fiscal stresses faced by state or local governments, we shouldn't see the same frequency of reforms."
