Moody’s Investors Service on Monday said recent pension overhaul enacted by the Tennessee General Assembly on April 24 “is credit positive because it lowers the state’s contributions to the new plan and provides the state with greater control of its future pension expenses.”
The legislation creates a new hybrid defined contribution/defined benefit pension plan for new employees starting in fiscal 2014.
The new plan would reduce the service accrual multiplier to 1% from 1.57%, increase retirement eligibility to age 65 from 60, require a salary contribution, and reduces the employer contribution to as low as 4% from 15%.
The plan also imposes triggers that would limit the state’s pension liability, such as reducing or suspending cost of living adjustments. The triggers could also increase the employee contribution by 1% and eliminate the future service accrual multiplier used to calculate benefits at retirement.
“Although the lasting effects of this change will be significant, the budgetary effect over the next few fiscal years will be minimal,” said Moody’s analyst Julius Vizner. “The hybrid plan reduces benefits by one third and lowers the state contribution to 9% of payroll expenses from the current 15%. It also requires that new employees contribute 5% of their salary to the plan, up from 0% under the legacy plan.”
The hybrid plan contains several features that will lower the state’s pension costs and liability growth, Vizner said.
If the actuarially determined state contribution in any year falls under the 4% target, which the state expects to be the case, then the excess goes into a stabilization reserve. If the contribution exceeds the target or if unfunded liabilities are greater than one quarter of outstanding state debt, the state must tap the stabilization reserve and implement benefit reductions.
“Over the past few years, most U.S. states have enacted pension reforms that have had varying levels of success in addressing large retirement liabilities,” said Vizner.
Before the reforms, the Tennessee Consolidated Retirement System had a below-average employee unfunded liability, according to Moody’s. The state’s adjusted net pension liability calculated by Moody’s was $5.4 billion or 19.2% of all governmental fund revenues as of June 30, 2011.
“We determined Tennessee’s share of liability for the pension plan to be in proportion to its contributions to the plan,” Vizner said.