Tuesday, August 21, 2012

Lost Opportunity: MPSERS Reform and SB 1040

By Rep. Rick Olson, 55th District
August 16, 2012

Senate Bill 1040 as passed by both the House of Representatives and Senate today takes a major step forward in many respects, but also represents a lost opportunity.

The now $50 Billion unfunded liability and 27% and rising employer contribution were crying for a solution. The approximately $5 billion of savings achieved from benefit reductions and increased employee contributions and another about $10 billion of reduction in the calculated unfunded liability due to beginning prefunding the health care obligations are major steps forward.

Nonetheless, I regard this as a lost opportunity because:

1. A major cause of the skyrocketing employer contribution rate is what are called "stranded costs", about which I have written in detail in my blog at http://repolson.blogspot.com/2012/07/stranded-costs-in-mpsers.html, has not been addressed. The version of SB 1040 previously passed by the House as "H-3" contained the solution known as the "COE" approach. This provision was stripped in the ultimate compromise and pushed into merely study language. The ultimate resolution is put off until the lame duck session after the study report is received on or before November 15. If agreement is not reached at that time, the MPSERS system will fail and a future legislature will again be faced with the thorny issue of what to do about MPSERS.

2. Major cost savings were left on the table:

a. The provision that retirees pay a larger portion of the health care costs from 10% to 20% was watered down by exempting anyone over age 65 from that new requirement, significantly reducing the potential savings.

b. The cliff vesting provision of qualifying for retiree health care benefits after 10 years of service was not changed to a "graded premium" approach which was changed in 2007 for anyone hired after that. The cliff vesting approach was never actuarially sound and is no more sound today than ever before.

c. Retirees may still retire early and fully qualify for health care benefits, instead of having to wait until age 60 as the original SB 1040 provided.
Collectively, the lack of these changes deprives the system of billions of dollars of savings drastically needed in the system.

3. Conversely, the requiring of the retirees to pay a larger portion of their health care premiums may be harsher on low income retirees than necessary. I have previously proposed a sliding scale approach from 10% to 20% based on certain percentages above the household income poverty level. This has never been seriously discussed. This surely would reduce the savings needed by the system but may be the more humane approach, especially for the numerous retired support service people who worked for very low wages and who will have a very small pension, but with the expectation for the retiree health care benefits.

Despite the shortcomings I perceive listed above, I voted with the majority to take a major step forward, with the hopes that the legislature can adequately address the stranded cost problem in lame duck. At the same time, we will review the results of the study on the closing of the defined benefit program and substituting a defined contribution program for new hires. I trust that the study will be done on an objective basis without bias for or against the conversion. Bottom line, we have much more work to do before we can say we have reformed the system in a lasting manner, and I pledge my efforts to getting that result achieved.

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