The origin of these unfunded liabilities predates FPPA. (Employees hired prior to April 8, 1978 are considered as Old Hires. Employees hired after that date are New Hires.) In fact, FPPA was created in large part because so many of the local old hire plans had not been adequately funded. At FPPA’s inception in 1980, there were 104 plans with unfunded liabilities receiving state assistance. The legislation that mandated proper funding did not require the full actuarially required contribution right away though. There were hardship provisions that gradually stepped up the contribution requirements so that the plans were being funded appropriately by 1988. Due to the hardship provisions, unfunded liabilities were legally allowed to continue to grow until 1988.
Through a combination of increased contributions, state assistance and better than expected investment returns produced by FPPA, unfunded liabilities in most of these plans have been eliminated. On the other hand, the Statewide Defined Benefit Plan set appropriate contribution rates to cover members since inception. At no time were contributions ever less than needed to cover each member from his/her first day on the job. The plan conducts an annual actuarial study to make sure that the funding level is on track.
Since inception of the plan in 1980 until 2014, there was never an increase in the 8% employer and member contribution rates, and the benefits under the plan have improved significantly during that time. However FPPA received member feedback indicating a desire to contribute more to their pension to improve the plan’s ability to pay Benefit Adjustments, (also called COLA’s), in retirement and decrease the possibility of future benefit reductions. Following the recommendation of a member task force, members of the Statewide Defined Benefit Plan voted in 2014 on a 4% increase to the member contribution rate, phased in over 8 years at 1/2% per year. That vote passed and the increase began in 2015 and it will be fully implemented in 2022.
There are several plan provisions worth mentioning that contribute to keeping the Statewide Defined Benefit Plan properly funded. First, when members purchase service credit, they must pay the full actuarial cost, not an “average, bargain, or subsidized” cost that creates an unfunded liability for the plan. Second, when the normal cost of the plan is less than the full 16% in any given year, rather than lower the contribution rate, the Board historically has held the “excess” in reserve for future benefit adjustments, then allocated any remaining funding to the members’ SRA accounts. All of the “excess contributions” stay in the plan and are available to fund the base benefits should there be adverse investment experience for an extended period of time. The consistent required contributions are also easier for the employer to budget for each year, rather than an amount that fluctuates according to the current financial requirements of the plan.
Employers with local money purchase plans have expressed their concerns about the possibility that the cost of the defined benefit plan could increase at some time in the future. FPPA has never had to increase the Employer contribution rate, yet has been able to improve benefits a number of times. The increase in the Member contribution rate adds further protection in the plan that is not currently required to pay the base benefits. No increase in the Employer contribution rate is anticipated at this time. Many local money purchase plans are already funding their plans well over the FPPA required rate. This was all done locally, and not required by FPPA.
Finally, the plan’s definitions of base salary and HAS minimize the likelihood of salary spiking, a practice that can have a negative impact on DB Plans.