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Action Center
Pension Reform Updates
Updated On: Sep 25, 2009

Important: Pension Reform Update

 

Chapter 21 of the Acts of 2009, Pension Reform

An outline of the provisions of the bill, its impact, and the effective dates

PERAC's FAQ about Pension Reform

FAQS Regarding Chapter 21 of the Acts of 2009

State of the Pension System 2009

Review Perac's take on Pension Reform by viewing their most recent memorandum to all retirement boards that was sent out June 22, 2009.

 

Report of the Special Commision to Study the Massachusetts Contributory Retirement System

A Commission report on how further pension reform proposals would affect the cost and well being of public employees.  Submitted to the Governor Spetember 1, 2009.

 

 

but rather that it needs to understand how the proposal would affectcosts and the well-
being of future public employees.
II.
The Challenge
The Commonwealth of Massachusetts??? public employee retirement systemprovides
similar retirement and disability benefit levels as other states withdefined benefit plans
and no Social Security coverage, and, before the recent financial collapse,the system was
on a path toward full funding by 2028.
Yet, taxpayers often perceive the retirement system as excessivelygenerous, particularly
in the wake of celebrated abuses reported in the press. But the publicoften fails to
recognize that public employees are not covered by Social Securityand make substantial
contributions to their own benefits. Moreover, taxpayers are oftenunaware that their
taxes have been contributing mostly to pay off the system???s large unfundedliability, and
not to pay for the state???s contribution towards the benefits beingearned by current
workers. In fiscal year 2008, 77 percent of the Commonwealth???s $1.3billion
contribution to State and Teachers??? pensions went to cover the unfundedliability; only 23
percent went to pay for the normal cost, the cost of benefits earnedby current employees
in that year.

Public employees and their employers are also concerned about the system.Employees
have seen increasing contribution rates for new employees, perceivethat some can
???game??? the system at their expense, and worry that once retired theirbenefits will be
heavily eroded by inflation due to limited cost-of???living adjustments.Employers are
concerned about their ability to attract and retain good quality employees.
In June 2009, the Massachusetts Legislature passed unanimously andthe Governor
signed a bill addressing what were viewed as some of the most egregiousabuses in the
Massachusetts Contributory Retirement System. The enactment of thesereforms enabled
this Commission to concentrate on the fundamental structure of thesystem.
The Commission agreed from the outset that, as a matter of fiscal policy,Massachusetts
should continue to oppose Social Security coverage of its public employees,because the
costs would exceed the benefits. While Massachusetts employers andemployees each
would be required to pay 6.2 percent of payroll to Social Security,only three quarters of
that amount would pay for benefits; at least one quarter would go tocover Social
Security???s legacy costs, associated with having provided benefits inexcess of
1
Commonwealth of Massachusetts Retirement Systems, Actuarial ValuationReport, January 1, 2008.


Page 4

contributions to early generations. The Commission also agreed toretain the defined
benefit structure, because it assures participants the most securesource of retirement
income.
In the context of no-Social-Security and a defined-benefit structure,the Commission has
discussed a number of changes that would improve the fairness and efficiencyof the
system for new employees and close some remaining loopholes. The Commissionhas
also discussed whether some of the provisions for new employees mightalso be
applicable to current employees.
What follows is an enumeration of some of the proposals consideredby the Commission.
They are included in this document not because the Commission supportseach one, but
rather to gain cost estimates for alternative strategies and/or tobetter understand their
implications. Once cost estimates are provided by the Chief Actuaryat the Public
Employee Retirement Administration Commission (PERAC), the Commissionwill
assemble a cost neutral package of reforms for new hires. Cost neutralitywas the
standard set by the Chair because the Commission had no informationarguing for either
an increase or a decrease in the total compensation for public employees.Cost neutrality
could mean many things ??? the same projected dollar cost to the Commonwealth;the same
normal cost payment by the Commonwealth; etc. For the purpose of thisCommission,
cost neutrality has two components ??? 1) the total normal cost of thesystem remains
unchanged, and 2) the sharing of the normal cost between the Commonwealthand the
employee reflects the distribution under current law. From this startingplace, the
legislature, as it sees fit, can adjust the recommendations by increasingor reducing the
benefit package or increasing or reducing the portion of the normalcost paid by the
employer.
The Commission???s discussion went beyond the retirement system to considerretiree
health insurance and whether the public employer???s contribution toretiree health
insurance should vary by years of service. Again, the Commission hasnot decided on a
recommendation, but the proposal is included so that its cost impactcan be determined.
Retiree health insurance falls outside PERAC???s domain and requiresa separate procedure
to estimate the impact of pro-rating on the budgets of Massachusetts???public employers.
To set the stage for the proposals to be costed by the actuary, a briefdescription of key
features of the Massachusetts system follows.
III.
The Massachusetts System
Massachusetts public employees are covered by a defined benefit pension plan that is
administered by 104 local retirement boards, the Massachusetts StateRetirement Board,
and the Massachusetts Teachers Retirement Board. PERAC oversees allboards, and all
the systems are governed by Chapter 32 of the Massachusetts GeneralLaws. As shown
in Table 1, the system now includes almost 320,000 active workers and190,000 retirees.
2
For a complete list of benefits, see the PERAC ???Massachusetts PublicEmployee Retirement Guide.???
2


Page 5

Table 1. Participants in Massachusetts Public Employee RetirementSystem, 2009
Participants
System
Active
Term
vested
Retired
State*
86,529
3,663
50,873
Teachers**
89,788
52,107
Local***
142,454
1,250
86,166
Total
318,771
4,913
189,146
Source: PERAC.
* As of 1/1/09.
** Preliminary as of 1/1/09.
*** Based on date of most recent valuation, which varies by system.
GROUPS
The Massachusetts system consists of 4 classes of membership:
Group 1: General employees and teachers;
Group 2: Certain specified hazardous duty positions;
Group 3: State Police;
Group 4: Police officers, firefighters, and other specified hazardouspositions.
ELIGIBILITY
A member is eligible for a retirement allowance (service retirement)upon meeting the
following conditions:
???
completion of 20 years of service; or
???
attainment of age 55 if hired prior to 1978, or if classified in Group4; or
???
attainment of age 55 with 10 years of service, if hired after 1978,and if classified
in Group 1 or 2.
A
MOUNT OF
B
ENEFIT
Retirement benefits are determined by a formula that multiplies theemployee???s length of
service times average salary times a factor that is determined by ageat retirement.
Average salary is the average annual rate of regular compensation receivedduring the 3
consecutive years that produce the highest average, or, if greater,during the last three
years (whether or not consecutive) preceding retirement.
Group 1 employees receive an accrual rate that ranges from 1.5 percentof final salary at
55 to 2.5 percent at 65, with lower rates should a retiree (with sufficientservice) claim
before age 55. Group 2 employees reach an accrual rate of 2.5 percentat age 60, and
Group 4 employees achieve an accrual rate of 2.5 percent at age 55(see Table 2). State
police have a separate system in Group 3 whereby they receive 75 percentof final pay
after 25 years of service.
3
Massachusetts public retirement systems also provide ordinary and accidentaldisability retirement
benefits for employees whose injuries are job-related and are not job-relatedand keep them from
performing their employment duties. Benefits under accidental disabilityare 72 percent of pay at the time
of injury. Benefits under ordinary disability are equal to a superannuationbenefit based on service and
salary at time of injury, applying the age 55 factor if the employeeis under the age of 55.
3


Page 6

Table 2. Benefit Accrual Rates
Group
Age
1
2
4
65
2.5
2.5
2.5
64
2.4
2.5
2.5
???
2.5
2.5
60
2.0
2.5
2.5
59
1.9
2.4
2.5
???
???
???
2.5
55
1.5
2.0
2.5
54
1.4
1.4
2.4
53
1.3
1.3
2.3
???
41
0.1
0.1
1.1
Source: Commonwealth Actuarial Report, 2005.
D
EFERRED
V
ESTED
B
ENEFIT
A participant who has completed 10 or more years of creditable serviceis eligible for a
deferred vested retirement benefit. The participant???s accrued benefitis payable
commencing at age 55, or the completion of 20 years, or may be deferreduntil later at the
participant???s option.
W
ITHDRAWAL OF
C
ONTRIBUTIONS
Member contributions may be withdrawn upon termination of employment.Employees
who first become members on or after January 1, 1984, may receive onlylimited interest
on their contributions if they voluntarily terminate their service.Those who leave service
with less than 5 years receive no interest; those who leave servicewith greater than 5 but
less than 10 years receive 50 percent of the interest credited.
T
ERMINATION
B
ENEFITS
Employees with 20 years of service who are terminated involuntarilyare entitled to an
allowance equal to 1/3 of the member???s 3-year final salary plus theannuitized balance of
the employee???s contributions, determined using a 7 percent return.
C
OST
-
OF
-L
IVING ADJUSTMENT
A cost-of-living adjustment (COLA) of up to 3 percent is paid on thefirst $12,000 of a
retiree???s total allowance. Thus the maximum COLA is $360 per year.
ANNUITY OPTIONS
A member may elect to receive his or her retirement allowance in oneof 3 forms of
payment.
??? Option A: Total annual allowance, payable in monthly installments,commencing
at retirement and terminating at the death of the member.
4


Page 7

??? Option B: A reduced annual allowance payable in monthly installments,
commencing at retirement and terminating at the death of the memberwith
potential for lump-sum payment to the designated beneficiary.
??? Option C: A reduced annual allowance payable in monthly installments,
commencing at retirement and terminating at the death of the member.At the
death of the retired employee, 2/3 of the allowance is payable to thedesignated
beneficiary. If the designated beneficiary dies before the member,the payment
???pops up??? prospectively to the amount payable under Option A.
CONTRIBUTION RATES
The Massachusetts system is funded by a combination of employee contributions,
investment returns, and state or local funding. Employee contributionrates are based on
the dates they joined the system (see Table 3).
The rate for new hires has been raised
repeatedly so that contribution rates within the system now range from5 percent to 12
percent, depending on the date of hire.
Table 3. Contribution Rates in Massachusetts Public Employee RetirementSystem
Date of hire
Contribution rate
Pre-1945
0%
1945-74
5%
1975-78
7%
1979-83
7% + 2 % on portion of salary over $30,000
1984-96
8% + 2 % on portion of salary over $30,000
1996
a
???present
9% + 2 % on portion of salary over $30,000
Teachers who elected ???Retirement Plus???
11%
Teachers hired after 7/1/01
11%
State police hired after 7/1/96
12% + 2% on portion of salary over $30,000
a. The increase in rate became effective 7/1/96.
Source: Commonwealth Actuarial Valuation Report, 2008.
4
The lump-sum payment is the amount by which the member???s contributionsplus interest exceed the
annuity payments received.
5
The designated beneficiary cannot be changed once the member???s retirementbecomes effective.
6
The State began to raise the employee contribution rate during the1970s, but the Supreme Judicial Court
ruled that the rate was part of a contract so that rate hikes werelimited to new employees. Opinion of the
Justices, 364 Mass. 847 (1973).
5


Page 8

IV. Proposals to be Costed for the Commission
The proposals presented below were designed for new hires. Both fairnessto current
employees and legal restrictions limit the extent to which changesshould be applied to
current employees. However, as with the 2009 legislation, it may beappropriate to close
some loopholes and correct badly-designed elements for at least somecurrent employees.
In addition, the Commission may propose to give current employees somecost-neutral
options.
BENEFIT DESIGN
1. I
MPROVE BENEFITS FOR SHORT SERVICE WORKERS BY REDUCING THE VESTING PERIOD
FOR RETIREMENT BENEFITS
(
BUT NOT FOR RETIREE HEALTH BENEFITS
)
FROM
10
YEARS TO
5
YEARS OF MEMBER SERVICE
.
Rationale: The existing vesting period of 10 years is longer than thatfor most other state
plans. Shortening the vesting period to 5 years would better serveshort service
employees ??? particularly employees who enter public service when theyare older.
2. I
MPROVE BENEFITS FOR SHORT
-
SERVICE WORKERS BY PROVIDING INTEREST EQUAL TO
THE ONE
-
YEAR
T
REASURY RATE ON ALL WITHDRAWN MEMBER CONTRIBUTIONS
.
Rationale: Employees who leave public service with less than five yearsof service
receive a refund of their contributions with no interest. Those whostay between five and
ten years receive a small amount of interest, based on the rates paidon individual savings
accounts at a sample of at least ten financial institutions. The currentrate is 0.6 percent.
Providing more substantial interest is important because Massachusettsworkers are not
accumulating any credits under Social Security while they work forthe Commonwealth,
and their state pension is not portablewhen moving outside the system.
3. E
NCOURAGE LATER RETIREMENT AND LOWER SYSTEM COST BY REDUCING THE AGE
FACTORS BY
0.125
PERCENT RATHER THAN THE CURRENT
0.10
PERCENT
. S
AMPLE FACTORS
FOR
G
ROUP
1
EMPLOYEES WOULD BE
2.5
PERCENT AT AGE
65 (
UNCHANGED
), 1.875
PERCENT AT AGE
60,
AND
1.25
PERCENT AT AGE
55.
SIMILAR CHANGES WOULD APPLY TO
THE AGE FACTORS FOR
G
ROUP
2
AND
G
ROUP
4
EMPLOYEES
.
Rationale: The factors used to determine a member's retirement allowancedepend on the
member's age at retirement. The reduction in the factors takes intoaccount the fact that
when a member retires at a younger age, the retirement benefit willbe paid for a longer
period of time. The current factors provide a subsidy to those membersretiring at
younger ages. In other words, the value of the benefit is greaterat younger ages than at
older ages. This proposal would reduce, but not eliminate entirely,the subsidy for early
retirement.
6


Page 9

4. I
NCREASE THE PERIOD FOR AVERAGING EARNINGS FOR BENEFIT FROM
3
TO
5
YEARS
.
Rationale: A slightly longer averaging period reduces the incentiveto inflate late career
earnings and slightly reduces initial benefits, thereby freeing upresources to help finance
a more adequate COLA and interest on contributions for those leavingearly.
5. P
RO
-
RATE BENEFITS ACCORDING TO THE NUMBER OF YEARS IN EACH GROUP
.
Rationale: Pro-rating may make employees more willing to accept administrative
positions towards the end of their careers, will prevent windfallsfor people who have
only a short period of service in a high group, and will reduce theongoing pressure to
reclassify jobs. Under the proposal, a person who has worked in Group4 for 25 years
and then changes to Group 1 and retires 5 years later with 30 yearsof service would
receive a benefit based on 25 years of service in Group 4 and 5 yearsof service in Group
1. Alternatively, an employee who has worked in Group 1 for 25 yearsand then moves
into Group 2 and retires in 5 years with 30 years of service wouldreceive a benefit based
on 25 years in Group 1 and 5 years in Group 2.
6. S
YSTEMATICALLY REVIEW THE CURRENT CLASSIFICATION OF JOB TITLES ANDCLARIFY
THE DEFINITIONS FOR BEING IN EACH GROUP
. R
EDUCE THE NUMBER OF GROUPS
.
Rationale: The Chapter 32 classification system presents a numberof problems for
retirement boards, the legislature, and participants: 1) Lack of clarityleads to anomalies
where people doing very similar jobs fall into different groups; 2) Classifying by job
held at retirement, rather than prorating, can give a large payoffto people changing jobs
late in their careers; 3) Basing benefits on final job creates a senseof inequity in that
retirement benefits do not reflect the whole of the service providedby the employee to
the Commonwealth; 4) No mechanism connects the move to a higher groupwith the need
for more revenues into the fund; and 5) Procedures for moving fromone group to another
are cumbersome and confusing due to the ambiguity of the definitions.
7. T
IGHTEN THE CAP ON EARNINGS FOR PURPOSES OF CONTRIBUTIONS AND BENEFITSTO
75
PERCENT OF THE
F
EDERAL LIMIT
($245,000
IN
2009).
Rationale: Under the defined benefit plan, Massachusetts taxpayersbear the risk of
swings in the market when investment returns diverge from the actuariallyassumed rate.
One result of this arrangement is that some public employees, whoearn very high
salaries, shift risk onto the average taxpayer, who has modest earnings.The proposed
cap would limit the amount of pensionassets that the average taxpayer would have to
secure. The 75-percent cap would have been $183,750 in 2009, indexedfor inflation
thereafter. This cap would have exceeded the income of all but 10percent of
Massachusetts households. High-wage employees would not make contributionson
amounts above the cap, allowing retirement saving in a separate account.
7


Page 10

8. I
NTRODUCE AN ANTI
-
SPIKING RULE
,
LIMITING THE INCREASE IN PENSIONABLE EARNINGS
IN ANY YEAR TO NO MORE THAN
7
PERCENT PLUS INFLATION OF THE AVERAGE OF
PENSIONABLE EARNINGS OVER THE PREVIOUS TWO YEARS
. T
HIS PROVISION WOULD NOT
APPLY FOR BONA
-
FIDE PROMOTIONS AND JOB CHANGES
.
Rationale: A pension plan thatbases benefits on only a few years of earnings generates a
strong incentive for workers to raise earnings in those last yearsto earn a larger pension
than is the system???s basic intent. To limit such gaming, many publicplans have anti-
spiking rules. Among the largest state plans that make up the BostonCollege data base,
42 percent have anti-spiking provisions. Of the plans for workersnot covered by Social
Security, 47 percent have anti-spiking provisions.
9. R
EPLACE THE CURRENT TERMINATION BENEFITS WITH A BENEFIT STRUCTURE THAT
BETTER MEETS THE SYSTEM
???
S GOALS
. O
PTIONS INCLUDE AWARDING
2
OR
3
MORE YEARS
OF SERVICE WHEN DETERMINING BENEFITS
,
OR AWARDING
2
OR
3
MORE YEARS OF AGE
.
L
IMIT ELIGIBILITY FOR TERMINATION BENEFITS TO THOSE TERMINATED AFTERAT LEAST
5
YEARS OF SERVICE IN THE SAME AGENCY OR TYPE OF POSITION
.
Rationale: Currently employees with 20 years of service who are terminatedat no fault of
their own are entitled to a benefit equal to 1/3 of high three earningsplus an annuity from
contributions. In most cases, the lifetime benefit is significantlylarger than what the
employee would have received if not terminated and declines with furtherincreases in
age and service. These outcomes do not seem consistent with the goalsof the
Massachusetts system. Only two other systems (DC Teachers and MontanaPERS)
widely offer termination benefits. These two plans award the terminatedworkers either
more years of service or consider them to be older; either approachwould be preferable
to the current arrangement.
10. C
ONSTRUCT A REPRESENTATIVE SAMPLE OF EARNINGS HISTORIES TO ENHANCE
ANALYSES OF THE ACTUAL WORKINGS OF THE CURRENT SYSTEM AND POTENTIALCHANGES
.
U
NDERTAKE A STUDY OF SWITCHING FROM A FINAL AVERAGING PERIOD FOR BENEFITSTO
AN INDEXED CAREER AVERAGE
.
Rationale: Short averaging periods for public employees have a longhistory. Before
computers, the ability to keep records for more extended calculationswas limited. Now
it would be administratively feasible to shift to an indexed careeraverage for new hires.
The traditional systems have shortcomings in both fairness and incentivesthat can be
avoided in a career average system. The United Kingdom has just switchedto an indexed
career average for civil servants. The Commission did not have thetime or a readily
available set of earnings histories for a careful evaluation and comparisonof the current
system with a career average system.
8


Page 11

RETIREMENT SECURITY
11. I
MPROVE THE POST
-
RETIREMENT COST
-
OF
-
LIVING ADJUSTMENT
(COLA)
SO THAT IT IS
AUTOMATIC
,
APPLIES TO A REASONABLE BASE THAT IS INDEXED FOR INFLATION
,
AND IS
APPLIED CONSISTENTLY ACROSS JURISDICTIONS
.
Rationale: The existing COLA provisions provide up to 3 percent annuallyon a base of
$12,000. Since the existing COLA is limited to a fixed pensionamount that is not
indexed, the purchasing power of many members??? retirement benefitserodes too much
over time. To reduce the vulnerability of retirement benefits toinflation, the aspiration,
subject to available financing, is to have the COLA base raised to$18,000 and that
amount adjusted annually for inflation.
12. I
NTRODUCE AN OPTION WHEREBY CURRENT EMPLOYEES COULD CHOOSE A LOWER
INITIAL BENEFIT IN EXCHANGE FOR A MORE GENEROUS COLA ON A COST
-
NEUTRAL BASIS
.
Rationale: Some current employees may be concerned about the extentto which their
future benefits might be eroded by inflation and be willing to tradeoff a lower initial
benefit for more inflation protection. Offering an actuarial equivalentoption would not
increase system costs but could increase the well-being of some members.To limit
gaming based on the latest inflation forecast, this option could beavailable only to
workers at least 5 years from eligibility for retirement and the windowfor choosing the
option would be limited.
13. I
NTRODUCE A NEW ACTUARIALLY EQUIVALENT RETIREMENT BENEFIT OPTION THAT
PAYS A CONSTANT PENSION STREAMFOR THE MEMBER AND HIS OR HER SPOUSE
.
Rationale: The current system provides various types of annuitiesfor both member and
spouse, but it is not clear that these options are well-suited tothe needs of all married
couples. Many states offer an alternative that provides a constantbenefit over the life of
the retiree and beneficiary, and it could be developed to be actuariallyequivalent to the
existing options so as to not increase costs.
14. I
MPROVE NOTIFICATION OF MEMBER
???
S SPOUSE WITH REGARD TO THE ANNUITY OPTION
SELECTED BY THE MEMBER
.
Rationale: Sending an additional notification letter, if first requestfor notification is not
signed, would help ensure that the member???s spouse is informed asto the type of annuity
actually going into effect.
15. C
LARIFY PENSION FORFEITURE LANGUAGESO THAT EMPLOYEES DO NOT LOSE PENSION
FOR MINOR MISDEMEANORS
,
BUT PRIMARILY FOR FELONY CONVICTIONS RELATED TO ONE
???
S
EMPLOYMENT
.
Rationale: Loss of pension dueto minor misdemeanor seems excessive and causes
increased administrative duties to the system.
9


Page 12

16. E
MPLOYEES MADE INELIGIBLE FOR A PENSIONDUE TO FORFEITURE
,
BUT WHO
CONTINUE TO WORK IN PUBLIC SERVICE
,
SHOULD NOT BE REQUIRED TO CONTRIBUTE TO THE
RETIREMENT SYSTEM
.
Rationale: If a member has been forced to forfeit his pension,it seems unfair to make that
person continue to contribute to the system.
17. A
LLOW BOARDS TO RECOUP PENSIONS AFTER CONVICTION RETROACTIVE TO THEDATE
OF RETIREMENT
.
Rationale: Currently, pensions can be recouped retroactive only tothe date of conviction.
However, in some instances, members may retire in order to receivebenefits in
anticipation of imminent criminal proceedings. In those instances,boards should be able
to require repayment of benefits received since retirement.
18. M
EMBERS WHO ARE ELECTED OR APPOINTED FOR A TERM OF YEARS UNDER
M.G.L.
C
.
32 S
ECTION
5(1)(
G
)
SHOULD BE REQUIRED TO REPAY ANY BENEFITS THEY RECEIVED WITH
INTEREST IN ORDER TO REJOIN THE SYSTEM
,
AND WORK FIVE YEARS IN ORDER FOR THEIR
BENEFIT TO BE RECALCULATED
,
CONSISTENT WITH THE PROVISIONS UNDER
M.G.L.
C
. 32
S
ECTION
105.
Rationale: This change would align the treatment of elected or appointedofficials with
that of other members.
19. R
EMOVE THE TEACHERS
???
PROVISION WAIVING THE HOURS AND COMPENSATION LIMIT
FOR THOSE WHO WORK AFTER RETIREMENT
.
Rationale: The provision was initially enacted to prepare for a ???massexodus??? of teachers
under the ???Retirement Plus??? program. This mass exodus did not occur,and the system is
currently providing waivers to about 80 educators per year. Treatingteachers differently
than other professionals that can be deemed in ???critical shortage???status and treating
professionals differently than non-professionals that can be deemedin ???critical shortage???
status creates inequities. Therefore, the provision should be removed.
20.
CALCULATE THE EFFECTIVE CONTRIBUTION RATE FOR EMPLOYEES CONTRIBUTING
9
PERCENT PLUS
2
PERCENT ON EARNINGS OVER
$30,000
AND CONSIDER INDEXING THE
$30,000
THRESHOLD
.
Rationale: The $30,000 threshold was introduced in the late 1970sand the additional
contribution on earnings above this limit was intended to apply onlyto high earners. As
earnings levels have risen, the majority now pay the additional contribution.Therefore, it
is important to know how the structure affects the effective ratepaid by participants and
to consider whether the $30,000 should be indexed so that the structurereflects its
original intent.
10


Page 13

SYSTEM FINANCING
21. D
EFINE THE
C
OMMONWEALTH
???
S CONTRIBUTION IN TERMS OF A PERCENT OF NORMAL
COSTS SO THAT BOTH THE COMMONWEALTH AND CURRENT EMPLOYEES PAY MOREWHEN
NORMAL COST INCREASES
,
THEREBY REDUCING THE SHIFTING OF THE BURDEN TO NEW
EMPLOYEES
. P
ERHAPS THE PERCENTAGES SHOULD DIFFER FOR DIFFERENT GROUPS
.
Rationale: Of systems without Social Security, Massachusetts has oneof the lower
normal costs and one of the highest shares of normal cost paid bythe employee.
Moreover, under current arrangements, changes in normal cost fromchanges in life
expectancy, interest rates, or any legislated improvements fall fullyon the government or
on future hires through further increases in contribution rates. Thus, workers doing the
same job can have different levels of total compensation. Definingthe Commonwealth???s
contribution in terms of a percentage of normal cost would mean thatboth parties would
have to respond to evolving circumstances and could keep contributionrates uniform
over employees with different future hire dates and so lead to a moreequitable outcome.
22. R
EQUIRE MEMBERS RE
-
ENTERING THE SYSTEM PURCHASING PRIOR CREDITABLE
SERVICE
,
AND THOSE ENTERING THE SYSTEM WHO ARE ELIGIBLE TO PURCHASE CREDITABLE
SERVICE BASED ON WORK ELSEWHERE
,
TO MAKE THAT PURCHASE SOON AFTER ELIGIBILITY
OR TO CONTRIBUTE MORE TO COMPENSATE THE SYSTEM FOR NOT HAVING ACCESSTO THEIR
FUNDS FOR THE FULL PERIOD
.
Rationale: Under existing law, a member re-entering the system orthose purchasing
service based on activities before pensionmembership may purchase prior creditable
service by paying an amount equal to the accumulated regular deductionswithdrawn plus
interest or an amount related to earlier employment. However, somemembers are not
required to make such a purchase within a certain period after eligibilityto purchase is
established. As a result, these purchases often take place immediatelyprior to retirement.
This pattern has the effect of understating the liability associatedwith the member???s
service as well as reducing the investable assets of the system.
23. A
LTERNATIVELY
,
REQUIRE MEMBERS RE
-
ENTERING THE SYSTEM PURCHASING PRIOR
CREDITABLE SERVICE
,
AND THOSE ENTERING THE SYSTEM WHO ARE ELIGIBLE TO PURCHASE
CREDITABLE SERVICE BASED ON WORK ELSEWHERE
,
TO CONTRIBUTE THE FULL ACTUARIAL
INTEREST RATE
.
Rationale: Under existing law, a member may purchase creditable servicefor work done
elsewhere (for example, teaching in the public school system in anotherstate, Peace
Corps) by paying an amount equal to the accumulated regular deductionsthat would have
been paid plus interest. However, the interest rate is 1/2 the actuarialrate. As a result,
whenever these purchases take place the purchase has reduced the abilityof the system to
finance benefits.
11


Page 14

24. M
AKE ELIGIBILITY TO PURCHASE CREDITABLE SERVICE BASED ON WORK ELSEWHERE
MORE CONSISTENT BY EITHER REDUCING THE CURRENT ABILITY TO PURCHASEOR
EXTENDING IT TO SIMILAR CLASSES OF WORKERS WHO ARE EQUALLY DIFFICULTTO
RECRUIT
.
Rationale: The opportunity to purchase creditable years of serviceis a recruiting tool; the
interest rate charged affects the size of recruitment generosity.Currently this opportunity
is restricted to particular classes of new hires. It is not clearwhether such differences in
recruitment incentives are appropriate across positions with similarrecruitment patterns.
25. R
EQUIRE ALL JUDGES TO CONTRIBUTE TO THE SYSTEM
.
Rationale: The members of the Supreme Judicial Court do not currentlycontribute to
their benefits. This exception is hard to justify in a contributoryretirement system.
26. E
XTEND THE CURRENT FUNDING SCHEDULE AND LIMIT THE ABILITY FOR SYSTEMSTO
REDUCE FUTURE APPROPRIATIONS UNLESS WELL FUNDED
.
Rationale: The recent financial crisis has seriously challenged theability Massachusetts
public employers to meet the payments required under the current fundingschedule.
Recent legislation extended the funding deadline from 2028 to 2030.A two-year
extension, however, does not provide adequate flexibility for manyMassachusetts public
employers. In addition, current law has a number of anomalies thatrequire attention. For
example, it is silent as to what occurs when the system becomes fullyfunded and on how
to amortize unfunded liability or surplus after 2030. To providefunding relief and to
flesh out guidance, the PERAC Actuarial Advisory Committee recommendsa new
funding procedure. The new schedule allows for lower funding now,but also requires
maintenance of effort when the stock market rebounds.
The unfunded liability will be amortized as follows
:
a.
The full funding date will be extended so that the current unfundedliability and
any additional amount accumulated over the next ten years will befully paid off
by a fixed date, which is no later than 30 years from the date thelegislature allows
the funding schedule to be extended, with a cap on the increase inamortization
payments of 4 percent a year.
b.
Any additional unfunded liability attributed to experiencedgains or losses after
the initial ten years will be separately amortized within a 20-yearperiod of its
occurrence, again with a cap on the increase in amortization paymentsof 4
percent a year.
The funding schedule outlined above is subject to the following additionallimits if the
funding ratio is less than 90 percent:
a. At the discretion of the Retirement Board, the increase in theappropriation from
one fiscal year to the next will
be
limited to 8 percent.
b. The appropriation cannot decrease from one fiscal year to the next.
12


Page 15

Require an actuarial valuation at least every 2 years and legislativereviews starting in
2015 and every 5 years thereafter.
27. I
NCREASE RESOURCES FOR SYSTEM ADMINISTRATION
.
Rationale: Some of the proposals presented above will require additionalrecord keeping
or processing on an ongoing basis. There are further startup costsin changing the record-
keeping systems in order to handle changed rules. In addition, itwould be helpful to
assemble an adequate sample of complete earnings histories for betteranalysis of the
existing pension benefit determinationprocess and consideration of alternatives.
RETIREE HEALTH INSURANCE
28. P
RO
-
RATE THE EMPLOYER CONTRIBUTION FOR RETIREE HEALTH INSURANCE BASEDON
YEARS OF SERVICE
.
Rationale: A general issue arises as to whether all retirees shouldreceive the same level
of benefits regardless of how many years of service they have or howmany hours per
week they have worked. Many other states have delinked retirementand health benefits
and pro-rate the retiree health contribution that they make basedon years of service as
well as having different vesting rules for cash benefits and healthinsurance benefits. For
example, some states pay 25 percent of the subsidy for people with10 years of service
and 100 percent of the subsidy for people with 25 years of service,with an increasing
percentage between the two points.
29. C
ONTRIBUTIONS FOR THOSE ON ORDINARY DISABILITY WOULD BE PRO
-
RATED BASED
ON THE YEARS OF SERVICE THEY COULD HAVE ACHIEVED AT THE NORMAL RETIREMENTAGE
BUT FOR THE DISABILITY
. T
HOSE ON ACCIDENTAL DISABILITY ARE EXCLUDED FROM THE
PRO
-
RATING SCHEDULE
.
Rationale: Disability retirement provides a specific case where theemployee is not able
to accumulate further service credits. Under the current pension system, disability
retirees continue to accumulate service credit while on disability.To align the pension
system in terms of fairness to workers with disability, the pro-ratingof the employer
retiree health care contribution will account for service accruedwhile on disability.
30. C
ONTRIBUTIONS FOR RETIREE HEALTH INSURANCE SHOULD BE CHARGED TO
EMPLOYING JURISDICTIONS BASED ON THE PORTION OF THE EMPLOYEE
???
S SERVICE IN EACH
JURISDICTION
(
SIMILAR TO THE PROVISION FOR PENSIONS
).
Rationale: Employees may have spent only a portion of their careerin the jurisdiction
from which they retire, yet the jurisdiction of final employment isresponsible for the full
contribution to retiree health insurance. Pro-rating contributionsbased on time spent in
each jurisdiction would allocate the cost more equitably across allthe employing entities.
Recognizing that jurisdictions pay varying rates toward retiree healthinsurance, it is
13


Page 16

recommended that the lower contribution rate should apply for thepurposes of the
charge-back.
31. R
ETAIN ELIGIBILITY FOR RETIREE HEALTH INSURANCE AT
10
YEARS OF SERVICE
.
Rationale: Contributions for retiree health insurance should be availableonly to longer
service employees. Requiring longer vesting for retiree health insurancethan for pension
benefits is one way to achieve that goal. Different vesting periodsfor retirement benefits
and health insurance contributions are common in other states.
14


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