Future State and Teachers' COLA Base Hurdles

Challenges In Achieving Higher Amounts

It’s been five and a half years – July 2012 to be exact – since state and teacher retirees saw a permanent increase in their COLA Base from $12,000 to $13,000. Naturally our state and teacher members are wondering when will the COLA Base be increased.

“Members can be assured that while we’re working with the 102 local retirement systems to enhance their COLAs, our efforts to do the same for state and teacher retirees continue unabated,” states Association President Frank Valeri. “And a comprehensive report, known as the Commonwealth’s Actuarial Valuation Report and released annually by PERAC (Public Employees Retirement Administration Commission), helps to clearly lay out the challenges that we face to enact a better state/teacher COLA.

In its most recent (January 1) report, PERAC details the pension benefits that are the state’s obligations, including state employees, all municipal teachers and certain local COLA costs. Even more importantly, it best identifies the Commonwealth’s overall total pension obligations.

Using both employee and retiree demographic and financial data along with various actuarial assumptions, the report formulates the total pension liabilities of the Commonwealth. Comparing these liabilities with the pension fund assets on hand in the PRIT fund, PERAC determines the funded level of the state’s pension liability. 

Readers of the report might be surprised by some of its important findings highlighted below, including that the Commonwealth’s funding level as of this past January 1 is identical to last year’s (2016) valuation report, at 56.7% funded. According to Valeri, “One has to look closely into the report to understand why or how this happened.

“While it showed overall actuarial gains for the state and teachers’ systems to be $1.1B over last year’s report, in part due to investment gains of 8.6% in 2016, mortality assumption changes and plan benefit adjustments negated these gains and as a result, we remained at the same funding level.

“We’ve included a chart (p.13) that shows the funding progress since 1990.  While our assets have grown some $8B over the past 5 years, only minor changes in the unfunded actuarial liability have taken place. Consequently, the funding progress has somewhat leveled off since 2012.”

The flattening out of this funding progress has been due to a number of assumption changes, primarily the mortality and investment rate of return assumption changes since 2012. These two changes, along with several funding plan adjustments (ERI, COLA base to $13,000, Higher Ed transfers from their Optional Retirement Plan and corrections in Job Group classifications) have accounted for 63% of the increase in our unfunded actuarial liabilities during this period.

Valeri continued his comments and observations on the report, emphasizing that less than 3% of  this 63% increase is attributable to the 2012 COLA Base increase to $13,000 for state and teacher retirees.

Consequently, since 2012, the unfunded actuarial liability has grown from $23.6B to $40.5B, with $10.7B of this $17B increase coming from these assumption and plan benefit changes. 

“Over the past few years our Governor, along with the House and Senate membership, have been very aggressive in their commitment to becoming fully funded by 2036. With increases of 8-9% annually in the pension appropriation they have been able to maintain this goal and address these assumption changes to ensure sustainability of the system,”  stated Frank Valeri, Association President.

However, while recognizing the fiduciary responsibilities of the Governor and legislature, Valeri is still hopeful for them to further enhance retiree COLA increases. Following his comments on pension appropriations, he continued by stating, “ I certainly appreciate the fact that we need to have the assets on hand so our pension checks can continue and that we are all living longer, but many of our members are not as concerned with 2036 as much as 2018 and the years ahead. I am hopeful that we can get some balance in future decisions so that the short term needs of retirees can be better addressed with a higher COLA Base.”