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SENATE BILL REPORT
ESSB 6530
As Passed Senate, February 10, 2000
Title: An act relating to plans 2 and 3 of the state retirement systems.
Brief Description: Pertaining to plans 2 and 3 of the state retirement systems.
Sponsors: Senate Committee on Ways & Means (originally sponsored by Senators
Fraser, Long, Snyder, Franklin, Bauer, Honeyford, Jacobsen, Fairley, Haugen,
Roach, Zarelli, Rasmussen, Goings, McAuliffe, Patterson, Eide, Winsley, Hale,
Costa, Kohl-Welles, Stevens, B. Sheldon, Gardner and Spanel; by request of
Joint Committee on Pension Policy).
Brief History:
Committee Activity: Ways & Means: 1/31/2000, 2/2/2000 [DPS].
Passed Senate, 2/10/2000, 47-0.
SENATE COMMITTEE ON WAYS & MEANS
Majority Report: That Substitute Senate Bill No. 6530 be substituted
therefor, and the substitute bill do pass.
Signed by Senators Loveland, Chair; Bauer, Vice Chair; Brown, Vice Chair;
Fairley, Fraser, Kline, Kohl-Welles, Long, McDonald, Rasmussen, Roach, Rossi,
B. Sheldon, Snyder, Spanel, Thibaudeau, West, Winsley, Wojahn and Zarelli.
Staff: Pete Cutler (786-7454)
Background: {+ Plan 2 and Plan 3. +} In 1977, the Legislature created new
retirement plans for the Public Employees' Retirement System (PERS Plan 2),
the Teachers' Retirement System (TRS Plan 2), and the Law Enforcement
Officers' and Fire Fighters' Retirement System (LEOFF Plan 2). These are
defined benefit pension plans where a member's retirement benefit is 2
percent of final average salary times years of service. Normal retirement
age in PERS Plan 2 and TRS Plan 2 is 65. Normal retirement age in LEOFF Plan
2 is 55. The member contribution rate in PERS Plan 2 is equal to the
employer contribution rate. The LEOFF Plan 2 contribution rates split the
cost of the plan between the member (50 percent), the employer (30 percent),
and the state (20 percent).
Members of TRS, PERS and LEOFF Plan 2 who leave employment before retirement
can either withdraw their own contributions plus 5.5 percent interest, or
they can leave their contributions in the retirement system and draw a
retirement allowance after reaching retirement age. The retirement allowance
of a PERS Plan 2 or TRS Plan 2 member, or a LEOFF Plan 2 member with less
than 20 years of service who leaves employment and leaves his or her
retirement contributions in the system, is based on the salary the member had
before leaving employment. The retirement allowance of a LEOFF Plan 2 member
who leaves employment with at least 20 years of service and leaves his or her
retirement contributions in the system is increased by 3 percent each year
from the time of separation to the date the retirement allowance begins.
Between 1990 and 1992 the Joint Committee on Pension Policy (JCPP) conducted
a review of the Plan 2 retirement age policy. As a result of the study, the
JCPP proposed the creation of a new Plan 3 design. The Plan 3 design
consists of a defined benefit portion and a defined contribution portion.
One of the goals of the JCPP in designing Plan 3 was that it be cost neutral
to the state. Legislation enacted in 1995 created TRS Plan 3. Legislation
enacted in 1998 created a new School Employees' Retirement System (SERS),
with a Plan 2 and a Plan 3, for classified school district employees.
The Plan 3 defined benefit provided at retirement is 1 percent of final
average salary times the number of years of service. The defined benefit of
a member who leaves employment with at least 20 years of service is increased
by 3 percent each year from the time of separation to the date the retirement
allowance begins. Normal retirement age is 65 with 10 years of service.
Early retirement is at age 55 with at least 10 years of service. The
retirement allowance under early retirement is actuarially reduced from age
65. The defined benefit is funded by employer contributions only.
The defined contribution portion of Plan 3 is funded by employee
contributions. Upon entry into Plan 3, the employee must make an irrevocable
choice of a contribution level. The choices range from 5 percent of salary to
15 percent of salary. All investment earnings on the member's contributions
accrue to the member's account. A Plan 3 member can choose to invest either
through the State Investment Board (SIB) in the same portfolio the SIB
invests all other state retirement fund assets, or in one of several other
funds offered by the SIB, in conjunction with the Employee Retirement
Benefits Board. When a Plan 3 member leaves covered employment, the employee
can withdraw his or her contributions plus investment earnings without
destroying the defined benefit.
All teachers first hired on or after July 1, 1996, are mandated to join TRS
Plan 3. Members of TRS Plan 2 have the option to transfer to TRS Plan 3. TRS
Plan 2 members who transferred to TRS Plan 3 before January 1, 1998, received
an additional transfer payment into their defined contribution accounts equal
to 65 percent of their accumulated member contributions.
The new School Employees' Retirement System will become effective on
September 1, 2000. All classified school district and educational service
district employees who are members of PERS Plan 2 will automatically be
transferred to SERS Plan 2, which is identical to PERS Plan 2. All SERS Plan
2 members will have the option to transfer to SERS Plan 3 which has the same
design as TRS Plan 3. SERS Plan 2 members who transfer to SERS Plan 3 before
March 1, 2001, will receive an additional transfer payment of 65 percent of
their accumulated member contributions. All classified employees first hired
on or after September 1, 2000, are mandated to join SERS Plan 3.
{+ Extraordinary Gains and Gain Sharing. +} In 1998 the Legislature enacted
a new pension benefit, called "gain sharing," which uses high investment
returns to fund benefit increases in certain state retirement plans,
including TRS Plan 3 and SERS Plan 3. Plan 3 gain sharing distributions are
made every two years when there are extraordinary gains. "Extraordinary
gains" are defined as a four year average investment return in the Plan 2 and
Plan 3 retirement trust funds in excess of 10 percent. A portion of the
investment returns in excess of 10 percent are distributed to Plan 3
individual member accounts based on each member's years of service.
{+ Plan 3 Retiree Annuity Payment Options +}. The Employee Retirement
Benefits Board (ERBB) was created when TRS Plan 3 was created. One of the
board duties is to select payment options for the Plan 3 defined contribution
accounts, such as fixed and participating annuities and payments that bridge
to social security or defined benefit plan payments. The ERBB also may
approve the creation of annuity options that can be purchased from the
combined TRS Plan 2 and Plan 3 fund or the combined SERS Plan 2 and Plan 3
fund. The ERBB has not created any such annuity options to date.
{+ Early Retirement Reduction Factors. +} Members of PERS Plan 2, TRS Plan
2, and SERS Plan 2 may apply for early retirement if they are at least age 55
and if they have at least 20 years of service. Members of TRS Plan 3 and
SERS Plan 3 may apply for early retirement if they are at least age 55 and
have at least 10 years of service. Members of LEOFF Plan 2 may apply for
early retirement if they are at least age 50 and have at least 20 years of
service. In each of these plans, the retirement allowance is actuarially
reduced to offset the cost of beginning the retirement allowance early. The
factors vary by plan and age, but average about 8 percent per year for a
person who chooses to retire five years earlier than normal retirement.
State agencies and higher education institutions employ about 65,000 PERS
Plan 2 members. Local government employs about 54,000 PERS Plan 2 members
and about 12,000 LEOFF Plan 2 members.
{+ Pension Contribution Rates. +} Employer contribution rates for PERS and
TRS, and the state contribution rate for LEOFF Plan 2 are set by the Pension
Funding Council (PFC) in even-numbered years, for use in the following
biennium, based on actuarial valuation studies conducted by the Office of the
State Actuary (OSA). In 1999 OSA conducted new valuation studies which
indicate the employer and state rates for PERS, TRS and LEOFF 2 could be
reduced and still meet all of the statutory pension funding requirements.
Summary of Bill: {+ Optional PERS Plan 3. +} A new PERS Plan 3 is created,
effective March 1, 2002, for employees of state agencies and higher education
institutions, and effective September 1, 2002, for employees of local
governments. PERS Plan 3 is a split plan similar to TRS Plan 3, with a
defined benefit portion and a defined contribution portion. The design of
the defined benefit portion of PERS Plan 3 is the same as PERS Plan 2, except
Plan 3 has a 1 percent benefit at retirement rather than 2 percent. The
defined benefit portion is funded entirely by employer contributions; PERS
Plan 3 members make no contributions to the funding of the defined benefit.
PERS members first hired after the effective date of PERS Plan 3 have the
option of selecting membership in either Plan 2 or Plan 3. The option must
be exercised within 180 days of employment. Until a member makes the choice
to join Plan 3, he or she will be a member of PERS Plan 2. Current members
of PERS Plan 2 have the option to transfer to Plan 3; those who do so have
their service credit and accumulated contributions transferred to their
individual account in Plan 3.
{+ Plan 2 to Plan 3 Transfer Payments. +} Those PERS Plan 2 members who are
state agency and higher education employees and who transfer between March 1,
2002, and September 1, 2002, and who earn service credit in February 2003,
receive a transfer payment to their defined contribution accounts equal to
110 percent of their accumulated contributions. Those local government
employees who transfer from PERS Plan 2 to PERS Plan 3 between September 1,
2002, and March 1, 2003, and who earn service credit in February 2003,
receive a 111 percent transfer payment. The transfer payments are made on
March 1, 2003.
{+ Plan 3 Gain Sharing Payments. +} The same gain sharing provisions
provided in TRS Plan 3 and SERS Plan 3 are included in PERS Plan 3. The
first gain sharing payment is paid March 1, 2003, and is equal to the gain
sharing payments made to TRS Plan 3 members in January 2000 and in January
2002.
{+ Plan 3 Annuity Payment Options. +} The ERBB is required to make optional
actuarially equivalent life annuity benefit payment schedules available to
Plan 3 members no later than July 1, 2005. These annuity options may be
purchased from the TRS, SERS, or PERS combined Plan 2 and Plan 3 funds.
{+ LEOFF Plan 2 Retirement Age and Early Retirement Reduction Factors. +}
The normal retirement age for LEOFF Plan 2 is reduced to age 53. A LEOFF
Plan 2 member who is at least 50 years old and has at least 20 years of
service may receive a benefit reduced by 3 percent for each year the member
is less than age 53.
{+ PERS, TRS, and SERS Plans 2 and Plans 3 Early Retirement Reduction
Factors. +} In addition to current early retirement provisions, a member of
Plan 2 or Plan 3 of PERS, TRS or SERS who is at least age 55 and has at least
30 years of service may receive a benefit that is reduced by 3 percent for
each year the member is less than age 65.
{+ Pension Contribution Rates. +} The employer and state contribution rates
for PERS, TRS and LEOFF Plan 2 are reduced effective May 1, 2000.
Appropriation: None.
Fiscal Note: Requested on January 24, 2000.
Effective Date: The bill contains several effective dates. Please refer to
the bill.
Testimony For: PERS Plan 3 provides greater flexibility and reduces the
financial penalty for employees who change careers prior to retirement.
Employees should have a choice between the defined benefit design of PERS
Plan 2, or the split benefit design of PERS Plan 3. The September 2001 begin
date would have been too early to provide enough time for employers to
prepare their payroll systems and to conduct the necessary member education;
the March 2002 date is better. The 3 percent early retirement reduction
factor will be very helpful for teachers, correction officers, and other
employees. LEOFF Plan 2 members should have a lower retirement age due to
the inherent risks of their jobs, and recruitment problems for law
enforcement officers. The Plan 3 design does not work well for LEOFF both
because there is not great turnover in LEOFF positions and because most LEOFF
members are not covered by Social Security, so the defined contribution
design would involve too much risk. Cities and counties support the Plan 3
design, both for PERS and LEOFF, but can support the bill only if local
governments receive adequate funding to offset the impacts of initiative 695.
Testimony Against: Fire districts support the Plan 3 design for LEOFF, but
the costs of the benefit increases for LEOFF Plan 2 members may be too great
a burden, especially if investment returns go down in the future, requiring
additional employer contribution rate increases. Fire districts do not have
PERS savings to offset the LEOFF rate increases.
Testified: Steve Eggert, King Co. Police Guild (pro); Pat Thompson, County
and City Employees; Fred Ropes, AFL-CIO; David Westberg, Stationary Engineers
(pro); Sherry Appleton, ATULC; Jamila Thomas, WSFSE (pro); Mike Ryherd,
Teamsters (pro); Wendy Rader-Konofalski, AFT (pro); Allan Jacobson; Lynn
McKinnon, WPEA (pro); Bob Maier, WEA (pro); Doug Nelson, PSE (pro); Bill
Vogler, WA State Assn. of Counties (concerns); Kevin O'Sullivan, Thurston
County Comm. (pro); Garry Edwards, Sheriff (pro); John Kvamme, WASH, AWSP
(pro); Kelly Fox, Cody Arledge, WSCFF (pro); Jim Justin, AWC (concerns); Ryan
Spiller, Dale Mitchell, WFCA (con).
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