| A Complicated Struggle But The Right Thing To Do

Recent press reports have created some confusion about the impact of the newly created Hybrid Plan — and particularly of employees who exercise their right to move from the ARP to the Hybrid Plan– on the finances of the State Colleges and Universities and the State. In fact, some un-informed reporters have even suggested that employees moving from the ARP to the Hybrid Plan cost the State money. This is absolutely incorrect. Here are the facts:

 In SEBAC 2011, the parties created a new Hybrid Plan which provided what is for many employees a more rational and cost-effective retirement choice, while saving money for the State. Employees who move from the ARP to the Hybrid Plan pay the full actuarial cost of moving with respect to their past service — every penny. If they move and don’t immediately retire, their future service costs in the Hybrid Plan are less expensive than they are in ARP — for newer employees much less expensive. Thus members who move from the ARP to the Hybrid Plan, or new members who choose the Hybrid Plan over the ARP or even over SERS, save the State money.

 However, there are complex accounting rules governing which charges for employees are paid by the State’s General Fund, and which are paid by the specific employing agency. Because our higher education institutions are paid by block grant, these rules can be particularly important.
 Some of these rules are set by the federal government, not the State. Of particular importance here is that for employees whose salaries are partially funded by federal reimbursement, the federal government will reimburse based on the employee’s salary, plus fringe benefits. There are many hundreds of millions of dollars which come back to the State government based upon these reimbursements.
 The federal government will reimburse for fringe benefits for current employees at rates that include payments towards the unfunded liability of the pension plan to which the employee belongs, even if the particular employee had nothing to do with the unfunded liability of the plan. But the federal government will do so, only if the State applies the same rules for accounting for fringe benefits internally that it does for the federal government.

 The State’s normal protocol is to attach to each SERS participating employee a pro-rata share of the State’s unfunded liability for all of the SERS plans. This means that even though the majority of the unfunded liability for SERS plans is for Tier 1, all SERS participants are attributed with the same pro-rata share of overall SERS unfunded liability, regardless of the Tier in which they participate. Under this protocol, the federal government contributes hundreds of millions of dollars towards the unfunded liability of pension plans selected by state employees whose salary is partially reimbursed by the federal government.
 The State’s normal protocol does not attach any unfunded pension liability to ARP participants, since the ARP does not promise any particular benefit and therefore does not have any unfunded liability. This protocol makes SERS appear to be much more expensive than the ARP even though the State’s normal contributions towards the ARP are higher — and for new employees much higher – than they are for SERS.

 The State also has unfunded liability for retiree health care. Due to an even more complex set ofrules, the State attributes unfunded liability for retiree health care in a way which makes retiree health care for SERS participating employees appear to be over 7 times more expensive than it is for ARP participants, even though the benefits and ongoing costs per participant are identical.
 These protocols are also applied when adjuncts, tuition-funded, or other non-general funded employees are employed by higher education institutions to determine the amount that those institutions will reimburse the General Fund for benefits provided to those employees. The result is that higher education institutions are charged substantially higher fringe benefit rates for employees choosing SERS pension coverage than ARP coverage, even though the SERS coverage is actually costing the State less money.
 For determining the fringe benefit rate for the Hybrid Plan, the State treats the Hybrid Plan as though it were a SERS plan, and thus as though it has inherited all the unfunded liability which SERS plans have.
 This means, for purposes of fringe benefit protocols, the State attributes to each Hybrid Plan participant a pro-rata share of the unfunded liability of all of the SERS plans. For adjuncts, tuition-funded, and other non-general funded employees, this means that the higher education institutions reimburse the General Fund for their fringe benefits at a much higher rate than they do for ARP participants, even though the actual cost for those employees to the State is less expensive than it would be if they elected to participate in, or remain in, the ARP.While these facts are complex and perhaps confusing, there is no confusion about the right result. The parties created the Hybrid Plan to provide an important new option for higher education employees and to provide a more efficient retirement choice that saves the State money. It was not created, and must not be allowed, to create a windfall for the General Fund at the expense of our Higher Education institutions.The higher education unions are working with SEBAC and the administration to undo this unintended consequence of the creation of the Hybrid Plan, and to achieve a more rational structure for charging higher education institutions for the fringe benefits provided to adjuncts, tuition-funded, and other non- general funded employees. The solution is not simple, and may take a little time. But there’s no doubt that it’s the right thing to do, and together, we must and we will make it happen.