legislative wrap-up

Pension study bill may set stage for future PERA debates

Criticism of the state pension system was muted during the 2014 legislative session, but lawmakers quietly passed what potentially could be one of the more significant pension bills in four years.

The future of the Public Employees’ Retirement Association (PERA) is of vital interest to the state’s teachers and school administrators, all of whom are covered by the system and who make up about 65 percent of PERA’s nearly 200,000 members.

It’s also of concern to school districts, which are paying an ever-increasing percentage of their payrolls to PERA.

Senate Bill 14-214 doesn’t make any changes in PERA – it just launches three pension studies. But the results of those reviews could set the stage for legislative decisions starting in 2016.

Public employee pensions have been the focus of growing concern in recent years, especially since the 2008 recession decimated the value of pension fund portfolios. PERA’s liabilities, for instance, are only about 65 percent funded. (Get national background in this brief from the Pew Center on the Pew Charitable Trusts.)

A 2010 law that passed with bipartisan support made important changes to PERA, including less generous age and service requirements for employees hired after the law was passed. The law also allowed reduction of cost of living increases for current retirees, a provision that drew a lawsuit. That case is pending before the Colorado Supreme Court (see story).

The 2010 law didn’t ease concerns about PERA on the part of some Republican lawmakers, who in recent sessions repeatedly proposed bills to change the PERA retirement age, tweak calculation of benefits, convert PERA to a defined contribution system, change the membership of the PERA board and target highly paid retirees (like former governors). None of those measures passed, and only two such bills were introduced this session.

What the 2014 bill would do

SB 14-214 will set in motion three PERA studies, the latter two of which are of particular interest to K-12 employees. The studies would:

  • Provide a more detailed look at the total compensation of state employees, including pension costs
  • Evaluate the costs and effects of switching PERA to a defined contribution system from the current defined benefit system
  • Determine methods for tracking the financial health of PERA at intervals over the next 30 years

Supporters of the bill hope the results of the studies, particularly the second and third ones, will provide information that will calm the ideological and somewhat circular arguments over PERA.

“Having the data to shut down those debates could be useful,” said Sen. Pat Steadman, D-Denver and vice-chair of the Joint Budget Committee. That panel’s six members sponsored SB 14-214.

Steadman said the third part of the study “is going to be the piece that’s the most interesting and that makes a potentially interesting 2016 session.”

The 2010 PERA reform law (Senate Bill 10-001) was designed to make the system fully funded in 30 years, based on a variety of assumptions about investment rate of return, contributions, retirement payouts and many other factors. But the problem has been there’s no way to gauge how the law is working along the way, leading to unproductive “sky is falling” vs. “stay the course” arguments that aren’t based on data.

Henry Sobanet, director Office of State Planning and Budgeting / File photo
Henry Sobanet, director Office of State Planning and Budgeting / File photo

State budget director Henry Sobanet notes that there have been “all kinds of pension questions” ever since the 2010 law that can’t really be answered.

“Take for example this idea of the rate of return,” referring to the predicted return on system investments.

The PERA board has been assuming an average 8 percent return over 30 years, a figure that some, including Republican state Treasurer Walker Stapleton, have criticized as unrealistic by some. The board recently lowered the assumption to 7.5 percent.

The problem, Sobanet notes, is “you really don’t know until 30 years from now” if the rate of return assumption was correct.

“Isn’t it more important to think about what we could do along the way to know if we’re off” in the effort to make the system solvent, he said.

The idea behind the third study is to come up with methods for assessing what’s happening at shorter intervals. “I think what this will do is give us a more explainable insight into whether the [2010] model is working,” Sobanet said. “I think we can do more to show people why we think it’s on track.”

Referring to all three studies, Sobanet added, “I just don’t think it’s productive to have these discussions theoretically. We should have some numbers associated with this.”

PERA a touchy issue

Suggestions for changing the pension system can raise anxieties quickly, as shown by the pending lawsuit and by the passionate testimony from retirees almost every time a PERA bill is heard in a legislative committee.

Given that, Sobanet is careful in discussing the studies, noting that his boss, Gov. John Hickenlooper, “supports PERA, and he also supports defending Senate Bill 1.”

Sobanet continued, “This is a data investigation. We’re not proposing changes to PERA.”

PERA background

The school division is the largest of PERA’s six divisions, with more than 115,000 members. The separate DPS division has about 14,000 members. (The DPS pension system was merged into PERA a few years ago, but the assets and benefits are kept separate.)

The pension system has about $43 billion in net assets, and its liabilities were 63.2 percent funded at the end of 2012. The 2013 PERA financial report is expected to be released in late June. (See 2012 report here.)

School districts contribute a base 10.15 percent of payroll to PERA, plus an additional 6.4 percent in supplemental payments, some of which is money that otherwise would have gone to employees as salary. Employees contribute 8 percent of pay. DPS, which is a separate division, has a variable contribution schedule that can be as high as 20.15 percent.

Those supplemental payments, known by the acronyms SAED and AED, are scheduled to rise to a total of 11 percent by 2018.

Indiana's 2018 legislative session

State takeover plans for Gary and Muncie could be revived as Indiana lawmakers return in May

PHOTO: Shaina Cavazos
Gov. Eric Holcomb addressed reporters Monday. He's asking lawmakers to return for a special session in May.

Lawmakers will return to the Statehouse this May after an unusual summons Monday from Gov. Eric Holcomb, and it’s possible they could revisit a controversial plan to expand state takeover of the Gary and Muncie school districts.

But Holcomb said the takeover plan should not be pushed through during a special session and should be acted upon next year. It’s been more than a decade since lawmakers held a special session in a non-budget year.

“I would prefer to wait,” Holcomb said. “I don’t believe that it rises to the level of urgency to be dealt with right now.”

The regular legislative session ended in chaos last week, with lawmakers leaving this and several other important bills unresolved when the clock ran out.

Republican lawmakers have been largely supportive of the takeover plan, and so they could revive the issue despite Holcomb’s stance. Holcomb said discussions would happen this week over what issues could be addressed during the special session.

House Bill 1315 sparked heated debate right up until the final minutes of the 2018 legislative session. The bill would have given control of Muncie schools to Ball State University and stripped power from the Gary school board. Another part of the bill would have developed an early warning system to identify districts in financial trouble.

On Thursday, House Speaker Brian Bosma said the bill was one of the important issues left on the table when the legislature had to adjourn.

But Senate President David Long also noted that the bill has been massively unpopular in some circles — Democrats were strongly opposed to it, as were teachers unions and some educators and community members.

Both Republican leaders said in statements Monday that they supported the governor’s special session request. But John Zody, the Indiana Democratic Party chairman, derided the move as wasteful and a reflection of lawmakers’ inability to finish their work on time.

“Republican leadership incompetently steered session into a wall on the last lap,” Zody said in a statement. “Now they’re asking taxpayers to foot the bill for another shot at passing their do-nothing agenda.”

Holcomb said his biggest priorities during the special session would be getting a $12 million loan from the state’s Common School Fund to Muncie schools to deal with financial difficulties stemming from declining enrollment and mismanagement of a bond issue. That loan was originally a provision in the House bill.

State Superintendent Jennifer McCormick said Monday morning that she also would support action to get Muncie schools the money they were promised. McCormick also said the early warning system could be helpful to prevent these situations in the future.

“We want Muncie to be successful,” McCormick said, adding that anything the state can do to be proactive “and get people help so we’re not dealing with more Muncies and Garys” is a good thing.

The special session could come with a steep price tag for Indiana taxpayers. Micah Vincent, director of the Office of Management and Budget, said early estimates for calling lawmakers back into session could be about $30,000 per day. But that cost “is dwarfed by the cost of inaction,” Holcomb said. It’s unclear how long the special session could last.

The governor also said he wanted to prioritize school safety legislation, another measure that didn’t get final votes before time ran out. He is calling for lawmakers to direct $10 million over the next two years to the state’s Secured School Fund. The money would allow districts to request dollars for new and improved school safety equipment and building improvements.

His plan comes in the wake of a shooting in Parkland, Florida, where 17 students and faculty members were killed last month.

The shooting also sparked activism across the country, with thousands of students protesting against gun violence in schools and calling for stricter gun regulations. Last Wednesday, many Hoosier students joined the national movement by walking out of school.

Indiana's 2018 legislative session

Indiana lawmakers OK up to $100 million to address funding shortage for schools

PHOTO: Scott Elliott

Indiana lawmakers agreed to dip into reserves to make up a shortfall to get public schools the money they were promised — and they’re trying to make sure it doesn’t happen again.

Both the House and Senate overwhelmingly voted to approve the final plan in House Bill 1001. The bill now heads to Gov. Eric Holcomb’s desk.

Rep. Tim Brown, a co-author of the bill and chairman of the House Ways & Means Committee, said it was necessary to take the uncommon step and have the state to use reserve funds to make up the gap, but in the next budget year making up that difference will be a priority. Brown said he, other lawmakers, and the Legislative Services Agency will work to make sure projections are more accurate going forward.

“Do procedures need to be changed?” Brown said. “We’re going to be asking those questions” during the next budget cycle.

Estimates on the size of the shortfall have ranged widely this year, beginning around $9 million and growing as new information and student counts came in. Projections from the Legislative Services Agency reported by the Indianapolis Star had the gap at $22 million this year and almost $60 million next year.

The final bill requires the state to transfer money from reserves if public school enrollment is higher than expected, as well as to make up any shortages for students with disabilities or students pursuing career and technical education. The state budget director would have to sign off first. Transfers from reserves are already allowed if more voucher students enroll in private schools than projected, or if state revenue is less than expected.

The budget shortfall, discovered late last year, resulted from miscalculations in how many students were expected to attend public schools over the next two years. Lawmakers proposed two bills to address the shortfall, and the House made it its highest legislative priority. The compromise bill would set aside up to $25 million for this year and up to $75 million next year. The money would be transferred from reserve funds to the state general fund and then distributed to districts.

The bill also takes into account two other programs that lawmakers think could be contributing to underestimated public school enrollment: virtual education programs and kids who repeat kindergarten.

District-based virtual education programs would be required to report to the state by October of each year on virtual program enrollment, total district enrollment, what grades the virtual students are in, where they live, and how much of their day is spent in a virtual learning program. These programs, unlike virtual charter schools, are not separate schools, so it can be hard for state officials and the public to know they even exist.

The report will help lawmakers understand how the programs are growing and how much they might cost, but it won’t include information about whether students in the programs are learning or graduating. Virtual charter schools in the state have typically posted poor academic results, and Holcomb has called for more information and action, though legislative efforts have failed.

Finally, the bill changes how kindergarteners are counted for state funding. The state changed the cut-off age for kindergarten to 5 years old by Aug. 1 — if students are younger than that, they can still enroll, but the district won’t receive state dollars for them. Some districts were allowing 4-year-olds to enroll in kindergarten early, Sen. Ryan Mishler said earlier this month. Then those same students would enroll in kindergarten again the next year.

Despite increases passed last year to boost the total education budget, many school leaders have said they struggle to pay salaries and maintain buildings, which is why funding shortfalls — even small ones — matter. This year’s unexpected shortfall was particularly problematic because districts had already made plans based on the state budget.

Find all of Chalkbeat’s 2018 legislative coverage here.