LEGISLATIVE FOCUS ON COLA %

JANUARY 1999 -
1.3% CPI Falls Short For Retirees - In light of recent changes in the process by which the federal
government calculates the annual Consumer Price Index (CPI), the
Association has filed legislation to allow the state’s 106 retirement
systems some latitude in establishing the annual COLA percentage.

Over
the past year, the Bureau of Labor Statistics (BLS), the federal
agency, which establishes the CPI, has changed the factors that
constitute the official CPI. In doing so, the annual inflationary index
has been lowered. While this may be good for the business community, it
could have a disastrous impact on retirees.

A
study, conducted by the BLS, tracked an experimental index designed to
monitor the spending habits of retirees. It shows a widening gap
between the cost-of-living for retirees as compared to the American
workforce as a whole. Between December 1982 and September 1998, the
experimental index for retirees rose 73.9%, while the official CPI rose
63.5%. Since 1990, the gap has widened in accord with the dramatic leap
in health care costs. For most retirees, the amount of money spent
towards health care significantly increases as they age. Critics of the
new process argue that the BLS does not accurately reflect this
occurrence in the CPI.

“The so
called ‘market basket of goods’ used by the federal government to
determine the CPI is off the mark when it comes to the spending habits
of retirees. You really don’t need to look any further than how health
care costs are weighted to determine that the process is not reflective
of inflation for retirees,” said Association President Ralph White. “If
Washington is not going to address the issue, then it will have to be
resolved on Beacon Hill.

“When
Chapter 17 (COLA law) was passed in 1997, the CPI was deemed to be a
fair index to use. Now that we know it is inaccurate, we cannot sit
back and allow the problem to go unaddressed.”

Funding Schedules Key

As
was the case with the original passage of Chapter 17 nearly two years
ago, the key to resolving the CPI gap is contained within the funding
schedules of the retirement systems. Under Chapter 32 (retirement law)
each of the state’s 106 systems has established a funding plan or
schedule. The schedule depicts the long range funding strategy of the
retirement system, along with a schedule of payments from the employer.

The
basis for each schedule is an actuarial set of assumptions ranging from
anticipated investment returns to the life expectancy of the members of
the system. When adopting Chapter 17, each system was required to
establish, within their funding schedule, an assumption that an annual
3% COLA would be paid to all eligible retirees, even though the law
provides that the lesser CPI figure be used. Each employer is then
required to appropriate enough money each year to cover its pension
obligations, including the assumed 3% COLA.

Members
are aware that the COLA for FY’99 was 2.1%, nine-tenths of a percent
lower than what was funded. The reported 1.3% COLA would be a whole
1.7% lower than the assumption placed by the schedule.

The
bill filed by the Association will grant the authority to the local
retirement board to pay a COLA above the CPI, up to the maximum amount
allowed under the funding schedule of 3%. As is the case with nearly
every bill effecting municipal finance, this proposal will be local
option. Once passed by the retirement board and the local legislative
body, this new process will allow the retirement board the annual
discretion to pay a COLA of up to 3%.

Increase In Base Amount

In
addition to filing legislation to address the COLA percentage, the
Association is also taking steps to increase the base pension on which
the maximum COLA is applied. With the passage of Chapter 17, the base
was increased to its current level of $12,000. The Association’s bill
would raise the maximum base to $16,000.

Long-time
members will recall that the previous base of $9,000 had been frozen in
place since 1986. Due to the high unfunded liability carried by the
state / teachers systems, as well as by most local systems, increasing
the base to a higher level had never been obtainable.

“I
have always felt that the base was too low, but the problem has been
how do you pay for raising it without damaging the pension fund,” says
White. “If you double the base without having the funds to pay for it,
you are only hurting those retirees with small pensions. I cannot
support a proposal that leaves our most vulnerable members out in the
cold.

“Some members may not want to
hear it, but the fact is that our pension system cannot support true
COLAs based on the full amount of one’s pension. The average pension
across the state is about $13,000. Teachers are slightly higher and
municipal workers slightly lower. A $16,000 base will give the average
retiree the full COLA, while still providing for those members with
smaller pensions.”

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