Act 184 (SB 18) of the 2023 Regular Legislative Session reforms the mechanism by which future cost-of-living adjustments (COLAs) are funded and granted.
Details and answers to frequently asked questions are below.
Frequently Asked Questions
Can you explain the old model vs. the new model (Act 184)?
The prior method used for funding COLAs did not result in dependable, meaningful COLAs. Under the old model, the employer indirectly funded COLAs through a gainsharing arrangement where excess investment earnings were used to pay for COLAs.
Under Act 184, the gainsharing funding model ends, and employers directly fund COLAs. Essentially, funding is now a component of the annual employer contribution rate and will be deposited directly into a newly created COLA account. As the Initial Unfunded Accrued Liability (IUAL) is paid off, employer contributions are expected to decline. Act 184 captures a portion of these, and other expected decreases to fund COLAs. Beginning in 2024, deposits will be made into the COLA account in the amount of 1.5% of payroll, growing until deposits reach a maximum of 2.5% of payroll.
WHEN WILL THE FIRST COLA BE PAID FROM THE NEW COLA ACCOUNT?
There is no set time for payment of the first COLA under Act 184. A COLA can only be granted when there are sufficient funds to pay a COLA and when the legislature approves the granting of the COLA. We anticipate that there will be enough funds in the new account to pay the first COLA in 2030. Ultimately, Act 184 provides a more reliable method to fund and grant future COLAs.
HOW MUCH WILL COLAs BE?
COLAS will be up to 2% of the first $60,000 of the retirement benefit.
WILL ELIGIBILITY CRITERIA FOR A COLA CHANGE?
Yes. When the first COLA is paid from the new COLA account, eligibility criteria will change.
Regular retirees will need to be at least age 62 and retired at least two years.
Disability retirees will need to be retired at least two years, regardless of age.
COLA eligibility also extends to beneficiaries of retirees who would have met the above criteria, if alive; and survivors of non-retired members who have received a benefit for at least two years and whose benefit was derived from the service of a deceased member who would have been at least age 62.
WILL COLAs BE AUTOMATIC?
No. COLAs would only be granted if there is enough funding in the account AND upon legislative approval.
CAN A COLA OVER 2% BE GRANTED?
Under the new law, when sufficient funding is available, the LASERS Board of Trustees can recommend a COLA of up to, but no more than, 2%. However, the legislature may choose to authorize a COLA in excess of 2%, subject to gubernatorial approval.
HOW OFTEN WILL COLAs BE GRANTED?
The new model is expected to generate enough funds to grant a COLA every two to three years, subject to legislative approval.
WILL MONEY BE DEPOSITED INTO THE NEW COLA ACCOUNT EVERY YEAR, AND WILL THERE BE A LIMIT ON HOW MUCH CAN BE DEPOSITED?
Deposits into the COLA account are expected to occur every year, unless one of the employer safeguards prevents it. Safeguards include reducing or foregoing a deposit if it would cause the total employer contribution rate to exceed the established cap; also, the COLA account balance is limited to the cost of paying two COLAs.
WHAT HAPPENS TO THE CURRENT EXPERIENCE ACCOUNT?
The Experience Account will be phased out. Any funds remaining in the Experience Account will be transferred to the new COLA funding account.
WILL ACT 184 ADD NEW DEBT TO THE SYSTEM?
No. As with the previous gain-sharing model, COLA funding is distinct from funding regular, monthly benefits. Funds for the actuarial cost of COLAS must be available before the legislature can grant a COLA, and that will not change. The allocation of funds to the COLA account via direct employer contributions does not create debt – unlike the prior gainsharing model which generated interest. Moving away from the indirect funding model allows more investment gains to be used to reduce existing debt.
DOES ACT 184 INCREASE THE COST OF COLAs?
No. The cost of the model under Act 184 will likely be less than the cost of the prior model.
WHAT CAN MONEY IN THE COLA ACCOUNT BE USED TO PAY?
Funds in the newly created COLA account will be used to pay COLAs and to offset system investment losses, in the event the system experiences a negative actuarial return.
DOES ACT 184 INCLUDE COST SAFEGUARDS FOR EMPLOYERS?
Yes, Act 184 includes built-in safeguards to protect employers.
The COLA rate cannot exceed 2.5% of payroll.
Prior to FYE 2039, the COLA rate shall not cause the total employer contribution rate to exceed the rate determined for FYE 2024. Beginning with FYE 2039, the COLA rate shall not cause the total employer contribution rate to exceed 22% of payroll.
WILL THE NEW COLA MODEL UNDO PAST REFORMS?
No. Pension reforms enacted in 2009 and 2014 directed more excess investment earnings of the systems to pay down the UAL. These reforms will remain in place. The oldest debt schedules are on track to be paid on time.