The current method for funding COLAs is complex and has not resulted in dependable, meaningful COLAs. Currently, the employer indirectly funds COLAs through a gainsharing arrangement where a portion of the System’s excess investment earnings are used to pay for COLAs, rather than reduce the employer contribution rate. Excess investment earnings are those earnings over the expected rate of return.
One-half of the excess earnings above a statutorily determined dollar amount (hurdle) are deposited into the Experience Account – an account that holds funds to pay COLAs.
This model relies heavily on market conditions. As such, there is no guarantee if or when any deposits will be made into the Experience Account.
Under the proposal, the gainsharing funding model would end, and employers would directly fund COLAs. Essentially, funding would become a component of the annual employer contribution rate and be deposited directly into a newly created COLA account.
In 2029, the Initial Unfunded Accrued Liability (IUAL), will be paid off. As that date nears, employer contributions are projected to fall. The proposed legislation captures a portion of these, and other expected decreases to fund COLAs.
Beginning in 2024, deposits into the COLA account would equal one-half of the decrease in the total employer contribution rate, growing until deposits reach a maximum of 2.5% of payroll.