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.
Put quite simply, the current method of funding COLAs is not working. It involves a complex granting matrix and relies too heavily on market conditions, which has resulted in LASERS retirees not having received a COLA in seven years.
Passing the legislation in the current session is important since, due to legislative reforms, the employer contribution rate is expected to steadily decline following the 2024 re-amortization of certain system gains.
These steady declines will be followed by significant declines once debt is paid off in 2029 and 2040.
No. COLAS would only be granted if there is enough funding in the account AND upon legislative approval.
Yes. When the first COLA is paid from the new COLA account, eligibility criteria will change.
Regular retirees would need to be at least age 62 and retired at least two years.
Disability retirees would 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.
COLAS will be up to 2% of the first $60,000 of the retirement benefit.
The proposed model is expected to generate enough funds to grant a COLA every two to three years, subject to legislative approval.
Under the proposal, 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.
The Experience Account will be phased out. Any funds remaining in the Experience Account will be transferred to the new COLA account.
No. As with the current 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 current gainsharing model which generates interest. Moving away from the indirect funding model will allow more investment gains to be used to reduce existing debt.
No. The cost of the proposed provisions will likely be less than the cost of the current model.
Deposits into the COLA account would 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 will be limited to the cost of paying two COLAs.
Funds in the newly created COLA account would be used to pay COLAs and to offset system investment losses, in the event the system experiences a negative actuarial return.
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.
Yes, the model 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.
There is no set time for payment of the first COLA under the proposed plan. 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.
The LASERS Board of Trustees considers the legislatively enacted mechanism for the funding and granting of an annual COLA for eligible system retirees a significant issue and is committed to finding a more reliable COLA mechanism. Learn more here.
