NewsTracker Tax and Budget

Local Pensions at Forefront for State Leaders

Some top Tennessee officials say they don’t expect the Legislature to address state employee pension reform at all this year — although retirement plans for some 483 local government groups might get a look.

“There will probably be some bills filed this year, everybody sort of getting on that bandwagon, like, ‘Oh, hey, we just discovered, you know there’s a pension issue,’” said Senate Majority Leader Mark Norris, R-Collierville. “There’s long been a pension issue. But it takes studied work, and it’s technical stuff.”

Lawmakers will be ready to tackle pensions for state employees, including teachers and workers in higher education next year, he told TNReport. That’s just four years before about 16 percent of state workers will qualify for retirement, according to state officials.

Tennessee has fared well compared to other states in terms of funding its pension system — an issue that has captured recent national attention. A recent Pew report found that the state’s pension system was 90 percent funded in the last two fiscal years, well above a widely used 80 percent threshold to measure the soundness of pension plans. By contrast, the plan in Illinois was funded at 51 percent in 2009, a stark reminder that many states have failed to set aside enough money to cover their promised pension payments.

Norris said he is unsure what the future holds for revamping the state’s retirement system but said lawmakers should give serious thought to adopting a program that mirrors a 401(k) matching system, much like what is used in the private sector.

For now, the plan is to target future municipal employees because local governments are “under greater cost pressures than the state is,” Treasurer David Lillard told lawmakers at the Council on Pensions and Insurance meeting Monday.

He is proposing offering those cities, counties, and school districts a variety of adjustments such as changing the retirement age, capping cost-of-living adjustments, capping maximum benefits or pairing supplemental deferred compensation plans with reduced pension benefits. Any changes need to be OK’d by the Legislature and the governor.

His plan would not affect state employees, K-12 teachers, higher education workers or current retirees, he said.

The state runs the Consolidated Retirement System, which handles pensions for those workers as well as the plans issued by some cities and towns.

Press Releases

Treasurer Pitches Local Pension Options

Press Release from Department of Treasury; Jan. 23, 2012:


Treasurer Lillard Proposes New Pension Options for Local Governments

To give local governments more choices for their employees’ retirement plans, Tennessee State Treasurer David H. Lillard Jr. today proposed several new options to state legislators for their consideration.

Lillard stressed that none of the suggested changes would affect K-12 teachers, state employees or higher education employees who are covered under the Tennessee Consolidated Retirement System (TCRS). The changes, which would require approval by the General Assembly, are optional for local governments and would only affect new hires. The proposed options do not affect any current retirees of TCRS.

“Our city and county governments across Tennessee have to balance the need to be good stewards of taxpayer money with the need to offer fair retirement benefits to their employees,” Treasurer Lillard said. “The goal is to make sure pension benefits are affordable, sustainable and sufficient. That’s why I am recommending some choices that would give local governments greater flexibility to meet their specific needs.”

The options presented today were:

• local governments may take no action and remain in the current TCRS defined benefit pension plan with retirement generally at 30 years of service or age 60; or

• local governments may adopt a TCRS defined benefit pension plan with an annual service accrual rate of 1.4%, with an increase in retirement age, limits on cost of living adjustments, a cap on maximum allowed benefits and a revised employee contribution structure; or

• local governments may adopt a TCRS defined benefit pension plan with an annual service accrual rate of 1% to offer reduced pension benefits, but with a supplemental deferred compensation program; or

• local governments may decide to offer only a deferred compensation program as a standalone option.

The proposals were developed following open meetings held throughout Tennessee with more than 200 local government representatives last fall.

“Over the last couple of years, we have had several local governments either withdraw or give notice that they planned to withdraw from TCRS due to changes in market conditions,” Treasurer Lillard said. “We are offering these options because we want local governments to remain part of TCRS, which is in the best interests of local governments, their employees and the citizens they serve. We believe local governments will be more inclined to do that if we’re offering more choices.”

Treasurer Lillard presented his ideas during a meeting of the General Assembly’s Council on Pensions and Insurance. For a copy of the local government pension option proposals and other documents, go to and look at the tab titled “Proposed Plans for Local Gov’t.”


Press Releases

Kelsey Proposing Pension Reform

Press Release from the Tennessee State Senate Republican Caucus, Dec. 22, 2011:

(NASHVILLE, TN) December 22, 2011 – State Senator Brian Kelsey (R-Germantown) announced today he has introduced legislation that would reform the way pensions are calculated for new state employees. The plan would be offered for new state employees but not for local government employees or for education workers. Kelsey said the proposal would establish a privately managed cash-balance plan to eventually replace the Tennessee Consolidated Retirement System defined benefits plan, participation in which would continue to remain available for current employees.

The legislation is the tenth in a series of announcements by Kelsey in his “12 for ’12” initiative for the next legislative session, which is set to reconvene January 10, 2012.

“It’s time for the General Assembly to discuss the future of state pensions,” said Senator Kelsey. “State leaders, Democrat and Republican alike, have done a great job of giving us a retirement system that is currently fiscally sound. But changes need to be made if we want Tennesseans to say the same thing of current leaders thirty years from now.”

The cash balance plan would guarantee full funding of the state pension system for current state employees. New state workers would receive 6% to 15% of their salary in a personalized account guaranteed to be there when they retire. The accounts would be aggregated and professionally managed for employees to reduce risk of loss. The Treasurer would choose among competing fiscally sound money managers for the one who guarantees the highest annual rate of return for workers. Therefore, risk in the market would be born by the fund manager rather than workers.

The state contribution for new employees would begin at 6% but rise to 15% as the funds which are necessary to pay pensions under the old system decrease.

In the last decade, at least 12 states have introduced some kind of defined-contribution plan such as a 401(k). Michigan and Alaska now require all new hires to join the defined contribution plan. Oregon, Utah, and Indiana require workers to participate in a “hybrid” defined benefit-defined contribution plan. An additional eight states have retained their defined benefit plan and simply offer the defined contribution plan as an option to their employees.

Among the criticisms of the traditional defined contribution plan is that proper management requires a great degree of financial literacy by the employee. That employee alone faces the risk of poor investment returns, the risk that they might outlive their assets, and the risk that inflation will erode the value of their income in retirement.

“This plan would ensure that our state employees are not alone in planning for their retirement,” concluded Kelsey.