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Cost-of-Living Adjustments (COLAs) Explained

​The Teachers’ and State Employees’ Retirement System (TSERS) and the Local Governmental Employees’ Retirement System (LGERS) are defined benefit plans. Defined benefit plans use a formula to calculate monthly retirement benefits once eligibility requirements have been met. Your contributions, your employer’s contributions and the investment earnings on total contributions pay the cost of providing your retirement benefits. After retirement, cost-of-living adjustments may be granted, but are not guaranteed.

 

How COLAs work for TSERS

TSERS retirement benefit increases may be periodically granted by the General Assembly when the TSERS employer contribution rate would not need to increase to pay for the cost-of-living adjustment or when the General Assembly appropriates funds in the state budget to provide for an increase.

The actuaries for TSERS present an actuarial valuation and information pertinent to the financial condition of the plan to the TSERS Board of Trustees each year. Benefit increases are generally considered when TSERS experiences sufficient investment gains to cover the additional actuarial accrued liabilities created by providing the increase and if the annual Consumer Price Index has increased since the prior year. Increases may also be considered when active members receive certain types of across-the-board salary increases. The Board reviews this information and makes a recommendation to the General Assembly as to the financial feasibility of granting an increase for retirees.

However, the TSERS Board cannot grant retiree benefit increases; it is within the purview of the General Assembly to enact legislation to provide for an increase for TSERS retirees.

In addition to the General Assembly consistently appropriating the actuary’s recommended TSERS employer contributions, the TSERS benefit increase policy has helped keep TSERS funding costs manageable when compared to other public sector retirement systems in the United States.

 

How COLAs work for LGERS

LGERS retirement benefit increases may be periodically granted by the LGERS Board of Trustees. The General Assembly has delegated to the LGERS Board of Trustees the ability to grant COLAs within certain statutory limitations.

The Board may grant COLAs under G.S. 128-27(k) up to a maximum amount of four percent, provided that the COLA does not exceed the year-over-year increase in the national Consumer Price Index and that the cost of the increase to the pension fund is paid for with investment gains. If investment gains are sufficient to permit the LGERS Board of Trustees to grant a COLA, the decision is made at the January board meeting each year. If granted, the COLA becomes effective in July of the same year.

In order for LGERS retirees to get a COLA larger than the amount allowed under this statute, the General Assembly would have to pass legislation that would effectively require local government employers to pay higher contribution rates in order to pay for the cost of the increase to the pension fund. This has never occurred, primarily because, in such a situation, local governments would be hindered in their ability to provide essential government services in order to pay for the unplanned increase in the employer contribution rate.

In addition to LGERS employers consistently contributing the actuary’s recommended LGERS employer contributions, the LGERS benefit increase policy has helped keep LGERS funding costs manageable when compared to other public sector retirement systems in the United States.

 

Cost of COLAs for TSERS

The most recent COLA granted to TSERS retirees was a one percent (1%) benefit increase. This benefit increase was paid for out of state appropriations, rather than using investment gains on pension fund assets. This increase went into effect on July 1, 2017, for TSERS retirees whose retirements began on or before July 1, 2016. Members with retirement effective dates between August 1, 2016, and June 1, 2017, received a prorated amount based on the number of months they had been retired.

All members who were in receipt of a benefit on June 1, 2017, will continue to receive the increased benefit amount resulting from this COLA for the remainder of their lifetime, regardless of how long they live. The COLA was projected to produce, on average, a $17 per month increase per retiree.

This one percent COLA was enacted by the legislature in the 2017 Appropriations Act (S.L. 2017-57, sec. 35.19A) and increased the TSERS pension liabilities by $430.3 million using the actuarial assumptions in place as of the valuation date, including a discount rate of 7.20 percent. This liability increase is essentially an unsecured promise to pay off an increase in the pension debt (known as the “unfunded actuarial liability” or “net pension liability”).

 

 

 Once granted, this debt is amortized over a 12-year period beginning with July 1, 2017, and ending June 30, 2030.  The annual payment toward the debt incurred as a result of the COLA is a level-dollar amount, totaling $58.7 million from all sources, about $40 million of which came from the General Fund. In other words, the General Assembly has made an unsecured promise to pay off the appropriated pension debt in installments of $58.7 million for the next 12 years. The schedule of annual payments is detailed below:

 

The last three COLAs enacted for TSERS retirees have been appropriated in a similar manner – as unsecured promises to pay off pension debt over a 12-year period. The chart below shows each of the most recently enacted COLAs for TSERS retirees, as well as the amount of the benefit increase, the total amount of pension debt incurred because of the COLA, as well as the annual payment amount related to each COLA and the number of years this amount will be paid.

 

When granted one after another, the annual payments toward the pension debt incurred as a result of these COLAs begins to accumulate, as demonstrated in the chart below:

 

 

These COLAs each have an annual payment ranging from $44 - $59 million, all of which are paid by employers participating in the plan (state agencies, local school districts, etc.) for a period of 12 years after they are granted. The enactment of the 2017 COLA brings the total annual payment toward all three COLAs to its apex, reaching $152.5 million and remaining at this level for about seven years, after which the payments gradually diminish until all COLAs are paid off in 20301.

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1This assumes that all actuarial assumptions in effect as of the valuation date related to the COLA-related liability are met exactly. If any assumptions are not met, any resulting shortfall will also be added to the outstanding pension debt and amortized over 12 years beginning after the valuation is performed, effectively increasing the cost of the COLA and lengthening the time needed to pay it off.

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Cost of COLAs for LGERS

The most recent COLA granted to LGERS retirees was 0.105 percent effective July 1, 2016.  This COLA was granted by the Board of Trustees and has a total cost to the pension fund of $12.7 million which will be paid for by investment gains realized during calendar year 2014 and by a portion of the 2016-17 employer contribution rate set by the Board in January 2016.

If the General Assembly had granted a one percent COLA effective July 1, 2017, LGERS pension liabilities would have been increased by approximately $136.6 million using the actuarial assumptions in place as of the valuation date, including a discount rate of 7.20 percent. This increase in the pension debt is distributed proportionately to, and subsequently paid off by, all participating LGERS employers. Thus, the City of Greensboro would assume a liability of about $3.4 million; the City of New Bern would assume a liability of approximately $463,000; and the Town of Spruce Pine, a liability of around $22,000. 

This increase in the outstanding pension debt as a result of the COLA would have been paid off over a 12-year period beginning July 1, 2017, and ending June 30, 2030. This would result in $18.6 million annually in additional contributions from all local governmental employers. For the City of New Bern, this would equate to an additional $69,000 each year in contributions for its 418 employees. For the Town of Spruce Pine, it would cost an additional $3,700 in contributions on behalf of its 28 employees. For the City of Greensboro, it would cost about $505,000 in additional contributions for its 3,050 employees.

 

 

 

COLA History

The following documents go into detail about the history of COLAs. The first document (“COLA History Since 1985”) provides the history of COLAs granted to both TSERS and LGERS retirees each year since 1985, along with the percentage increase in the Consumer Price Index since the previous year. The COLA percentage is rounded to the nearest tenth of one percent.

The “Retiree COLA” column shows the COLA that was granted to retirees each year. If a COLA is approved for any given year, it is granted in full only to retirees who retired the year before (included in the “Year of Retirement” column). For example, a COLA granted in 2018 becomes effective July 1, 2018, for members who retired on or before July 1, 2017.

The “Formula Increase” column is a bit more complicated. Generally speaking, a “formula increase” is a method of increasing the overall generosity of a pension benefit, which is accomplished by increasing the accrual rate for retiring employees’ TSERS or LGERS pension benefits. The accrual rate is a component of the retirement benefit formula that, along with their average final compensation and years of service, determines an employee’s pension benefit. The current accrual rate is 1.82 percent for TSERS members and 1.85 percent for LGERS members.

Whenever the General Assembly increases the accrual rate for active employees in a given retirement system, a retirement benefit increase is typically granted to retirees receiving benefits from that system. The retirement systems’ consulting actuary calculates an amount that is equal to the accrual rate increase, and the General Assembly then increases retirement benefits by that amount. This increase is usually in addition to any other COLA granted by the LGERS Board of Trustees or the General Assembly – hence the “Total Increase” column.

When trying to compare the CPI and COLA increases between two time periods, it’s important to understand how much the year of retirement factors in to the comparison. Although the national CPI has increased by 17.4 percent since 2007, the CPI has increased by just under 17.3 percent for members who retired in 2008; 14.2 percent for members who retired in 2009; 12.5 percent for members who retired in 2010; 9.2 percent for members who retired in 2011; 7.4 percent for those who retired in 2012, and so on. In other words, members who retired after 2007 have not lost the same amount of purchasing power since 2007 as have members who retired in 2007 or prior.

It is also important to understand the specific impact of inflation and COLAs together. The second document ("COLA Impact -- Purchasing Power by Year of Retirement") provides a breakdown of the cumulative impact of inflation and of all COLAs granted on a retiree's benefit since the year of retirement from 1985 through 2017. Each row represents a retired TSERS or LGERS members who retired in the year indicated in the "Year of Retirement" column. The values in the subsequent columns represent the remaining purchasing power of a retiree's current benefit (in 2018) relative to the purchasing power they had in their year of retirement.

 

COLA vs. one-time benefit supplement

At times, the General Assembly may determine that there are not enough budgetary funds available to cover the full liability that the retirement systems takes on when a COLA is granted. Instead, the General Assembly may choose to grant a one-time benefit supplement instead of a reoccurring increase. The media and other reports often call these COLAs, but they are not ongoing increases. A COLA will affect a retiree’s benefit payment going forward, while a one-time benefit is typically paid all at once and does not affect any future months’ payments.