The Senate Finance Committee approved a pension reform bill this week for governmental entities outside the Tennessee Consolidated Retirement System (TCRS) to help ensure they have the adequate funding to pay retirees. Senate Bill 2079 requires that TCRS and each local government entity with a defined benefit pension plan calculate an actuarially determined contribution (ADC) which will include normal costs and the amortization of any unfunded liabilities.

Currently, the 487 local government entities and 118 local education agencies in the TCRS system are required to pay 100% of the annual required contribution (ARC) as actuarially determined each year. In April 2013, the Director of the Tennessee Consolidated Retirement System (TCRS) requested actuarial and financial information from local governmental entities with defined benefit pension plans which are not enrolled in TCRS. The survey found there were 31 local government pension plans external to TCRS, 13 of which did not pay 100% of the ARC in 2012.

Only 2.04% of all Tennessee local government pension plans fund less than 100% of the ARC. The bill requires that each local government must maintain effort in the payment of the ARC based on what the entity paid during the first fiscal year the bill is enacted. Those entities paying less than 100% of the ARC are subject to a one year grace period plus five years of incremental phase-in, making an effective six-year phase in period to reach payment of 100% of the ADC.

If a local government cannot comply with funding progress during the phase-in period, the entity may submit a plan of correction to the State Treasurer to modify the required annual funding progress but may not extend the phase-in period. Consistent with the provisions of the Hybrid Pension bill adopted by the General Assembly in 2013, the bill includes provisions that, for employees hired after the effective date, the political subdivision may freeze, suspend, or modify benefits on a prospective basis and that no implied right to continuation of a benefit exists. The bill also provides that a local government may, upon agreement with the State Treasurer, have either its plan administration and/or the investment of its plan assets performed by the Tennessee
Treasury Department.