LEGISLATIVE SERVICES AGENCY
OFFICE OF FISCAL AND MANAGEMENT ANALYSIS
200 W. Washington St., Suite 301
Indianapolis, IN 46204
(317) 233-0696
iga.in.gov
FISCAL IMPACT STATEMENT
LS 6626 NOTE PREPARED: Dec 22, 2023
BILL NUMBER: SB 160 BILL AMENDED:
SUBJECT: Local Government Pensions.
FIRST AUTHOR: Sen. Pol BILL STATUS: As Introduced
FIRST SPONSOR:
FUNDS AFFECTED:XGENERAL IMPACT: State & Local
XDEDICATED
FEDERAL
Summary of Legislation: The bill increases the 1977 Police Officers' and Firefighters' Pension and
Disability Fund's maximum annual cost of living adjustment from 3% to 5%. It also increases the maximum
duration that members of certain funds can participate in the deferred retirement option plan from 36 to 60
months.
Effective Date: July 1, 2024.
Explanation of State Expenditures: Indiana Public Retirement System (INPRS): The Indiana Public
Retirement System (INPRS) administers the ‘77 Fund and would have increased workload and expenses to
make the changes to the ‘77 Fund required by the bill. The administrative costs of the ‘77 Fund are paid from
the fund.
Additional Information -
DROP: DROP is an optional pension benefit that allows fund members who are eligible for an unreduced
retirement benefit to continue to work and earn a salary for up to 36 months under current law or up to 60
months under the bill and then retire with a pension benefit calculated as of the date the individual entered
the DROP, plus receive an additional amount equal to the total of the pension benefits that the member would
have been paid during the same period had the member retired at the time they entered the DROP. The DROP
benefit is payable either in a lump sum or three equal annual payments.
Any impact due to DROP changes by members of the 1925 Police Pension Fund, 1937 Firefighters’ Pension
Fund, and 1953 Police Pension Fund would be minor. As of January 2023 there were fewer than five active
SB 160 1 members remaining in these funds who would be eligible to enter the DROP. These police and firefighter
funds are administered at the local level and are funded through General Fund appropriations to the Pension
Relief Fund.
Explanation of State Revenues:
Explanation of Local Expenditures: Summary - The bill would increase the present value of future benefits
for the ‘77 Fund by an estimated $97.4 M, increase the actuarial liability of the ‘77 Fund by an estimated
$162.2 M, and reduce the funded status of the ‘77 Fund by 1.93%. This would increase the employer
contributions that local police and fire departments pay annually to fund future pension benefits for their
employees by 2% of employee salary beginning in calendar year 2026.
DROP: Based on an actuarial cost estimate provided by INPRS, increasing the DROP period from a
maximum of three years to a maximum of five years could increase the present value of future benefits by
an estimated $3.7 M, increase the actuarial accrued liability of the ‘77 Fund by an estimated $84.3 M, reduce
the funded status of the ‘77 Fund by 0.95%, and increase the employer contribution rate by 1.1%. The
estimate assumes that people would enter the DROP two years earlier than they do under current law.
As of June 30, 2022 there were 824 active members of the ‘77 Fund who were in the DROP program. The
bill would also allow active members of the DROP who entered the DROP before July 1, 2024 to extend the
length of their DROP period to up to five years from the date they entered the DROP. The ‘77 Fund is funded
through employer and employee contributions. For calendar year 2024, the employer contribution rate is
19.1% of salary.
‘77 Fund COLA Maximum: Changing the long-term assumptions of the ‘77 Fund to account for the increased
maximum COLA would increase the present value of future benefits by an estimated $93.7 M, increasing
the unfunded actuarial accrued liability by $77.9 M. This would reduce the funded status of the ‘77 Fund by
0.98%, and require an increase in the employer contribution rate of 0.91% beginning in calendar year 2026.
These estimates are based on an actuarial cost estimate of the proposal provided by INPRS.
Increasing the maximum COLA would increase the risk to ‘77 Fund, and any high inflationary year would
create a significant impact on the fund that would require an increase in employer contributions. Since
COLAs increase an individual’s monthly pension benefit, they build on each other. An extended period of
high inflation would cause a further reduction in the funded status of the ‘77 Fund and would necessitate
further future increases to the employer contribution rate. A 1% increase in a COLA provided above 3% in
any year would increase the future cost of benefit payments by an estimated $20 M and would increase fund
liabilities by $25 M due to the compounding nature of COLAs. The ‘77 Fund’s funded ratio would decrease
by 0.35% and employer contributions would increase by about 0.25% for the next 20 years.
Additional Information - The annual COLA for the ‘77 Fund is equal to the lower of the Consumer Price
Index for all Urban Consumers (CPI-U) or 3% under current law, which would increase to 5% under the bill.
This proposal would only impact the COLA in years when the CPI-U is greater than 3%. The change in the
COLA maximum will apply to the COLA provided to benefit recipients of the ‘77 Fund on July 1, 2024.
The change in the COLA maximum to 5% would increase the long-term assumptions for the COLA the ‘77
Fund to 2.04%. The current COLA assumption in the 2022 Actuarial Valuation is 1.95% based on an
assumption of 2% inflation per year.
SB 160 2 The employer contribution rate is set as a percentage of salary sufficient to cover the actuarially determined
contribution rate determined by fund actuaries. Actuaries do this by computing the present value of future
benefits. This is the amount required to fund the normal cost (the cost for new service and new pay earned
in the current year) as well as an amount to cover any unfunded liability of the fund. The unfunded liability
is paid for (amortized) over 20 years. The employer contribution rate for the ‘77 Fund is set at 18% of
employee salary in calendar year 2023, 19.1% for calendar year 2024, and 20.3% for calendar year 2025. The
‘77 Fund is 93.1% funded as of June 30, 2023.
1925 Police Pension Fund, 1937 Firefighters’ Pension Fund, and 1953 Police Pension Fund: Any
administrative impact to local employers due to DROP changes by members of the 1925 Police Pension
Fund, 1937 Firefighters’ Pension Fund, and 1953 Police Pension Fund would be minor.
Explanation of Local Revenues:
State Agencies Affected: Indiana Public Retirement System.
Local Agencies Affected: Local units with active members in the 1925 Police Pension Fund, 1937
Firefighters' Pension Fund, 1953 Police Pension Fund (Indianapolis), or the ‘77 Fund.
Information Sources: Cavanaugh Macdonald Consulting. (2023, October 23). 1977 Police Officers’ and
Firefighters’ Retirement Fund – Extend DROP Period. Cavanaugh Macdonald Consulting, LLC. Indiana
Public Retirement System Local Public Safety Pension Relief Fund. Actuarial Valuation as of January 1,
2023. https://www.in.gov/inprs/files/2023Valuation_IndianaPensionReliefFund.pdf; Cavanaugh Macdonald
Consulting, LLC. (2022, August 2). Impact of Increasing the 3% Maximum on the ‘77 Fund Cost-of-Living
Adjustment; Cavanaugh Macdonald Consulting, LLC. Indiana Public Retirement System. 1977 Police
Officers’ and Firefighters’ Retirement Fund. Actuarial Valuation as of June 30, 2022.
https://www.in.gov/inprs/files/2022ActuarialValuationReport_77Fund.pdf; INPRS. 2023 valuation pension
database; INPRS. 2022-2023 Employer Contribution Rate Information.
https://www.in.gov/inprs/employers/employer-communication/er-contribution-rate-info/; INPRS. (2023,
September 20). 2023 INPRS Update to the Pension Management Oversight Committee.
https://iga.in.gov/pdf-documents/123/2023/universal/committees/interim/pension-management-oversight-
interim-study-committee/a44f678f-91ef-417c-b4a1-731f1758cf5e/exhibits/attachment_5414.pdf
Fiscal Analyst: Camille Tesch, 317-232-5293.
SB 160 3