Ohio Pension Bill Protects Taxpayers and Promotes Transparency
State lawmakers in Ohio are set to consider legislation that would take a meaningful step toward protecting taxpayers from excessive retirement plan costs while enhancing transparency in public employee compensation. Introduced by Rep. David Thomas, HB 473 prohibits government agencies from paying the contributions public employees are required to make toward their retirement, which can range from 10 to 14 percent of salary depending on the specific pension plan. Known as a fringe benefit “pickup” contribution, this form of compensation is often provided through contract negotiation and can mask an employee’s true cost to taxpayers. At a time when Ohioans are already on the hook for more than $50 billion in reported unfunded pension liabilities, HB 473 will help ensure that public workers make a full contribution to their own retirement without additional pension costs shifting to the general public.
Ohio administers five statewide pension plans, all funded through a mix of employer and employee contributions. The two main types of contribution pickups are salary reduction and fringe benefit. Under the salary reduction model, the employer picks up the contribution for federal tax purposes while the actual proceeds come out of the employee’s salary. On the other hand, employers pay for fringe benefit pickups using additional public funds. HB 473 targets fringe benefit pickups while continuing to allow the tax-preferred treatment of the salary reduction pickup.
Historically, the fringe benefit pickup contribution issue received attention only when granted to school superintendents within the State Teachers Retirement System of Ohio (STRS); however, they are also permitted for other types of public employment. In STRS, the board sets contribution rates up to a statutory cap of 14 percent each for the employee and the school district employer. When contributions are picked up, taxpayers bear the cost of the full 28 percent combined rate while the employee contributes nothing.
The argument in favor of the fringe benefit pickup is that it serves as a recruitment tool that allows school districts and other public employers to compete for talent in the job market. But from a cost perspective, pickups are more expensive for the government employer. Funds that would have come from the employee’s salary are replaced by an additional amount from the government’s budget. While there may be a recruitment case for increasing the compensation package to attract qualified workers, raising salaries directly is a far more transparent and straightforward approach than covering the cost of an employee’s pension contribution.
Fringe benefit pickups also make it difficult to accurately measure an employee’s take-home salary. For example, a worker with a $100,000 salary who contributes to STRS under a salary reduction pickup will take home $86,000 after making their 14 percent contribution. On the other hand, a worker with that same salary will take home the full $100,000 if the employer picks up the $14,000 contribution as a fringe benefit. However, both salaries will still be reported as $100,0000 even though the true value of that pay rate is significantly different between employees. This creates unnecessary complexity when it comes to tracking government personnel costs and holding public officials accountable.
HB 473 proposes a simple ban on fringe benefit pickup contributions moving forward. Importantly, the solution outlined in the bill applies prospectively to all public workers, meaning that any pickups in effect can remain through the duration of the existing contract but will not be allowed in the future. This is a reasonable approach in a state like Ohio, where collective bargaining among public employees is permitted and laws that impair contractual obligations are banned. HB 473 respects existing obligations while asserting the legislature’s role in setting pension policy that ensures the fund’s fiscal sustainability and protects Ohio taxpayers. Applying the ban to all public workers also addresses concerns over a prior version of this policy targeting school superintendents, principals, and treasurers, which Gov. Mike DeWine vetoed in June.
Overall, banning pension pickups is a responsible policy that will help improve confidence in Ohio’s pension system and local government employers. Ensuring that employees pay their share of the contribution to their pension plan will protect taxpayers and promote transparency at all levels of government in the Buckeye state.