By Chris Comisac
Bureau Chief
Capitolwire
HARRISBURG (May 28) – If pension reform happens during the current legislative session, it appears as though it’s going to take the form of a hybrid pension proposal the Public Employee Retirement Commission on Wednesday said could save the state’s pension plans more than $11 billion during the next 30 years.
That’s a welcomed amount of projected savings, according to the proposal’s sponsor, given the two systems currently have a combined unfunded liability – a debt owed by the state’s taxpayers – of at least $47 billion.
“This is a multi-tier approach to getting us out of the pension crisis we’re in,” said state Rep. Mike Tobash, R-Schuylkill, following the PERC meeting. “The first step clearly needs to be that we reduce costs within the system, I mean we’ve got $47.5 billion of debt … we’re going to reduce costs, develop savings, we’re going to shift some risk while maintaining a very good safety net defined benefit program in this plan.”
The savings from Tobash’s plan are derived by shifting the level of risk from the Commonwealth and school employers to new hires enrolled in the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) and implementing a reduced benefit tier for new employees, according to the PERC’s analysis.
PERC’s report indicates the proposed hybrid plan’s reliance on what amounts to, for new hires, a capped defined benefit (DB) plan and a new defined contribution (DC) plan is likely to produce retirement planning that is “less predictable” and which involves “greater individual attention to risk management than participation in a traditional defined benefit plan.”
Calling the proposal a way to “stop the bleeding” in the pension systems, James McAneny, PERC’s executive director, said most rank-and-file state employees would not be impacted by these changes. But he indicated the hybrid plan does establish a “safety net” DB plan, which employees can then build upon with the DC plan.
“If you’re looking to retire with an $80,000-a-year pension, you’ll have to rely on your defined contribution plan,” said McAneny. “There’s nothing wrong with that … and it only impacts people earning more than $50,000.” He said most rank-and-file employees don’t earn $50,000 annually. Tobash said the plan will also apply to any newly-elected legislators, but not those winning re-election. McAneny said it’s unlikely the state’s judges will allow it to apply to them, and the proposal also seeks to exempt Pennsylvania State Police officers from the hybrid plan.
PERC indicated the range of projected total cumulative savings to the two systems identified by three other actuarial firms (Buck Consultants for PSERS, the Hay Group for SERS, and Milliman, Inc. for Gov. Tom Corbett’s Office of the Budget) is $12 billion to $14.4 billion. However, the analysis by the commission’s contracted actuarial firm, Cheiron, indicated an expectation that, if the firm’s assumptions hold true for the next 30 years, the hybrid pension proposal would allow the state to spend approximately $11.2 billion less than it is currently expected to pay to satisfy the systems’ unfunded liability. The analysis also notes the savings variations are due to different assumptions made by each actuarial firm, and do not amount to significant difference in projections.
According to the PERC report: “Although the numbers appear large, in reality, the range of savings calculated by the various actuaries is not significantly different. When you compare the accumulated savings of the hybrid plan over the next 30-year period to the total estimated employer contributions under existing law for the 30-year period, then the savings would range from 11 percent to 13 percent for SERS and 2.5 percent to 5 percent for PSERS. The actual savings will ultimately depend on actual plan experience.”
As for the plan itself, it’s not much different than the one Tobash explained several months ago.
New employees, starting in 2015, would be entitled to a defined benefit equal to a two percent annual benefit accrual rate multiplied by the member’s years of service, up to a maximum of 25 years, multiplied by the member’s final average salary, which would be derived from the member’s five highest salary years. The total defined benefit would be limited to $50,000, indexed at 1 percent per year. The employee contribution to the defined benefit (DB) plan would be 6 percent of their salary, for the first $50,000 of their salary, for the first 25 years of employment. There would also be a 10-year vestment period for the DB portion of the plan.
In addition to the defined benefit portion, a defined contribution (DC) plan – a 401(a) plan – would be created into which the new hires would be required to contribute 1 percent of the their salary for the first $50,000 of their salary for the first 25 years of service. If an employee earns more than $50,000, they would be required to contribute a total of seven percent of the salary in excess of $50,000 into the DC plan. Any employee, once they eclipse 25 years of service would be required to contribute seven percent of whatever salary they are receiving into the DC plan.
For the employer – be it the Commonwealth or a school district – payments made to the DB plan would be the actuarially-determined rate for the first $50,000 of an employee’s salary and nothing for any salary in excess of $50,000. On the DC side, the employer would contribute one-half of a percent of the employee’s first $50,000 of salary for the first 25 years of service. For an employee earning more than $50,000 a year, the employer would contribute 4 percent of the salary in excess of $50,000 into the DC plan. For any employee employed for more than 25 years, the employer would contribute 4 percent of the employee’s salary into the DC plan.
One potential fly in the ointment? According to the state’s largest teachers’ union, it’s a provision within the legislation that would make current employees who leave their employment – referred to as a break in service – subject to the new hybrid pension provisions upon returning from that break.
Steve Nickol, a former state legislator who now serves as the assistant director of retirement programs for the Pennsylvania State Education Association (PSEA), called that provision “draconian” for those who leave employment, particularly female employees – which he said make up about two-thirds of PSERS’ school employees – who go on maternity leave and suspend their employment to take care of their children.
“We’re not 100 percent sure that the break-in-service provision would survive an impairment of contract challenge in the courts,” said Nickol. “It is likely to be challenged.”
After the PERC meeting, Tobash said there are currently “generous” break-in-service rules for state and school employees, particularly for situations involving leave without pay.
“The [pension] systems allow up to a two-year period of leave without pay and still you’re not terminated from the system,” said Tobash, noting that in many other areas of employment, when you leave one job and take another, you start under whatever retirement plan is offered by the new employer. “In this case [the case of PSERS members], if you leave one school and go to a different school, you’re still in the same system.”
“To characterize this as a plan that somehow affects someone who leaves [employment] for a period of time due to a disability or a pregnancy, then comes back to work, that’s really not the case,” added Tobash. “In practicality, when I talked to different school boards, they’ve indicated that’s really not an issue.”
Nickol expressed concern the legislation doesn’t currently contain a provision to adjust the current employer contributions to SERS and PSERS, and asked if there would be an effort to add something later. The Corbett administration has proposed as part of its 2014-15 state budget plan, reducing current employer pension contributions – referred to as “collaring” – to save the Commonwealth approximately $170 million and school districts a combined $130 million in the coming fiscal year. Nickol said any collaring proposal would likely wipe out most, if not all, of the projected saving from the hybrid plan, thereby doing little-to-nothing to address the unfunded liability issue.
Responding to Nickol’s worry, Tobash said his legislation is entirely separate from budgetary concerns, and there was no “preconceived thought” to include collars in the legislation at a later date.
Nickol also said it’s PSEA’s opinion the proposal seeks “enormous sacrifice” from new employees in return for “a weak and declining defined benefit plan” and “a weak DC plan,” the latter providing little benefit to most employees – since significant contributions to the DC plan won’t occur until after 25 years of employment.
He suggested the proposal could run afoul of federal law if it could be shown the hybrid proposal is deferring some of the employer costs with employee contributions, something Nickol argued could be occurring.
Additionally, Nickol criticized the legislation’s planned elimination of the premium assistance program for new hires. The program currently provides $100 a month in health insurance premium assistance to about 88,000 retirees, as long as they use the health insurance stipulated by the program.
Tobash’s plan (as well as two other pension changes, including teh state police exemption from the hybrid plan, collectively evaluated by PERC to provide the aforementioned savings figures) has been drafted as an amendment to House Bill 1353, which is awaiting consideration by the full House of Representatives. Noting the importance of doing something sooner rather than later, he said he has gotten no indication from House Majority Leader Mike Turzai, R-Allegheny, as to when the bill could come up for consideration by the chamber.
However he did say he’s had discussions with Turzai about the legislation and state Budget Secretary Charles Zogby has been very instrumental, from the Corbett administration’s side of things, in facilitating discussions and work on the hybrid proposal.
“I think that we’ve got a growing group of people that are coalescing around this concept,” he said.
-30-
