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POINT OF ORDER: A relatively quick look at the somewhat familiar Senate GOP pension reform plan

POINT OF ORDER: A relatively quick look at the somewhat familiar Senate GOP pension reform plan

POINT OF ORDER: A relatively quick look at the somewhat familiar Senate GOP pension reform plan.

POINT OF ORDER

A Capitolwire Column

By Chris Comisac
Bureau Chief
Capitolwire

HARRISBURG (May 7) – So we have, at last, a first glimpse at the Senate Republican’s pension plan.

Okay, so it’s only a co-sponsorship memo and not teeming with a lot of details, but it’s something more than what had become the standard Senate GOP answer to any pension questions: “Soon.”

There is much within the memo-outlined plan that we’ve seen before.

As expected – at least by many close to the issue – there is a 401k-type plan for all new hires (with a different contribution rate for new Pennsylvania State Police pension participants compared to other public employees), as well as requiring all General Assembly members to be enrolled in the 401k-type plan. The plan would require employers (the state and school districts) to contribute the amount equal to the current defined benefit normal cost of post-Act 120 of 2010 employees.

The last time a 401k-type plan was on the table, in 2013, it died before it could come up for a floor vote in either General Assembly chamber following a report that indicated such a proposal could produce between $3 billion in future savings and roughly $40 billion in future costs for the pension systems. On thing is certain, the impact of this portion of the Senate GOP proposal won’t be felt for many, many years.

Building off of changes that are already applied to new hires (as per Act 120 of 2010), the Senate GOP revived proposals that would also impact current employees, in the hopes of producing additional savings for the pension systems: an “anti-spiking” provision, i.e. changing the pension formula’s final average salary calculation so that it encompasses the five highest salary years rather than the current three highest years; and making sure when retiring employees choose a lump sum withdrawal, it is calculated so that it is actuarially neutral with respect to the pension system (meaning it doesn’t impose additional costs upon the system). These two ideas have enjoyed some bi-partisan support in the past.

Some notable new-ish proposals include adding a cash balance plan to the 401k-type plan for new hires, requiring those employees to contribute 3 percent of their earnings which will earn interest of no more than 4 percent; and making something similar – although optional – available to current employees. The Senate GOP memo refers to those components as offering “retirement security.”

And a bit like an idea floated back in 2013 by former state Rep. Glen Grell, R-Cumberland, the Senate GOP proposal would give current employees the ability to opt into a higher contribution rate for themselves (meaning the employee would have to contribute more to their own pension) going forward for all future earnings.

The Senate GOP see this as another way to help reduce the current unfunded liability – and it has the potential to do that in a more-immediate fashion – but why would an employee agree to do that? It’s a bit of a “carrot” and “stick” situation.

According to the Pennsylvania Employee Retirement Commission, prior to the passage of Act 9 of 2001, the annual benefit accrual rate – the multiplier – applicable to most state and school employees was 2 percent, with Act 9 effectively increasing the benefit accrual rates for most of those employees from 2 percent to 2.5 percent. That switch was both retrospective and prospective, and enhanced the retirement benefits of most employees by 25 percent.

If current employees don’t go with a higher contribution rate, the Senate GOP plan would roll back the employee’s prospective benefit multiplier and contribution rate to pre-Act 9 of 2001 levels, which would undo those multiplier increases for future earnings – a pretty significant “stick” given how much the improved multipliers have enhanced pension benefits for many.

But there’s also a “carrot” of sorts (or a bit more of a “stick,” depending on one’s perspective).

The plan proposes to, every three years, calculate the difference between the pension systems’ actual and assumed investment returns.

Then, according to the memo, “For every percentage that the system realized a return in excess of assumed returns during the calculation period, an employee’s contribution, for those who chose the increased contribution option, will be reduced by a half a percentage point for the following three years. Those employees who did not choose the increased contribution level will not be eligible to have their employee contribution rate reduced.”

So it’s possible for those employees who take the higher contribution rate option to keep their multiplier and potentially get their elected higher contribution rate lowered, assuming pension system investments perform well; or they can take a lower contribution rate and a lower multiplier. Both options (as well as the other aforementioned current employee benefit changes) are predicated on the state Supreme Court allowing pension benefits of current employees to be altered (and not seeing those changes as an unconstitutional impairment of an existing contract), if the changes are challenged in court.

There’s also a new commission that would be created and tasked with reducing the fees paid by the pension systems for both active and passive management of the systems’ investments (something about which Gov. Tom Wolf has been and continues to be a vocal proponent), as well as ways to maximize the returns on those investments.

Additionally, the Senate GOP proposal would make some alterations to the two boards overseeing the state‘s two public pension systems.

Notably absent from the plan is the philosophy of “letting Act 120 of 2010 work” or a pension obligation bond – which are currently illegal in Pennsylvania – for either of the systems. Wolf’s pension plan – supported by House and Senate Democrats – espouses the “Act 120 is working” philosophy and would borrow $9 billion to pay off a small part of the state’s current unfunded liability obligation to the Public School Employees’ Retirement System.

So cue the back-and-forth debate about long-term costs and savings to the systems, the constitutionality of altering current employee benefits, and whether the state can afford to live with the pension system status quo.

Senate GOP leaders say their plan will soon be introduced as Senate Bill 1 and the chamber will begin to consider that legislation next week.

The soon-to-be SB1 will have a few more components than its 2013 predecessor, some of which could prompt controversy beyond the 401k issue.

Time will tell if this new version of pension reform will have a better future than the 2013 version.

 

 

 

 

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Robert Storm

Eastern Region Vice President

rstorm@pscoa.org

www.pscoa.org