Sunday’s Senate action starts week-long push to get pension reform to governor

Sunday’s Senate action starts week-long push to get pension reform to governor

Author: Jason Gottesman/Sunday, June 4, 2017/Categories: News and Views

Holding a rare session day Sunday, the Pennsylvania Senate started what is looking like a week-long, legislature-wide push to get a pension reform bill to the governor’s desk.


The legislation, Senate Bill 1, was considered by the Senate Appropriations Committee Sunday night and was sent to the Senate Floor by an 18 to eight vote. The bill is expected to be on final passage in the Senate on Monday.


On the surface, the bill largely resembles legislation that was moved out of a conference committee toward the tail end of last session that was ultimately not brought up for a vote after a loose majority for support of the legislation in the House failed to hold together.


That proposal would have changed the current defined benefit plan for future hires by providing a choice between two different side-by-side hybrid pension plans with different contribution rates and multipliers and a straight defined contribution plan.


The current proposal does the same.


According to an actuarial analysis issued by the Independent Fiscal Office Sunday morning, the pension reform proposal that was amended into Senate Bill 1 consists of what is said to be compromise legislation between House and Senate Republicans, and provides three different pension reform plans.


The first is a default side-by-side hybrid defined benefit-defined contribution plan that would have employees contribute 8.25 percent of their compensation to be divided among the DB and DC components (5.5 percent (DB) and 2.75 percent (DC) for PSERS members; SERS members five percent (DB) and 3.25 percent (DC)).


On the employer side for the default plan, the DB contribution would be based on an actuarial determination, while the DC contribution would be 2.25 percent of compensation. The default plan also has a multiplier of 1.25 percent for DB plans.


Employees would have the option of selecting an alternative side-by-side hybrid defined benefit-defined contribution plan that would have employees 7.5 percent of their compensation to be divided among the DB and DC components (4.5 percent (DB) and three percent (DC) for PSERS members; SERS members two percent (DB) and 3.5 percent (DC)).


The employer contribution for the DC component would be a flat two percent and the alternative plan carries a lower multiplier of one percent.


Additionally, a third plan is given that is in the form of straight defined contribution plan. This has employees contributing 7.5 percent of total compensation with an employer contribution rate of two percent for PSERS and 3.5 percent for SERS.


The new plans would apply to employees beginning in 2019; January 1 for PSERS and July 1 for SERS. It exempts out State Police, Corrections Officers, and other hazardous duty personnel, but it does apply to new judges and legislators elected or appointed after the effective date for SERS employees.


The plan would require lump sum and early retirement withdrawals be done on an actuarially neutral basis, makes changes to how final average salary is calculated and limits “spiking,” extends the shared-risk/shared-gain provisions of Act 120, and plows back any savings into the unfunded liability.


Additionally, it creates the Public Pension Management and Asset Investment Review Commission with the goal of studying the performance of current investment strategies, a cost/benefit analysis of passive vs. active investment strategies, and how changes to investment strategies can result in savings to the plan. The commission must also make recommendations for investment strategy changes that will result in $1.5 billion and $3 billion in savings for the system over a 30-year period depending on the valuation used.


According to members, it was largely the changes to allow more options in terms of early retirement withdrawal, the formation of the commission, and work to get the equivalent retirement benefit as close to the current plan as possible that led to a bipartisan compromise being possible.


As to the hard numbers, the plan—almost as expected—does not create any upfront savings and, according to the IFO analysis, would cost more in the early years due to the transition costs to the new plans.


However, over the 30-year amortization period, the legislation is expected to save between $319 million and $1.4 billion depending on the valuation used. It is also expected to reduce the current unfunded liability by a combined total of $1.4 billion and $4.2 billion depending on the valuation used.


Importantly to Senate Republican leaders over the last several sessions, the legislation is expected to transfer a large amount of risk: 53 percent for PSERS and 56 percent for SERS, a dollar figure estimated to be about between a combined $2.9 billion and $6.5 billion depending on the valuation used. Those numbers could be even higher should the two systems meet their expected rate of return, which currently sits at what some have called an aggressive 7.5 percent.


Senate Appropriations Committee Majority Chairman Pat Browne (R-Lehigh) noted the risk shift is one of the unique and most beneficial elements of the plan.


“This is the whole reason we are doing this,” he told reporters about the risk shifting element. “Any talk of actuarial savings is missing the fundamental point…the fundamental problem is state government is flying at 300,000 feet in terms of risk and we need to find ways to mitigate risk.”


The legislation advanced Sunday also keeps in place the Act 120 funding amounts to pay off the unfunded liability in the two pension systems.


Reaction from lawmakers Sunday was mixed.


Senate Republican leaders, who have been pushing for this style of pension reform for several sessions now were high on the plan.


“It’s probably the most comprehensive pension reform bill in the country, but we probably had the biggest pension problem in the country,” Senate Majority Leader Jake Corman (R-Centre) said of the plan. “The problem certainly called for a significant response and I think this is it.”


Some Democrats on the Appropriations Committee Sunday night were reluctant to support the plan, noting they have not read the entire actuarial analysis given by the Independent Fiscal Office.


“There remains some unreadiness, as you can tell from the vote, on the part of some members,” said Appropriations Committee Minority Chairman Vince Hughes (D-Philadelphia).


Two Democrats on the committee, Senate Minority Leader Jay Costa (D-Allegheny) and Sen. Judy Schwank (D-Berks) did vote to support the legislation. One Republican, Sen. Scott Wagner (R-York), voted against the bill.


In the House, where the plan is expected to be voted on final passage Thursday, Democrats through Appropriations Committee Minority Chairman Joe Markosek (D-Allegheny) put out an analysis Sunday afternoon that questions whether or not the plan that is expected to be on final passage in the House on Thursday is real reform to begin with.


For several months, Rep. Markosek and staff have been peppering interested parties with rhetoric contending that true pension reform would pay off the unfunded liability quicker and generate real savings for the General Fund.


Sunday, they said, the legislation moving their way from the Senate does neither.


"Actuarially, this is not reform, though, because it doesn't further address the debt or reduce taxpayer costs, but it does continue to reduce our debt at the same rate as Act 120 (underscoring the fact, as we've been saying, that 2010 reforms are working)," read an introduction to the analysis.


Their analysis goes on to excoriate the plan, that they say will reduce benefits for future employees compared to the current pension plans, increase taxpayer costs in the short-term, and increase the burden on public school districts by $69 million in the first ten years of the new plan.


They also point to the fact that the new plans would apply to new members of the judiciary, potentially subjecting the plan to a constitutional challenge.


House Republicans—according to leadership sources—are on board with the reform plan.


On Friday, House Majority Leader Dave Reed (R-Indiana) tweeted that the House will be coming in for session this coming Thursday at 9:00 a.m. for what is hoped to be a final vote on public employee pension reform.


Should the legislation pass the House on Thursday, it would then be before Gov. Tom Wolf for a decision and he said Sunday night that he supports the measure.


"I applaud Senators Corman and Browne for their leadership on reforming our pension system, and I commend members on both sides of the aisle for their work on this very important issue," he said.


"I continue to support reform that pays down our debt, reduces Wall Street fees, and shifts risk away from taxpayers, all while providing workers with a fair retirement benefit. This compromise plan, which is the result of tireless efforts over the course of the last several weeks by leaders in both chambers and my administration, accomplishes these goals, and the Senate’s vote tonight is an important first step in the process."