Pension reform bill’s savings come at a high cost, PERC says

Pension reform bill’s savings come at a high cost, PERC says

Author: Jason Gottesman/Wednesday, June 17, 2015/Categories: News and Views

The Public Employee Retirement Commission—colloquially known as PERC—approved an actuarial note to House Bill 900 Wednesday, and in so doing, reported that while the legislation provides for considerable pension savings over a shorter period of time than other reform proposals, it may require funding not in line with budget realities.

One of the policy considerations included in the actuarial note says the following:

“[House Bill 900] requires the systems' unfunded accrued liabilities to be fully funded over a period of 20 years, beginning July 1, 2015. Yet the bill fails to detail the source(s) of the additional funding necessary to fund the unfunded accrued liabilities in an accelerated amortization schedule. Policymakers may want to determine the viability of such a proposal in light of the Commonwealth's current budgetary climate.”

In fact, the commission went so far as to adopt an amendment to the actuarial review to emphasize the budgetary stress the pension reform bill would require, saying the almost $20 billion in combined savings “come at an immediate, substantial increase in contributions."

PERC executive director James McAneny explained the bill would achieve the savings by restructuring the amortization period from 30 years to 20 years and convert the current valuation to use the market value of assets while also removing temporary collars under Act 120.

Not all were totally put off by the high-cost, high-savings proposal.

“It is important to go the record that the changes in this are substantial, but they are merited because they are trying to make us responsible with respect to our unfunded liability,” said Sen. John Blake (D-Lackawanna). “While this is a substantial increase in employer contributions in the short term, it pays off with substantial pension savings in the long term.”

Rep. John McGinnis (R-Blair), prime sponsor of the legislation, said the PERC actuarial note does not take into consideration the cost of not making the substantial investment required by his legislation.

“House Bill 900 will have the funds at 100 percent funding in 20 years, but their numbers don’t show that,” he told reporters. “There’s no mention in the PERC report about the cost of credit downgrades and I can assure you if House Bill 900 were to pass and get the governor’s signature, that it immediately the credit rating agencies would look at that as a favorable event.”

Rep. McGinnis conceded that finding the funding for the plan—which he put at a $2.5 billion increase annually—will not be easy, but said it will only get harder if nothing is done.

He said the school districts will have to shoulder the burden of finding their share of $500 million to $750 million. Something he said might come from increasing property taxes.

“I know people want to—our leadership says we want to have lower property taxes, we want to increase education spending, and we want to address the pension problem—you get your choice of one of those in the real world,” he said. “If you don’t address the pensions, property taxes are going up anyway. It’s just the math.”

As to the state share of $1.75 billion to $2 billion, he said $1 billion should come from the $11 billion state general education line-item and the rest should be made up with a five percent cut across all other line-items.

House Bill 900 currently sits in the House State Government Committee where it has yet to be scheduled for a vote.

While PERC usually attaches actuarial notes right before legislation reaches second consideration in a chamber, it does not necessarily have to wait until the brink of floor action.

“You can’t get second consideration until this occurs, but it can be earlier in the process if you want to prepare things,” Commissioner Anthony Salomone explained.

McAneny said the bill was considered at this early stage because there was an official request for an actuarial note from PERC, which he said is a good sign the bill will move soon.

If the bill is amended to where it has a substantial actuarial impact, a new note will have to be attached before second consideration is possible.

The commission was scheduled to also consider an actuarial review of House Bill 727, legislation by Rep. Warren Kampf (R-Chester) to move new state and public school hires into a 401(k)-like defined contribution pension plan and away from the current defined benefit plan.

According to commission members, that meeting will take place on Thursday afternoon as actuaries needed more time to revise the note to be considered since there is a desire to focus on only the work of PERC’s actuary and not other contracted-for actuaries.

“What we directed [staff] to do is focus on the numbers our actuary gave to us, rather than a review of all actuarial numbers,” said Commissioner Salomone.

“What we have is a situation where our actuary was able to delve into the numbers more completely and had more time and more resources than in other situations and do a number that firm is more confident with than in other situations.”

That meeting will take place Thursday afternoon at 1:00 p.m.

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