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Pennsylvania pension debate: Where do we go from here?

By - Last modified: March 1, 2013 at 12:13 PM

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Who will introduce the pension reform package that mirrors Gov. Tom Corbett's budget proposal?

No one has yet.

In fact, there have been very few memos circulated early this session that call for moves to defined-contribution plans, according to the House and Senate Web sites. Some focus on pension changes for new state lawmakers, while others have proposed an optional defined-contribution plan for state and public-school employees.

There are other proposals circulating that wish to see $2 casino entrance fees to help offset unfunded pension liabilites that total more than $44 billion, as well as one that would mandate that half of the state’s year-end surplus be used to pay down liabilities.

A search for pension-related bills also found a memo about automatic annual cost-of-living adjustments, or COLAs.

Bottom line: The governor’s plan is expected to save $11.6 billion over the next 30 years, according to a new administrative summary of his proposals.

Corbett is calling on lawmakers to pass legislation that would move new employees into a 401(k)-style defined-contribution system that brings the state in line with much of the private sector. That change would take effect in 2015 for both the State Employees’ Retirement System and Public School Employees’ Retirement System. The state match for new hires would be 4 percent.

The governor also wants to change the formula for future benefits in current employees’ plans.

Beginning in 2015, he has proposed reducing the multiplier used to determine future benefits by 0.5 percent. Final salary under the Corbett model would be based on a five-year average rather than the current three.

Pensionable compensation would be capped at 110 percent of the average salary of the previous four years, while the ceiling on pension income would be set at the Social Security wage base, which is $113,700 for 2013.

Meanwhile, the 2013-14 budget would reduce the annual increase in the employer contribution limit to the pension funds to 2.25 percent, instead of the 4.5 percent increase scheduled to take effect. That amount would increase by 0.5 percent per year until it reaches 4.5 percent again.

Through fiscal year 2018, this “collar tapering” would save the state about $1.8 billion, according to the analysis. It adds more than $3 billion by 2043.

Moving to a defined-contribution plan creates more than $2.6 billion in savings, according to the administration.

The message from the Office of the Budget has been that all pieces of the plan need to occur for the real savings to show up.

The current employee reforms, which could face a legal challenge, would be the largest driver of savings — about $9.3 billion at PSERS and about $2.5 billion at SERS, said spokesman Jay Pagni. The multiplier change is the biggest piece of the equation.

Democratic state Treasurer Rob McCord and the labor-backed Keystone Research Center argued this week that the Corbett plan does not save money, but rathers adds costs and pushes up the unfunded liability ‑ maybe as much as $25 billion more by 2046, McCord said.

McCord and KRC Executive Director Stephen Herzenberg contend the change in plan types reduces the return on investments because fund managers will look for less risky assets for aging employees still in the defined-benefit plan. Unfunded liabilities grow if plans do not earn projected 7.5 percent annual rates of return.

The collar tapering will add $5 billion by 2019, McCord said.

“It’s basically a planned tax hike on anyone who plans on living in Pennsylvania in 2019 and beyond,” he said, equating it to pouring gas on a fire and calling it another contribution “holiday” by the state. “(The pension debt) is one of these things that’s going to be with us for awhile.”

The critics fail to look at the entire package, Pagni said.

Lawmakers are back in session March 11. The 2012-13 budget year ends June 30. There are several big issues on the front burner for the 2013-14 budget, including transportation infrastructure funding and privatization.

Jason Scott

Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin County. Have a tip or question for him? Email him at jasons@cpbj.com. Follow him on Twitter, @JScottJournal. Circle Jason Scott on .

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