York County lawmaker takes aim at local pension reform
York County Republican Rep. Seth Grove has not found a silver bullet, but a plan he is circulating might just pack enough punch to take down the pension beast that is terrorizing municipal budgets.
Excluding Philadelphia and Pittsburgh, local governments have amassed an unfunded pension liability of about $1.84 billion, according to the Public Employee Retirement Commission, which tracks the progress of local and state pension plans.
That is a far cry from the $47.4 billion combined debt of the two state-administered pension plans.
"It needs to be in the discussion, no matter what," Grove said of the municipal debate, which has largely taken a back seat to solutions involving the public school and state employees' retirement systems.
With much of the local government pension debt tied to uniformed police and firefighters, Grove has decided to take the lead on a bill that would introduce a cash balance hybrid model for new public safety hires.
Current employees would remain in existing defined-benefit plans. However, benefits would be frozen at current levels, according to the proposal, which is backed by the Coalition for Sustainable Communities, a broad coalition of business and government leaders.
"It's a point to start the discussion," said Grove, citing York as one example of a municipality weighed down by public safety pension debt.
York has an unfunded liability of about $55 million. Its funded ratio is about 62 percent, which is the lowest in York County, according to PERC.
Closing the gap
There are no hard numbers available for how much the cash balance proposal could save municipalities.
According to the memo Grove is circulating, 25-year modeling projections of municipal plans show a "tremendous benefit" just from freezing the current defined-benefit plan benefits.
The additional ability to put interest earnings from the cash balance plan toward existing unfunded liabilities closes the gap even more, Grove said.
"There is no quick fix to the current pension crisis without a huge influx of revenue and even that won't fix the underlying problem of benefit structure," his memo reads. "The cash balance concept draws a line in the sand on the existing DB plans, reduces benefits for new hires and has the ability to provide a source for additional revenue for unfunded liability."
Most municipalities would see a payoff of their unfunded liability after 15 years or so, said Rick Schuettler, deputy executive director of the Pennsylvania Municipal League, one of the coalition members and a driving force behind the pending legislation.
"We're trying to keep it as simple as possible," he said of the cash balance proposal, which has been gaining interest in other states. "We're trying to send a message that we're not trying to take away people's existing benefits."
A cash balance and other hybrids have been floated to address the state systems. The bulk of the dialogue has been focused on moving away from defined-benefit pensions to a defined-contribution, or 401(k)-style plan, for new hires.
"This is a balance between ensuring individuals have a good pension with limited liability on the taxpayers," Grove said. "We are not talking about tax increases. This is giving locals the ability to take care of their pension issues."
He said he is optimistic that a state pension fix also will happen this spring.
"There is enough time (during this budget season)," he said, adding that it's about "finding the sweet spot" the way the House did with liquor store privatization.
Municipal pension debt
Collectively, municipalities across the commonwealth have unfunded pension liabilities of nearly $7 billion, according to the latest report from the Public Employee Retirement Commission.
Philadelphia and Pittsburgh make up about $5.15 billion of that.
Rep. Seth Grove's legislation excludes Philadelphia. The unfunded liability of all other municipalities is about $2.22 billion, according to PERC data.
The spring push begins April 8 in the Pennsylvania General Assembly.
That is when both the state House and Senate return to session. The House has 30 scheduled session days in April, May and June, while the Senate has 28.
With the 2012-13 fiscal year ending June 30, all eyes will be on the 2013-14 budget deliberations and key legislative initiatives, including pension reform.
Gov. Tom Corbett has called on lawmakers to pass legislation that would move new state and public school 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 unfunded liabilities of each combine to be about $47.4 billion.
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.
Local pension fix
Backed by the Coalition for Sustainable Communities, Rep. Seth Grove's pending legislation would create a cash balance hybrid model for municipal pension plans.
What Grove's proposal says:
• It would not affect all municipal employees, just public safety.
• It does not include Philadelphia.
• Only new hires would be affected. Current employee benefits are frozen at existing levels.
• Cash balance is a defined-benefit plan with a formula based on percentage of pay that is relative to the contribution level.
• Mandatory member contributions would be 6 percent of salary for those who participate in Social Security, but 9 percent for those who do not. Employer contribution would be 4.5 percent. Current employee contributions average between 5 percent and 8 percent, according to the Pennsylvania Municipal League.
• Each member of the new plan has an individual account balance made up of mandatory employer and employee contributions and an employer-guaranteed interest credit, which is tied to market performance. That benefit also is portable.
• Any interest earning over the rate guaranteed to employees can be directed to pay down the unfunded liability of the old defined-benefit plan.
• It authorizes an optional 457 plan, or tax-exempt deferred compensation plan, as an additional employee retirement tool.
• Full vesting would begin at 12 years, partial at 8. Members always are vested in their contributions plus interest.
• Retirement age is set at 55 with 25 years of service.
• Members of the cash balance plan are not eligible for post-retirement health care benefits.
• It requires pensions to be calculated on base pay only.
• It removes pension benefits from the collective bargaining process.