The latest piece in Pennsylvania's pension reform saga was unveiled today by Cumberland County Republican Rep. Glen Grell.
Grell, who heads up a House task force on the issue, laid out a comprehensive proposal that aims to significantly reduce the unfunded liabilities of the Public School Employees' Retirement System and the State Employees' Retirement System.
His projections have the debt, which is currently more than $47 billion, shrinking by as much as $37 billion over the next 30 years. It also would provide short-term relief to the state's general fund, while allowing savings to school districts and other state agencies that are part of SERS.
The three-pronged approach would establish a new shared risk, or cash balance, plan for future hires. It would be a new tier on the existing defined-benefit plan. But instead of relying on a formula that calculates retirement benefits based on length of service and the salary from the final three years of service, it would rely on a guaranteed interest rate combined with fixed employee and employer contributions.
If the plan passes, it would guarantee a minimum 4 percent rate of return and with an employee contribution of 7 percent and employer contribution of 4 percent. After 15 years of service, the employer would pay 5 percent. If the market produces better returns, the excess earnings would be split equally between the employer and employee, Grell said.
Essentially, this hybrid model saves up like a defined-contribution plan but pays out like a defined-benefit plan, he said, as the cash balance is paid in monthly annuity installments for life.
He estimates that would save $7 billion over 30 years.
The second part of the plan addresses 10 years of pension system underfunding by the state through a $9 billion bond issuance. That money, which would be borrowed over two or three years, would be injected into the two systems. By issuing bonds at the current low rates, it could reduce the unfunded liability by $15 billion over 30 years, Grell said.
The final piece offers current members an opt-in incentive of a lower employee contribution rate — 0.5 percent off 6.25 percent for SERS and 7.5 percent for PSERS — in exchange for modifications to the present "option 4" lump sum withdrawal.
Grell is seeking to make that withdrawal actuarially neutral, which would reduce the monthly annuity by about 4 percent from the current law, while changing the final average salary calculation to the five highest years.
"There is no immediate disadvantage to take the lower contribution rate," he said.
He said he wants to encourage more people to leave their money in the system.
The voluntary changes could save up to $15 billion. Grell is optimistic that a high percentage of current members would agree to participate, given the large budget hits school districts are projected to take on pensions, which affect jobs and program funding.
The borrowing amount is on a sliding scale that depends on buy-in from the members. If only 50 percent of current members agree, then the bond would be for $4.5 billion, he said.
To cover the debt service on the borrowings, Grell is proposing some short-term relief through collar limits on scheduled employer contribution increases. The amount of collar relief is contingent on other reforms.
"Borrowing is the lynchpin of this whole plan," he said, adding that it's unfair to ask for concessions without making up for underfunding by the state.
The bills are expected to be introduced by early to mid-October. If passed by the end of this year, changes would take effect in 2015, Grell said.
The unions have been engaged and are cooperating in this effort, Grell added. The plan does not affect current retirees' benefits.
Mike Crossey, president of the Pennsylvania State Education Association, the state’s largest teachers union, said: “Rep. Grell’s ideas represent an interesting new direction, finally moving the conversation away from costly legislation that would create a new 401(k)-type plan and cost taxpayers another $40 billion. It shows that people are starting to realize that 401(k)-type plans are really just a $40 billion problem, not a solution.
“To address pension issues in a responsible way, you can’t use a sledgehammer. But for the past year, the plans we’ve seen do just that. They’ve been unconstitutional, unfair for working people, dangerous for retirees, expensive for taxpayers, or all of the above.”
Crossey also said the proposal is complicated and there are many unanswered questions about it. It should provide an interesting new framework for the discussions about pension funding, he said.
The Pennsylvania Chamber of Business and Industry put out a statement saying it hoped today’s announcement would jumpstart action on pension reform this fall.
“Job creators and school district taxpayers are already realizing the impact of unaffordable and unsustainable public pension costs,” said President Gene Barr. “As the commonwealth’s unfunded pension obligations continue to increase each budget year, lawmakers will no doubt look to businesses and residents to make up the difference, killing jobs and economic growth and opportunity in the process.”
The Pennsylvania School Boards Association said its believes the proposal is worthy of further consideration.
“The plan would bring an infusion of new state dollars that are needed, a component that has not been incorporated into other pension reform plans offered to date,” the PSBA said in a statement. “In keeping with PSBA’s legislative platform, the association urges the General Assembly to adopt school employee pension reform with the dual purpose of reducing projected employer contribution rate increases and reducing projected costs to school districts and taxpayers, while maintaining an appropriate pension benefit for school employees.”