While there remains no consensus on how to fix Pennsylvania’s pension funding crisis — a sum that totals more than $41 billion — a joint committee hearing Tuesday in the state House might have set the stage for a serious 2013 debate.
Members of the House Finance and State Government committees met to begin vetting a series of proposed reforms that largely focus on future retirement liabilities as opposed to paying down the lingering legacy costs.
The current proposals aim to move away from defined benefit plans in favor of defined contribution plans for new public employees — a shift to more 401(k) options.
The private sector has gradually moved away from defined benefit pension plans as a way to better control costs.
Existing pension plans guarantee specific benefits for employees when they retire, which becomes a real challenge for employers during recessionary periods as investments traditionally fail to live up to return assumptions, and higher contributions are needed.
The proposed reforms aim to provide the state with more fixed costs moving forward, putting more of the burden on employees to contribute more to retirement plans as they progress through their careers.
“We need to stop adding people to the current system. I don’t believe the taxpayers should bail out the plan when the market tanks,” said Rep. Warren Kampf, a Chester County Republican who has proposed twin bills that would make changes for the Public School Employees’ Retirement System, or PSERS, and the Pennsylvania State Employees’ Retirement System, or SERS.
Kampf’s bills would most immediately address the expansion of pension plans by requiring all new state and school employees to be enrolled in defined contribution plans.
The state’s contribution to the new plans would be set at a 4 percent match, Kampf said. Employees also would be required to contribute at least 4 percent of their pay.
Existing employees would be incentivized to freeze their pension and move to the new plan with the lure of a 7 percent state match and the ability to manage the account’s investment options, he said.
Other bills on the table include a hybrid approach that would create a “cash balance” plan, which would keep the defined benefit system in place while creating a new tier.
That new tier would provide an annuity for retirees equal to the amount of their account balance, which is accrued with a 7.5 percent employee contribution rate, a 5 percent employer contribution rate and a defined 4 percent interest credit.
That cash balance would follow that employee and could be rolled into a 401(k) plan, said Rep. Scott Boyd, R-Lancaster County, the bill’s sponsor.
Additional proposals would establish a defined contribution plan for state lawmakers.
Stephen Herzenberg, executive director of the Keystone Research Center, warned lawmakers not to emulate “the erosion of retirement security in the private sector” by switching to defined contribution plans. Preliminary analysis of the proposed bills suggests they will slightly increase retirement costs due to higher plan management fees.
The more-conservative experts — Richard Dreyfuss, a senior fellow with the Commonwealth Foundation, and Andrew Biggs, a resident scholar at the American Enterprise Institute — argued that the public sector workers in Pennsylvania are more than adequately compensated compared to the private sector.
“We need to have better discipline with regard to funding,” Dreyfuss said.
He said he believes the unfunded pension liabilities are much higher than the estimates due to optimistic assumptions on investment returns.
He is advocating for lower investment assumptions of around 6 percent — compared with 7.5 percent — and shorter amortization periods. The reforms would have to be coupled with at least $2 billion more per year in general fund spending to cover current obligations, Dreyfuss said.
Local governments also would need to contribute about $2 billion more per year, he said.
Rep. Daryl Metcalfe, chairman of the State Government Committee, who led the hearing, said he expects additional hearings on pension reform and more serious debate next year, the start of the new legislative session.