A Republican-led plan to overhaul the commonwealth’s public-sector pension system, which has more than $70 billion in unfunded liabilities, cleared the state House today by a 143-53 vote, setting up a final approval by Gov. Tom Wolf.
On Monday, the Senate passed S.B. 1, which Wolf has already said he supports and will sign, by a 40-9 vote.
“The passage of Senate Bill 1 is an example of how Harrisburg can come together to make progress on issues that matter to the people of Pennsylvania,” the governor said in a statement.
The Republican-led General Assembly has tried for several years to pass public-sector pension reforms.
S.B. 1, which many elected officials agree is a big step forward, offers three retirement options to new public school and most state employee hires after 2018, including one to move retirement benefits into a 401(k)-style defined-contribution plan.
The other two options would narrow the traditional defined-benefit pension plan and blend it with a defined-contribution plan. These new options are known as side-by-side hybrid plans.
The Senate proposal would not impact the pension benefits of current employees and retirees. However, current employees could choose to opt into one of the new plans.
Republicans say this historic reform plan will stop the bleeding in the state pension plans and should save taxpayers more than $5 billion. An additional savings of up to $3 billion is projected in terms of reduced costs and fees for investment management.
“This marks a historic point in Pennsylvania government, moving to a defined-contribution plan for new hires in the public sector,” House Speaker Mike Turzai (R-Allegheny) said in a news release from Republican leadership. “Private-sector employees have been in the defined-contribution space for some time now. The dramatic increases in pension costs have put significant pressure on the taxpayers. This reform will protect future taxpayers’ hard-earned dollars while still providing competitive benefits for new hires.”
House Majority Whip Bryan Cutler (R-Lancaster) added in the same Republican news release that it’s not the perfect bill, but a “strong bill that receives a vote is far better than a perfect bill that may never exist.”
S.B. 1 is not a comprehensive solution because it doesn’t directly tackle the unfunded liability. The compromise is intended to mitigate future financial risks to the state because employees are sharing more of the costs, which should keep the outstanding liability in check.
“While more work remains to fully address the pension problem, including tackling the debt, this reform is a major step toward ensuring that in 20 years, we won’t look back and say, ‘If only we had acted,'” said Nathan Benefield, vice president and COO for the conservative-leaning Commonwealth Foundation.
Nathan Mains, executive director of the Pennsylvania School Boards Association, called the bill a positive step forward that will reduce employer costs over time.
The legislation gradually shifts the investment, inflation and longevity risks away from the state and school districts, thus providing the protection and relief school employers have been asking for, he said.
“This bipartisan legislation offers the state a rare opportunity to make course corrections that will put pension reform on the right path,” Mains said. “School districts need this pension cost reduction and a pension system that is built for this century in order to manage their costs and continue to provide the best education possible for our students.”
The reform will impact state workers, teachers, judges and members of the General Assembly.
At a glance
Here is a quick breakdown of each option under S.B. 1:
1. The first hybrid option, which would become the default plan for those who don’t make a choice, would require the employee to contribute 8.25 percent of their pay for retirement.
For SERS employees, 5 percent would go to the defined-benefit pension while 3.25 percent would go to the defined-contribution, or 401(k). For PSERS employees, the split is 5.5 percent pension and 2.75 percent 401(k).
The guaranteed pension would be based on a multiplier of 1.25 percent of their final average salary times years of service. The final average salary calculation is based on the five highest years, up from three now. For state workers, there is an overtime cap of 10 percent of base salary.
The employee also would have their 401(k) account earnings.
2. The second hybrid option calls for a 7.5 percent employee contribution, which is split 4 percent pension and 3.5 percent 401(k) for SERS employees. For PSERS employees, it would be 4.5 percent pension and 3 percent 401(k).
The guaranteed pension would be tied to a 1 percent multiplier, supplemented by the 401(k).
3. The standalone 401(k) option requires minimum employee contributions of 7.5 percent with no guaranteed pension. The employer contribution would be 3.5 percent for SERS members and 2 percent for PSERS members.