HARRISBURG – The state Senate voted 40-9 Monday to reform Pennsylvania’s public pension systems by creating hybrid pension plans for new government workers.
Gov. Tom Wolf has indicated he will sign the legislation if it passes the state House later in the week.
It’s a plan that offers little short-term relief, but proponents, such as Senate Majority Leader Jake Corman, R-Centre, say it provides long-term benefits. That mostly includes cutting the state’s risk of getting stuck on the hook when pension investments underperform. Under the current pension plan design, if the pension fund’s holdings don’t meet performance targets, taxpayers foot the added cost, he said. The pension reform bill, Senate Bill 1, solves that problem, he said.
“When you’re sick, you’re not feeling well. You go through a period of pain.
“When you’re sick, you get medicine. We haven’t taken our medicine. We’re just feeling the pain,” Corman said before the floor vote. “This is the medicine we haven’t taken. It’s going to make us feel better later.”
Corman said that increased pension costs have overwhelmed the state’s efforts to spend more elsewhere.
Wolf has proposed $100 million in additional classroom funding for schools in the 2017-18 budget. But that money will be consumed by pension cost increases, Corman said.
“That money’s not going into classrooms. It’s not going to hire teachers,” Corman said.
Wolf called the legislation a compromise that grew out of “tireless efforts” by lawmakers and members of his administration.
“I continue to support reform that pays down our debt, reduces Wall Street fees and shifts risk away from taxpayers, all while providing workers with a fair retirement benefit,” Wolf said.
The proposed pension reforms satisfy Wolf’s goals, the governor said.
“The Senate’s vote tonight is an important first step in the process.”
Under the plan, the state would offer most new employees in state government and public schools a choice of three pension plans. Two of the plans would by hybrid plans offering partial defined-benefits, such as those in the existing pension plan. Those partial benefits would be augmented by defined contribution accounts.
The third option would allow employees to simply enroll in a defined contribution account such as 401(k)-style plans used in most private business.
The plan would exempt “hazardous duty” employees, such as state police and prison guards.
They would be allowed to continue participating in the traditional defined-benefit public pension plan. New lawmakers are enrolled in the new hybrid pension and existing lawmakers will be able to move into the new pension plans.
Wolf’s not alone in getting on board.
An analysis by the Pew Charitable Trusts dubbed the bill “the most comprehensive and impactful reform any state has implemented,” according to a letter to lawmakers written by Greg Mennis, director of Pew’s public sector retirement system’s project.
In April, the Pew Charitable Trust released a report saying that only four states – Colorado, Illinois, Kentucky, New Jersey – have pension systems in worse shape than Pennsylvania.
The Pew review found that the plan would move Pennsylvania into the top half of the states in terms of the adequacy of its pension contributions.
“It is the biggest turnaround in contribution adequacy nationwide,” Mennis said in the letter.
The Pew review also found that the plans would make Pennsylvania’s pensions among the six best state plans in the country in terms of risk mitigation.
And while it’s an amount that’s just a percentage of the state’s $67 billion unfunded liability, the plan would save the state between $5 billion and $15 billion over the next three decades, Pew’s analysis said.
Business groups across the state, the Pennsylvania School Board Association and conservative small government groups all signaled their support for the legislation.
The legislation “represents the needed long-term reform and stability that school districts have been calling for and need,” said John Callahan, assistant executive director of the Pennsylvania School Board Association in a letter supporting the plan.
By reducing the risk to taxpayers over increased pension costs in the future, the bill “protects taxpayers from jarring tax increases and/or draconian program cuts,” Callahan said.
In 2008-09, pension contributions were at about 2 percent of a district’s expenses. In 2016-17, pension costs are estimated to climb over 11.5 percent of their spending.
Matt Smith, president of the Greater Pittsburgh Chamber of Commerce, pointed to the Pew analysis as “quite the stamp of approval” for the bill.
“This is really a significant piece of legislation,” he said.
Smith added that with the legislation apparently on the fast-track, it demonstrates that there is the opportunity for bipartisan cooperation to get things done at the Capitol. In addition to the support from the governor, a Democrat, eight of the 16 Democrats in the Senate voted in favor of the pension bill.
The Democratic support didn’t escape the notice of Republican state Sen. Wayne Langerholc, R-Richland.
“It’s evident in the roll-call vote that this is no longer a partisan issue, and today’s passage signals a bipartisan effort to tackle one of, if not the most, troubling problem facing our commonwealth,” he said.
The new options would provide greater flexibility for employees who do not spend their entire career in public service while still providing good retirement security for career workers, said state Sen. Pat Stefano, R-Fayette. Most employees who leave service with 20 years or less of service time would see better benefits due to the portability of the 401(k)-style plan, he said.
State Sen. Gene Yaw, R-Lycoming, added that the legislation would have lasting benefits.
“Senate Bill 1 is a historic plan that reflects the seriousness of the situation we face with pensions,” Yaw said. “If we fail to act, we are putting the state’s finances and taxpayers burdens at risk.”