After an hour-long executive session and an hour
long public meeting, the Public Employee Retirement Commission (PERC)
unanimously approved an actuarial note to the hybrid pension plan offered by
Rep. Mike Tobash (R-Schuylkill).
Rep. Tobash called the plan a “rescue effort” in
terms of pension reform and a first step in broader changes designed to attack
an estimated $40 billion-plus unfunded liability.
As explained by PERC’s executive director, James
McAneny, three amendments to House
Bill 1353 – A06917, A07089, and A07096 – would have the combined effect of creating
a new hybrid benefit tier, commonly referred to as a “stacked hybrid” plan, for
both the State Employee Retirement System (SERS) and the Public School Employee
Retirement System (PSERS).
According to McAneny, the plan would maintain the
current defined benefit plan for the first $50,000 of income with an employee
contribution rate of six percent. The defined contribution component consists
of a one percent employee contribution on the first $50,000 of income and then
the full seven percent contribution rate would apply to any salary above
$50,000.
The defined benefit would be capped at an annual
retirement benefit of $25,000 per year and the vesting would revert to pre-Act
120 timeframes.
In sum, he noted, the plan is “basically a safety
net provided for rank-and-file government employees.” He also stated that the
average state employee makes less than $50,000 and receives a benefit of less
than $25,000.
The hybrid plan would apply to all new state and
public school employees except sworn officers of the Pennsylvania State Police.
Depending on the assumptions and the actuarial
analysis used, savings from the plan could be between $9 billion and $14
billion over 30 years.
Despite the savings, the sponsor of the
amendments said this is not a “silver bullet” to address the unfunded pension
liability, but is rather a “first step.”
“Is there a silver bullet? Is there a magic wand?
No. But there is a first step, and we need to take it,” Rep. Tobash stated.
“With this legislation we can draw a line in the sand, we can reduce costs, we
can save money and we have to get to work on rescuing the benefits that people
have earned.”
Rick Dreyfuss of the Commonwealth Foundation,
however, is not so sure the plan offered by Rep. Tobash will even decrease the
unfunded liability since the actuarial analyses used in projecting savings from
the plan are based on an aggressive 7.5 percent assumed return on investment,
something he believes cannot be maintained over time.
He noted Rhode Island used that rate of return in
recent pension reform measures and was predicted by that state’s version of
PERC to only have a 40 percent chance of meeting that rate of return.
“I don’t believe we invest money any better or
any worse than Rhode Island does down here in Pennsylvania,” he said.
“There is considerable risk and uncertainty in
achieving the 7.5 percent and the downside to that is any shortfall goes
directly into the unfunded liability and now you have a bigger debt to pay
off,” he told The PLS Reporter.
Rep. Glen Grell (R-Cumberland) also speculated
that the 7.5 percent assumed rate of return might be unrealistic going forward.
However, sources within PERC confirmed that when
looking at a long-term historical window, the actual rate of return has
exceeded the assumed rate of return.
Dreyfuss argued a better solution would
immediately lower the unfunded liability by providing more funding to pay off
the existing debt.
He conceded the approach being taken in the
Tobash amendments might be the most politically feasible, but argued that does
not make good policy.
“Just because they can get 102 votes in the
House, 26 in the Senate, and have the governor sign it doesn’t make it a good
bill.”
Rep. Grell, however, was not convinced the
funding exists for such a plan.
“We have all sorts of competing concerns,” he
noted of the budget in explaining why it would be difficult to put extra money
toward the unfunded liability.
Despite this, he noted that while PERC believes
with its action today that the hybrid plan will yield small, but measurable savings,
the problem is much larger than what the hybrid plan accomplishes.
“We don’t have a small problem, we have a big
problem,” he noted of the unfunded liability.
House Democrats were similarly skeptical of the
legislation.
A memo from the House Democratic Appropriations
Committee Chairman Joe Markosek (D-Allegheny) argued the plan does not pay off
the unfunded liability any faster than under Act 120 and makes a large chunk of
its savings in PSERS by cutting a $100 per month supplement to help public school
employees pay for health care insurance.
“The Tobash amendment is hundreds of pages long.
As with any bill that size, the devil is always in the detail. Pension changes
this dramatic should be fully vetted through public hearings. Most importantly,
any changes to the pension systems need to be carefully considered in light of
recent warnings from credit rating agencies,” the memo goes on to state.
Steve Nickol of the Pennsylvania State Education
Association also expressed concerns at the meeting that eliminating the health
care supplement would reduce employment incentives.
Raising a number of other issues at the meeting,
including applying the new plan to employees following a break in
service—something he called “draconian” for female employees—Nickol went on to
say the plan requires “enormous risk” to be borne by employees for a relatively
small employer savings.
House Bill 1353 currently sits on the tabled
calendar in the House and would need to be moved to the active calendar before
it—and the aforementioned amendments—could be considered.
Calls to the Pennsylvania Budget and Policy
Center seeking reaction were not returned.
Source: PLS
Reporter
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