Pension plan has Pa. state workers worried

Gov. Corbett's revised package to address the Pa. plans' $41 billion debt raises many questions.

Posted: February 12, 2013

The pension reform package Gov. Corbett proposed last week to address the state's $41 billion pension debt leaves 386,000 state employees and teachers wondering how it would change their retirement income.

Specific answers are not easy to come by because of the complexity of the proposed changes and the uncertainty over whether there is legislative support for some or all of the proposals.

There is also uncertainty for school districts as they prepare preliminary budgets not knowing precisely what their state funding will be, given that Corbett tied his education-funding proposal to approval of his pension package.

But a few things are certain under his proposal: The changes would not affect current retirees' pensions and would not reduce benefits current employees have already earned. If enacted, the proposed changes would take effect in 2015.

The proposal is aimed at two pension plans: the Public School Employees Retirement System (PSERS) and the State Employees Retirement System (SERS).

The alarm raised since Corbett spelled out his plan Tuesday has prompted employees to call their pension systems and unions to ask how they would be affected. Both pension plans have posted announcements on their websites telling members they don't have enough information yet to answer questions.

"Part of the problem is a lot of people are really reacting as if they have to rush out and make a decision, and we've been trying to calm them down," said Jim Buckheit, executive director of the Pennsylvania Association of School Administrators.

Among the proposed changes for current employees is a reduction in the multiplier used to calculate pension benefits from 2.5 to 2.0.

In addition, the number of years used to determine employees' final salary would be changed from the highest three years of compensation to the last five years of compensation.

All new employees would be placed in a 401(k)-type defined contribution plan. New SERS members would be required to contribute 6.25 percent of their income and new PSERS members 7.5 percent to the defined contribution plan. The employer contribution would be 4 percent. In the case of school districts, 4 percent would be split between the state and district.

The $41 billion pension debt was created by several factors, including the legislature's decision to increase benefits in 2001, when the accounts were more than 100 percent funded - but just before the investment market crashed after the 9/11 attacks and the dot-com collapse.

The benefit increase was followed by years of poor returns on investments, which make up 71 percent of the funds, and contributions from the state and employers that were well below what was necessary.

However, state employees and teachers continued to make their required contributions.

To address the spiraling debt, the legislature in 2010 approved Act 120, which initially lowered employers pension contributions, which were on the verge of a significant spike, but created a lengthy period of escalating pension contributions by employers and the state until the debt eventually would be paid off around 2045.

Though union officials and some legislators have argued Act 120 should be permitted to run its course, supporters of Corbett's plan say Act 120 does not shift the investment risk of pensions from the state to employees, as his proposal does.

Jay Pagni, a spokesman for the governor's budget office, said Corbett's plan, like Act 120, calls for initially lowering pension contributions from the state and employers, starting with 2013-14, but then shows an increase in the contributions. The lowered contributions would save school districts about $140 million in 2013-14.

The long-term saving in the two pension systems that would result from the proposed reforms - projected to be $200 million to $300 million annually over nearly 20 years starting in 2016 - would be enough to pay off the debt in about the same time as Act 120. However, with the governor's plan, all new employees would be shifted to a defined contribution plan, which takes funding responsibility away from the state.

There are 310,000 retirees drawing pensions from the SERS and PSERS plans. There are 386,000 active employees. Of the retirees, 195,000 are school employees, as are 279,000 of the active employees.

"This is not about attacking the pension plan, it's about preserving it," Pagni said.

Officials of the Pennsylvania State Education Association and AFT Pennsylvania issued statements last week saying it was unfair to make employees pay for the debt out of their future pension earnings, particularly because they made their required contributions in years when the state and school districts did not.

PSEA president Mike Crossey said his union would take legal action against any changes in benefits for current employees, maintaining they are protected by the state constitution.

"The governor's pension plan is unconstitutional, unpopular, and incomplete. In fact, the system he has proposed would actually cost more to operate than the systems we have now. The Pension Reform Law of 2010 helped solve this problem. The governor's proposal will just make it worse," PSEA spokesman David Broderic said.


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