June 13, 2016
A compromise pension reform bill that seeks to give everybody a win, but falls short of landmark change to some critics, easily passed its first test on the Pennsylvania House floor Monday, passing 150-41.
That vote inserted a plan negotiated by House leaders into Senate Bill 1071 with significant bipartisan support. Forty-six Democrats voted for the plan, setting the stage for final House passage later this week.
It would, for Republicans, introduce a 401(k)-style benefit component into the major state retirement plans for state and school employees, which will on some level shift the costs of future recessions away from taxpayers.
For public sector unions and their mostly-Democrat allies, it preserves a guaranteed base pension built on a workers' years of service and salary.
State Employees Retirement System projections for many of the state's blue-collar or clerical workers show benefits for a 30-year employee would be virtually unchanged. That was an important enough concession for the largest of the state workers' unions to take a "neutral" position Monday.
For taxpayers, the plan introduced by Rep. Mike Tobash, R-Schuylkill County, is projected to save an estimated $5 billion in future pension costs over the next 30 years.
If that sounds like a lot, know this:
That's only about 2.1 percent of the projected $240 billion taxpayer cost through that time under the current pension format. And that was not enough to satisfy the General Assembly's most vocal pension hawks Monday.
"Anybody thinks or says that this is moving us into the 21st Century with pension reform and we're doing something historic here with creating a defined contribution plan, you're crazy," argued Rep. John McGinnis, R-Blair County and a former college finance professor.
McGinnis said the Tobash bill just continues a "grim tradition of deplorable pension legislation" that's made spiking retirement costs a generational black cloud over state government's finances.
"Do we have to repeat (the mistakes of) Act 9, Act 38, Act 40 and Act 120?" McGinnis asked, listing some of the major pension bills that have led to or tried to treat the current pension hangover.
Winding up with a sarcastic reference to championship rings on the day after the Pittsburgh Penguins claimed the Stanley Cup, he concluded, "Do we have to have one for the thumb when it comes to sticking it to the taxpayers of Pennsylvania?"
But most Republicans - 104 to be exact - saw it differently.
"I would like to see a bill go much further (in reforming the state's retirement systems), but just like last week's change in wine sales, this is at least an incremental step in the right direction," said Rep. Steve Bloom, R-Carlisle. "It's progress."
No Democrats spoke during Monday's debate, but dozens of supporters in the House minority seemed to feel they had achieved the preservation of two basic fundamentals for their public-sector union allies:
* Survival of a core "defined benefit" plan that, with a 3 percent annual growth in the $50,000 cap, ensures a basic level of retirement security for rank-and-file workers that should withstand normal wage growth.
* No changes in future benefits for current employees.
With those standards met, leaders of District Council 13 of the American Federation of State, County and Municipal Employees - the largest of the state's unions - said Monday they would not oppose the Tobash plan.
The state's largest school teachers' union, the Pennsylvania State Education Association, continues to oppose the Tobash plan.
(Teachers hired under the new plan - like many higher-paid state workers - could see their future pension benefits cut by about one-third from Act 120 levels, according to Public School Employee Retirement System projections. One showed a career teacher hired into the current system and retiring with an $82,000 salary drawing a state pension of $55,770; it would fall to $36,231 for someone hired under the new plan.)
Still, the biggest hurdle House supporters face now may be getting their version through the state Senate.
The Senate passed a reform plan last year that saves less money but, in the eyes of its supporters, did a better job of cutting taxpayers' risk of new cost spikes if and when the retirement funds' investment earnings hit future valleys.
Senate leaders have voiced concerns that since the House plan keeps more people in the guaranteed pension pool for more time, it leaves Pennsylvania's taxpayers - who ultimately fill in any fiscal gaps in the short-funded retirement systems - on the hook for even higher taxes in event of a new recession.
"We're willing to work with them (the House)," Senate Majority Leader Jake Corman, R-Centre County, said last week.
"But as I've said from the beginning, this is too important of an issue, and I'm not going to pat myself on the back and say: 'I did pension reform' and end up accomplishing nothing."
Corman noted while it is true that pension cost increases are supposed to start moderating after the 2016-17 fiscal year, which could make budgeting for the state and its 500 school districts a little easier, "We're just a recession away from having to climb even higher. That's the big problem."
The details of Tobash's "stacked-hybrid" plan:
* Workers hired after Jan. 1, 2018 (state), and July 1, 2018 (school), would start with a baseline, guaranteed pension based on the traditional formula of years of service multiplied by 2 percent of top average salary.
That defined-benefit plan would convert to a (401)k-style plan for any income earned over $50,000-per-year, and for all income earned after 25 years' service - hence, "the stack."
* These workers would contribute 7.5 percent of their pay into the retirement system, with the state (or state and school district in the case of teachers) providing a 4 percent match on compensation above the 401(k) income threshold.
* Pennsylvania State Police would be exempted from the new system, in part because they don't participate in Social Security. Other uniformed workers - Capitol Police, park rangers, game wardens, etc. - would go into the new plan.
* Full retirement comes at age 65, or at any time where the "rule of 92" applies: meaning a worker who hits age 57 with 35 years service can leave with no penalty.
Gov. Tom Wolf said Monday he has been following the House negotiations and supports the emerging plan in concept, but will need to review any final language when a bill hits his desk.
Any pension reform would not have a significant effect on the 2016-17 budget. In what is currently projected as the last major step up in costs, the state's tab for the retirement systems may be up about $500 million or more next year.