June 14, 2016
The Pennsylvania House of Representatives gave final passage Tuesday to a new set of reforms to the state's major public employee pension funds, but its immediate future in the state Senate is unclear.
The House vote, at 136-59, was strong and bipartisan, with "yes" votes coming from from 103 Republicans and 33 Democrats.
Gov. Tom Wolf quickly signaled he would sign the bill as is.
But leading pension reform proponents in the Senate continued to push Tuesday for changes they say would shift more retirement cost for future state and public school employees from the current "defined benefit" system to 401(k)-style plans.
Senate Republican leaders say their approach offers greater long-term protection to taxpayers from future cost spikes due to circumstances like a recession that drives down pension fund investment returns.
Senate Majority Leader Jake Corman, R-Centre County, said Tuesday there's little chance his Republican caucus would accept the House-passed plan as is, but he promised a good-faith negotiation.
"We'll open up discussions with them, see if we can iron out our differences and go from there," Corman said.
Here's the key details of the House plan, as sponsored by Rep. Mike Tobash, R-Schuylkill County, and hammered out in negotiations with House Democrats this spring:
* 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.
Most of an employee's initial contribution would go into the traditional plan. Contributions on income earned outside the $50,000 / 25-year box would all go into the individual's 401(k).
* Participants in the 401(k) program would have at least 10 investment options to choose from, from at least three providers.
* Pennsylvania State Police are exempted from the new system, in part because they don't participate in Social Security. Other uniformed workers who do receive Social Security - 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. The latter means, for example, that a worker who hits age 57 with 35 years service can retire with no pension penalty.
The Tobash plan, like most pension reform bills, is an attempt to answer a yawning fiscal problem that has its roots in a 2001 legislative deal.
Pennsylvania's lawmakers at that time, along with then-Gov. Tom Ridge, made a critical mistake by granting lucrative and retroactive pension benefit increases to themselves, plus all public school employees and state workers.
Then, legislators compounded the problem in the years that followed by delaying payments on the much higher pension cost structure in order to avoid tax increases and keep funding available for other state needs.
In the last few years, the chickens have come home to roost in the form of taxpayer-funded "employer contributions" that have jumped from under $1 billion in 2010 to an anticipated $5.9 billion by fiscal 2016-17.
Several speakers in Tuesday's House debate noted that the state budget impasse of 2015-16 is directly rooted in that 2001 decision.
The bill that passed the House Tuesday has no fiscal impact on the 2016-17 state budget, and projections are that it will only save about $5 billion, or 2 percent, on the state's cumulative $240 billion tab over the next 30 years.
But supporters argued its main benefit lies in the taxpayer protections afforded by a greater reliance on a 401(k) system going forward.
"It's not a day to celebrate," Tobash said moments before Tuesday's House vote. "No one wants to show up in their place of business and deliver a message that says we need to cut back - even if it's just for future employees.
"But if we... manage our (pension) challenge and stay positive, we can ensure a better tomorrow for our students, and workers and taxpayers."
Independent analysts from the Pew Charitable Trusts - a non-profit that's created a special project on public pension issues in recent years - were already floating a potential compromise Tuesday evening that borrows from both the Senate and House plans.
Their plan would start with the Senate's so-called "side-by-side" hybrid, in which workers' retirement contributions are split from day one between the guaranteed pension and a 401(k).
By placing a salary cap on the defined benefit portion of the plan, offering higher employer contributions to the 401(k) portion as worker longevity increases, and imposing Social Security age standards for full retirement, Pew analysts claimed this hybrid of hybrids could save more in future costs, cut future taxpayer risk by more and still pay higher pensions for career teachers.
Republicans in control of both legislative chambers said Tuesday that their preference is to get some kind of final package to Wolf's desk before this year's summer recess.