Pa. legislature approves overhaul of public employee pensions

Pennsylvania Daily Life
Pennsylvania’s GOP-controlled legislature approves a bill aimed at overhauling public employee pensions.

HARRISBURG — After years of wrestling with the issue, Pennsylvania’s Republican-controlled legislature is sending Gov. Wolf legislation to reduce the cost of pensions for state workers and public school teachers.

Legislators in the House on Thursday followed their Senate colleagues in approving a bill that would shift at least some benefits for future state and public schools employees into 401(k)-style plans.

The goal is to create a system that will relieve taxpayers of the entire liability for funding public-employee pensions. Some critics have said the changes would do little to address the crushing, $62 billion debt held by the state’s two biggest pension funds. And some Democrats have balked at shifting away from the state’s traditional and more generous benefit plan, which they argue helps attract good workers and ensures them a predictable and stable retirement.

Wolf, a Democrat, has said he supports the measure, and is expected to sign it Monday.

In a statement, Wolf called the pension bill “an example of how Harrisburg can come together to make progress on issues that matter to the people of Pennsylvania.”

Lawmakers had been seriously attempting for at least five years to reach a consensus on the best way to address the financial strain retirement obligations costs put on the state budget.

Pennsylvania’s pension problem was created by a combination of the legislature’s decision to make generous enhancements to retirement benefits in 2001, when money was flush; lackluster investment returns; and nearly a decade of underfunding by state government and local school districts.

To begin addressing the problem, legislators in 2010 scaled back benefits for new employees and set a payment plan to start paying down the pension debt. But those installments have been a money drain, turning budgeting into a near blood sport every year as Democrats and Republicans argue about whether to increase taxes, and pressuring lawmakers to make changes to the system.

During Thursday’s debate on the House floor, which led to the 143-53 vote to pass the measure, Rep. Mike Tobash (R., Schuylkill) acknowledged that the bill does not solve every problem, but still called it “forward thinking” and “proactive.”

“This is groundbreaking legislation,” said Tobash, who has been key to crafting recent pension reform efforts. “Some will say that this not a full loaf … but this pension problem we’ve got is crushing our schools, it is destroying our budgets.”

The bill would affect only future state and public school employees who receive benefits through the state’s two big pension funds.

Under the proposal, new employees, starting in 2019, would be given two options.

They could choose a hybrid plan that steers a percentage of their pay into a 401(k)-style plan and a portion of their pay into accounts receiving the current pension benefit (calculated using a formula that relies on years of service and the highest three years of pay). In the hybrid retirement-savings plan, the employer contribution would range between 2 percent and 2.25 percent for both teachers and state employees.

Or they could switch entirely into a 401(k)-style plan that requires them to kick in 7.5 percent of their salary. In that option, the employer match would be 2 percent for teachers and 3.5 percent for state workers.

Current employees could opt in, but would not be forced to participate in the new plans. Legislators have determined that a mandate would lead to years of litigation.

Incumbent legislators, too, as well as judges, would not be forced to switch if they are reelected after the bill takes effect — a controversial provision. Those elected for the first time after 2019 would have to use the new system.

House Speaker Mike Turzai (R., Allegheny) said he would select one of the new plans.

State troopers and corrections officers hired in the future would be exempt from the changes, and current retirees would not lose benefits.

According to an analysis by the state’s Independent Fiscal Office, the bill would reduce retirement benefits for most employees hired after next year. A state employee of 35 years retiring under current law at 65, with a final year salary of $60,000, would receive a yearly pension of $40,500. The same employee, under the hybrid plan, would see that pension drop to $34,048, and to $19,257 under a strict 401(k)-style plan.

The fiscal office projected that between 2019 and 2050, the changes would reduce the state’s obligation by $1.4 billion.

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