House Approves Public Pension Reform Bill
On November 15, 2010, the Pennsylvania House of Representatives approved legislation that would make cost-saving changes to the state’s two large public-sector pension systems. Approved by both the House and Senate, HB 2497 was signed into law by the governor on Nov. 23.
While this legislation does not go as far as I would like in curtailing pension costs to taxpayers, I think this is a good first step and prevents the situation from becoming worse. It reduces the costs of the state’s two pension systems by forcing new employees to choose either reduced benefits or increased contributions. It also provides short-term relief to taxpayers and school districts throughout Pennsylvania.
Without action, state government and school districts would be required to increase their contributions to the pension systems at double-digit rates as early as 2012, which would remain high for the foreseeable future. These increased costs would be borne by school property tax and state income tax payers. For example, projected Employer Contribution Rates (ECR) under the former law would have increased from 5.64% in 2011 to 28.71% in 2013, whereas projected rates following the passage of HB 2497 will only increase to 12.22% in 2013. Over the next 33 years, expected savings will be around $1.3 billion.
This bill includes nine long-term reforms that will considerably affect the benefits offered to all new state employees, school district employees and legislators, such as:
- Rolling back the benefit enhancement of 2001 and reducing the benefit multiplier from 2.5 percent to 2 percent for employees and from 3 percent to 2 percent for lawmakers while maintaining employee contribution rates of 6.25 percent for members of SERS and 7.5 percent for members of PSERS. Thus, new employees will get a lower benefit while paying a higher contribution rate.
- Increasing the vesting period from 5 years to 10 years.
- Increasing the retirement age from 60 to 65 for state employees and from 62 to 65 for school employees.
- Eliminating the lump sum option that currently permits retiring employees to withdraw all of their contributions at the end of their career, while receiving monthly benefits for the remainder of their lives.
- Prohibiting the use of pension obligation bonds to prop up or mask the funded status of either plan.
- Capping the retirement benefit under the new plan at the member’s pre-retirement salary, regardless of how many years of service.
- Reducing the “fresh start” amortization of the plan’s liabilities from 30 years to 24 years.
- Requiring any future “purchase of service” to be priced so that they are actuarially neutral.
- Creating a “shared risk” provision, in which the employer or the taxpayer would no longer be solely responsible for investment losses in the future. The contribution rate for employees would be adjusted periodically to reflect any poor investment performance by the fund. If the fund does not achieve its assumed rate of return of 8 percent, employees would be required to increase their level of payroll contributions to the fund.
These changes would apply to lawmakers taking office on and after Dec. 1, 2010, state employees hired after Jan. 1, 2011, and school employees hired after July 1, 2011.
If you have further questions about details or specific contribution rates, please feel free to contact me by email at email@example.com or by calling my district office at 610-925-0555.