pension reform

Rep. Glen Grell's pension reform plan would produce some savings over the long term to taxpayers, according to actuaries who reviewed it for the Public Employee Retirement Commission.

Rep. Glen Grell's pension reform idea that would impact future state and school employees would produce savings that range between $27 billion and $30.5 billion savings for the two state pension funds over 30 years, according to an actuarial review of his plan released on Wednesday.

But for taxpayers who foot the bill, the bulk of those savings for the Public School Employees' Retirement System and State Employees' Retirement System would be offset by having to pay off a $9 billion pension obligation bond that the Hampden Twp. Republican lawmaker's plan would require.

Specifically, his plan would move new employees, hired after Jan. 1 (and new lawmakers taking office Dec. 1), into a "cash balance" plan. That plan would have them contributing 7 percent of their pay to their pension account and the employer would make a 4 percent contribution to it for the first 15 years of service, 5 percent after that.

Employees in this plan would be guaranteed interest earnings of 4 percent. Any interest earnings above that, would be divided evenly between the employee and employer.

Excluded from this plan would be judges and state troopers. Grell said his intention is to exclude university faculty as well, who now participate in a defined contribution plan.

His plan is not without its critics. Among them are lawmakers and Gov. Tom Corbett who are wary of the state taking on that kind of debt, along with other issues of concern.

To pay it off the borrowing plus interest, Corbett administration officials offered a letter indicating it would obligate the state to pay $600 million to $750 million a year from the general fund for 20 years. That payment would be in addition to the annual contribution to the pension fund that this year consumes $2 billion of the state's $29.1 billion budget.

At the Public Employee Retirement Commission meeting when the actuarial note was reviewed, commission executive director James McAneny said a pension obligation bond requires a fiscal discipline that the state has lacked. He said that contributed to the pension systems finding themselves in a situation where they are now short some $50 billion to pay the pension benefits they owe.

Additionally the cost of borrowing could drop the net savings of Grell's plan for taxpayers to as little as $2.6 billion over the next 30 years, according to the actuarial study.

Still, Grell said actuaries agree that savings would be realized from his plan.

Further, he said actuaries didn't consider voluntary concessions built into his plan for current employees. Those concessions allow current employees to elect to opt out of taking a lump-sum payment at retirement in exchange for a .5 percent lower contribution rate to their pension and having their pension calculated on a five-year averaging of their highest salaries instead of the current three years.

He estimates that part of his plan could generate as much as $15 billion more in savings.

Grell was grateful the actuarial report reflects what he has been saying in his town hall meetings around the state in selling his plan that it produces some savings.

"This shows how we could fix the whole problem instead of tinkering around the edges," he said.

Gaining support for a pension obligation bond is not the plan's only potential stumbling block. Actuaries pointed out the plan's provision to split excess interest earnings about 4 percent also creates a potential tax qualification issue and may not fly with the Internal Revenue Service, McAneny said.T

Taper the collars to limit the increase in annual pension contribution to provide budgetary relief instead of paying the amount that actuaries say is necessary is another.

Rep. Mike Tobash, R-Schyulkill Haven, who authored a pension reform proposal of his own, said having the state not pay what actuaries say it should, coupled with the borrowing that the plan requires, are unlikely to improve the state's bond rating that was recently downgraded to Aa3 from Aa2.

"Bond rating agencies are not generally in favor of pension obligation bonds and they are really not in favor of not paying what you are supposed to," Tobash said. "The downgrade was based on their belief of the commonwealth's ability and desire to pay down the debt. That's what is problematic about this from my perspective."

Grell defends the borrowing as a way for the plan to win support from public sector unions and shore up the pension funds.

"This is a way for the general fund to make up for the 10 years that these plans were intentionally underfunded," Grell said. "So if it costs the general fund $600 million a year to make up for that and do it in a fixed and disciplined way, I'm okay with that."

Neither the American Federation of State, County and Muncipal Employees Council 13, the largest of the state employee unions, nor the Pennsylvania State Employees Association, the largest of the two state teacher unions, offered a comment about the actuarial report on Grell's plan on Wednesday.

Other pension reform plans that have been offered include one that would simply move most new employees into a 401k-style or defined contribution plan, which actuaries said would cost the state about $45 billion over the next 37 years. A more limited plan that the Senate passed in June would move only elected officials into a 401k-style plan.

Tobash's plan, which so far is Corbett's favorite, proposes a hybrid pension system that combines a limited defined benefit plan with a limited defined contribution plan.

It keeps lower-wage employees in the current defined benefit plan but moves some earnings of the higher-end income employees into a 401k-style plan where they would bear the investment risk. It is estimated to save about $11 billion over 30 years.

Tobash said he still believes his plan is a better path for the state to take in that it changes the pension plan design, lowers the cost to the state, shifts more of the investment risk on to employees, and offers a sustainable pension plan that is fair to employees.

Grell said he doesn't expect the actuarial report on his plan will change the minds of Corbett or House GOP leadership but he sees it as a game-changer for the public discussion about pension reform.

He said it shows "there is a more comprehensive approach out there that yields a much better savings number and actually provides some real relief to our school districts."