HARRISBURG - Senate Republican leaders plan to introduce legislation soon to put new hires for state government and school district jobs under a defined contribution pension plan similar to 401(k) plans in the private sector.
The pending legislation could be considered Act Two for efforts in recent years to lessen the impact of a costly spike in payments by state and school taxpayers to meet public pension obligations to hundreds of thousands of current and retired state government and school district employees.
This proposal would end the traditional defined benefit plan for those hired after a future date. Defined-benefit plans enable retirees to collect a portion of their salary based on a formula that weighs age, years of employment and their own contributions.
"Without significant changes in the design of Pennsylvania's pension system, including a switch to a defined contribution system, the costs associated with the pension system in the long run will be unaffordable to Pennsylvania taxpayers," said Senate Majority Leader Dominic Pileggi, R-9, Chester, and Sens. Pat Browne, R-16, Allentown, Jake Corman, R-34, Bellefonte, and Michael Brubaker, R-36, Lititz, in a memo seeking bill cosponsors.
The senators said having a defined contribution plan will make pension costs more manageable and allow public employees to enjoy the benefit of market returns and integrate the investment of pension funds with the rest of their portfolio.
Officials hope the cost containment part is addressed in the 2013-14 state budget.
The state is contributing $481 million to the State Employees' Retirement System this year with a $1.7 billion contribution projected by fiscal 2016-17 to meet a wave of retirements. The state is contributing $671 million to the Public School Employees Retirement System this year with a $2.3 billion contribution projected by fiscal 2016-17, according to the state Independent Fiscal Office.
The renewed focus on pensions follows in the wake of a 2010 state law that cut pension benefits for new state and school district employees. The law increases the vesting age to be eligible for a pension from five years to 10 years, for example. This law spreads out the costs of meeting pension obligations over ensuing decades.
But the governor and Corman warned that pensions obligations will still overtake the state's other spending priorities.
"The first thing you have to do is draw a line in the sand. The costs are unsustainable," said Rick Dreyfuss, a Hershey actuary who writes about pension issues.
A spokesman for the teacher-oriented Pennsylvania State Education Association said the pending Senate bill doesn't address existing pension obligations.
"It's important to remember that the current and future increases in pension costs to the Commonwealth and school districts were brought on by 12 years of employer underfunding, combined with investment losses from two historic recessions," said PSEA spokesman Wythe Keever. "Changing future hires into a defined contribution system won't erase that debt."
The emergence of the Senate bill has led to speculation about a third act: tackling existing pension benefits for current employees and retirees.
State officials and pension fund managers have said that Pennsylvania can't legally reduce pension benefits for current and retired employees because the state Constitution and case law define them as a contract between the state and its employed that can't be impaired.
But one theory suggests the contract definition may not apply to pension formulas and benefits not yet earned.