Pension reform doesn't go far enough

There is no question that the elephant herd in the room is public pensions. By some estimates, the state needs about $6 billion to fully fund the pension system, which has fallen further and further into debt.

State legislators have anguished session after session and wrangled over how to fix this major problem, which, by the way, is of their own making, but, so far, no workable solution has been found.

Last month, the state House of Representatives passed a bipartisan hybrid pension reform bill (Senate Bill 1071) by a vote of 136-59. The bill modifies the action taken earlier by the Senate, so the amended bill now goes back to the Senate where its fate is uncertain. Gov. Tom Wolf indicated that he would sign the House-passed bill as is.

The House bill protects the benefits earned by current employees and retirees while meeting the state's legal obligations to the retirement systems. The changes to the public pension systems will apply only to future state and school employees, who first begin service in 2018.

Senate Majority Leader Jake Corman, R-Centre, said there's little chance his Republican caucus will accept the House-passed plan as is, but he promised good-faith negotiations. Senate Republicans say their plan offers better long-term protection to taxpayers in the event of a recession, which would decrease pension fund returns.

Sen Mike Dobash, R-Schuylkill, authored the House version with these provisions:

• 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.

• 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 exempt 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. This means, for example, that a worker who hits age 57 with 35 years of service can retire with no pension penalty.

This bill is a good start, but it does not go far enough. To solve the state's fiscal dilemma, the system needs to be revamped completely so that the defined benefit portion of the proposed legislation is eliminated and future employees would contribute to their retirement fund, with an employer match only, just as most other Pennsylvania employees do. The days of defined benefit plans for public employees must be put into the rearview mirror. Taxpayers cannot afford the staggering liability.

Political observers said that lawmakers and then-Gov. Tom Ridge made a critical error in 2001 by granting excessive and retroactive pension benefit increases to themselves and all public school employees and state workers.

If that wasn't enough, lawmakers delayed making payments on the much higher pension costs to avoid tax increases. Not surprisingly, the chickens have come home to roost, because the state's employer contributions jumped from under $1 billion in 2010 to an expected $6 billion by June 30 of this year.

While both the Senate and House bills promise huge savings in the next 20 years, it will not be enough to right the imbalance in the pension fund. The only reasonable and practical way to do this is to eliminate the defined benefit plan of the proposal entirely starting with new employees in 2018.

We agree that no current employee should be impacted by any changes, because that would just not be fair.

By Bruce Frassinelli | tneditor@tnonline.com