Pennsylvania’s General Assembly passed a pension bill Monday to help the state lower retirement contribution costs that otherwise would increase by more than $2 billion in fiscal 2013.
The House approved Senate amendments to the bill, HB 2497, by a vote of 165 to 31. The Senate passed the measure Oct. 14. Outgoing Gov. Edward Rendell is expected to sign the legislation, pending legal review of the bill, according to spokesman Gary Tuma.
Lawmakers hailed the measure as a start to revamping retirement benefits for new employees.
“The pension reform bill lays the groundwork for overhauling state and public-school pensions in Pennsylvania for future employees,” said Johnna Pro, a spokeswoman for Representative Dwight Evans, who is the legislation’s primary sponsor. “We believe the governor will sign the legislation thus allowing the state and Pennsylvania school districts — and by extension the taxpayers — to save tens of millions of dollars.”
The pension initiative also prohibits the state from issuing pension bonds, though there have been no plans to sell such securities to help address Pennsylvania’s unfunded pension liability of $21.3 billion. Selling pension bonds would be uncharacteristic for the state, whichhas no variable-rate debt or derivatives and only sells debt via competitive bid.
The Public School Employees’ Retirement System had an unfunded liability of $15.73 billion as of June 30, 2009. The state is responsible for 55% of that liability, with local school districts picking up the remainder.
The State Employees’ Retirement System had an unfunded liability of $5.59 billion, as of Dec. 31, 2009. The measure re-amortizes the PSERS obligation over 24 years and the SERS liability over 30 years.
Investment gains and losses for the PSERS fund will be calculated over 10 years, rather than the current five-year plan. SERS will maintain its five-year asset smoothing. The state will continue to assume investment earnings of 8%.
The legislation places limits or “collars” on employer contribution increases to both funds, including limits of 3% in fiscal 2012, 3.5% in fiscal 2013, and 4.5% thereafter. Those caps will be in place until the first fiscal year in which the actuarially calculated contribution rate is less than the collared rate.
Without the bill, the fiscal 2013 general fund would need to allocate a combined $3.11 billion for PSERS and SERS contribution payments, up from $1.02 billion the previous year, according to a House fiscal note on the bill. That represents a difference of $2.08 billion.
The PSERS employer contribution rate was set to increase to 28.71% in fiscal 2013 from 10.22% the year before, while the SERS employer contribution rate would have ballooned to 26.71% in fiscal 2013 from 8% in 2012.
With the re-amortization, the combined PSERS and SERS contribution in the fiscal 2013 general fund will increase by $415 million — less than the $2.08 billion increase without the bill — to $1.32 billion. The PSERS employer contribution rate will be 12.22% and the SERS employer contribution rate will be 11.50%.
Lawmakers anticipate the bill will offer near-term general fund savings of $155 million in fiscal 2012, $1.78 billion in 2013, and $1.61 billion in 2014, according to the fiscal note. While the bill helps to ease retirement payments, it pushes more of the unfunded liability to future years.
HB 2497 does include benefit changes for new employees, except for the judiciary. The changes do not apply to existing workers.
New employees will share in investment risk by contributing more if the fund’s actual investment returns fall below projected investment returns. On the other hand, employees will pay less if investment earnings are greater than anticipated. There is a floor and ceiling to the “shared risk” plan — employee contribution rates will not fall below regular contribution rates, and employee payment increases cannot increase by more then 2% to help offset possible investment losses.
The bill increases the retirement age for new employees, raises the vesting period to qualify for a pension to 10 years from five years, and asks new workers to select either lower pension benefits or higher contribution payments.
The bill also creates a new Independent Fiscal Office. It will calculate state revenue projections and anticipated surpluses or deficits, review all tax and revenue proposals submitted by the administration, and analyze the existing sales and use tax.
Many Democratic lawmakers, including Rendell, oppose the new nonpartisan fiscal office as being another cost for the state. The Senate also inserted the new fiscal agency in the pension bill, which Democrats say is unrelated to pension reform.
“The bill is vulnerable to a court challenge largely because language creating an unrelated legislative agency was improperly inserted by the Senate,” Pro said. “We expect there will be a challenge. Ultimately, only time will tell if this bill provides the changes and the savings we so desperately need in the pension systems.”