Pennsylvania's Senate passed a bill to overhaul retiree benefits by shifting state workers and public school teachers hired after 2018 to a new hybrid system.
The Republican-controlled Senate approved the legislation on Monday by a 40-9 vote, following negotiations over the weekend between top lawmakers and Gov. Tom Wolf. The measure will go to the House of Representatives – also GOP-dominated – for concurrence.
Wolf, a Democrat, is expected to sign the measure.
“This pension compromise achieves my foremost goals: continuing to pay down our debt, reducing Wall Street fees [and] shifting risk away from taxpayers, all while providing workers with a fair retirement benefit,” the governor said.
State Auditor General Eugene DePasquale said last week that the Public School Employees Retirement System spent $416 million on fees in 2016, reflecting what he called a pattern of overspending on Wall Street money managers. DePasquale's office is also auditing Pennsylvania's other major state pension plan, the State Employees Retirement System.
Affected by the legislation would be state workers hired after Jan. 1, 2019, and public school teachers hired after July 1, 2019. Current state or school employees, including lawmakers and judges, could opt into the new system for pension credits.
The bill does not cut the benefits for current public employees, lawmakers or retirees.
It appears, though, to barely make a dent in the pension liability.
According to a 131-page actuarial note Milliman Inc. conducted for the legislature’s nonpartisan Independent Fiscal Office, the proposed changes would pare only $1.4 billion from the combined, taxpayer-funded portion of the pension costs through 2050.
Still, the prime sponsor called the measure badly needed.
“This bill has very little impact on today’s budget, but if people were forward-looking back in 2001, we would not be in the position we are today,” Senate Majority Leader Jake Corman, R-Bellefonte, said during Monday’s floor debate.
“This is the medicine we haven’t taken so far for the pain of being sick.”
Then-Gov. Tom Ridge signed a law in 2001 that boosted workers’ pensions by 25%, including retroactively. Underfunding the previous few years, when returns were high, also helped trigger the spiral.
The unfunded liability of SERS and PSERS is estimated at $70 billion. The two manage a combined $78 billion of assets.
That has pushed the commonwealth into the glare of the bond-rating agencies. Moody’s Investors Service, Fitch Ratings and S&P Global Ratings have all cited pension underfunding and budget imbalance in multiple downgrades over the past three years.
Moody’s rates the commonwealth’s general obligation bonds Aa3 with a stable outlook. Fitch and S&P each assign AA-minus ratings with outlooks of stable and negative, respectively.
Critics say the measure -- soft enough and suitable enough for all sides to sidestep a political third rail during an election year while still saying they did something -- doesn't go far enough.
“This is well short of the pension reform we need," said Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow at the Manhattan Institute for Policy Research.
Dreyfuss said the bill's flaws range from too many employee-category exemptions -- State Police, uniformed police and judges, for instance -- to excessive complexity.
Inconsistencies, he added, include an employer contribution of 2% for school employees and 3.5% for state employees for those who select defined contribution rather than the hybrid.
“That’s an employee-relations problem waiting to happen," he said.
During House debate, Rep. John McGinnis, R-Logan Township, is expected to propose shortening Pennsylvania's amortization period from 30 years to 20.
That, however, would require larger appropriations in a state that is scrambling to seal a roughly $1 billion revenue gap -- Pennsylvania's largest since the recession -- for the current fiscal year.