The pension reform department of the final state budget talks is aimed toward producing a new benefit plan for future state and public school employees that’s come to be known as a “side-by-side hybrid.”
That’s side-by-side, as in it’s really two distinct pension plans working for the employee from their first day on the job: one part a traditional defined benefit with payouts based on annual salary and years of service; the other a 401(k)-style plan more dependent on the worker’s contributions in and investment choices.
Because Harrisburg is a company town, and government is our company, here’s PennLive’s in-the-moment look at what we know about this issue so far, what’s still being negotiated, and a little about what it may mean for public sector workers and taxpayers in the long run.
Will the basic retirement benefit be cut?
Not for any current employees or retirees.
The change in plan design would affect those workers hired in the future.
For them, the new plan will produce an end-of-career retirement benefit that is lower than what this year’s rookie teachers or first-year water quality analysts have signed on for.
How can Gov. Tom Wolf and Democratic lawmakers agree to this? Aren’t they selling out their public sector union allies?
In a way, yes.
Democrats have consistently said — and the facts appear to bear them out — that pension reforms enacted in 2010 really stopped the bleeding in terms of resetting retirement benefit levels for future employees at sustainable levels.
It’s precisely why the pension reforms proposed thus far by Republicans have generated relatively little in savings from benefit cuts.
But Wolf and his Democratic allies are up against historically large Republican majorities in the state House and Senate, and that means compromise.
If this deal holds up they will likely hang their hats on the argument that the plan they are working on now is better for workers than the one that the governor vetoed in July.
And, according to experts with the Pew Public Retirement Project, side-by-side hybrids have been proven to work well for federal employees since the 1980s, and for about a half-dozen state governments since then.
So how bad is the future benefit cut?
That’s an unknown until the final details — which all sides agreed Wednesday are still a work in progress — are set.
One source familiar with proposals being traded this fall said the finished plan still has the potential to meet standard income replacement goals for career public-sector employees.
With Social Security benefits factored in, that source said, a retiree could expect to get to about 85 percent of his or her retirement-year gross income, a figure that would decline gradually from there since Pennsylvania’s state pension systems don’t give cost-of-living adjustments.
Over the course of retirement, the revised plan plus Social Security should average over 70 percent in replacement income. That would be a benefit cut of about 10 percent from current levels available to new hires, the analyst said.
What’s the big deal then?
First of all, it’s not clear the numbers that projection was based on will be in the final bill.
Senate and Wolf administration sources confirmed Wednesday final employer and employee payroll contribution rates have not been finalized for the 401(k) portion of the new plan, and even small changes there will have huge implications for benefits.
Secondly, state union leaders are irritated that future workers are being forced to accept lower retirement benefits at all.
Benefits for new hires were already rolled back in 2010 to levels in place prior to the fiscally catastrophic retroactive benefit increases enacted in 2001, they argue.
Cutting them further, they believe, is hurting the next generation of workers primarily so Republicans can score the philosophical point of getting a so-called “defined contribution” element into the state’s systems.
But the Republicans say…
The current pension systems need high annual returns on investment to stay solvent, and if the markets turn south it falls on the state and local school districts — aka John and Jane Taxpayer — to fill the hole created by the existing guaranteed benefits.
Market downturns, coupled with the 2001 benefit increases, have created a present-day budgetary nightmare for Pennsylvania with spiking annual pension costs for the state and school districts.
Republican lawmakers and former Gov. Tom Corbett resisted statewide tax increases, only to the see cuts in state aid to public schools and increases in taxes at the local level.
The importance of a 401(k)-style plan going forward, GOP leaders say, is that the future risk is moved away from state taxpayers collectively — a major Republican objective — and shifted to the individual worker.
As Senate Majority Leader Jake Corman put it Tuesday, “If we are going to climb this hill with our pension obligation, which we are, we need to be able to tell our taxpayers this will never happen again.”
What are the savings to the taxpayers who are now bearing the brunt of that 2001 decision?
Again, it won’t be known until the final details are set and actuarial analyses are completed.
Corman, R-Centre County, said this week the Senate Republicans’ proposal would save more than $12 billion in total over the next generation, but his caucus had not released back-up information to support that claim as of Wednesday.
The current plan is not likely to have any budgetary impact in the 2015-16 fiscal year.
How close is this piece to being completed?
It is and it isn’t.
There is agreement to try to hammer out a reform plan on the broad strokes described above, but sources familiar with the discussions say major details still have to settle.
For example, Pew’s Greg Mennis says 401(k) contributions in a side-by-side hybrid should be about 6 percent to produce the desired end result. The ongoing negotiations in Harrisburg are unsettled as to how those contributions in are split between workers and employers.
In addition, some Senate leaders have apparently advanced a plan to refinance the state pension systems’ existing unfunded liability again, in the interest of producing about $170 million in savings for fiscal 2016-17.
That is believed to be a hard sell with Wolf, and some House Republicans, who argue that the best way for the state to turn the corner on this problem is to start meeting its full cost now.
A final thought.
The pension discussions are all taking place in the context of broader talks aimed at getting a global state budget agreement, five months late. Then there’s the matter of whipping up the votes to pass it.
It is not clear yet if the state’s major public sector unions will go to war over the proposed reforms, which will also likely include rules changes on overtime and lump-sum withdrawals of pension system contributions that would apply to current employees.
That could make things even more complicated.
“That’s something we’re going to have to decide,” David Fillman, executive director of Council 13 of the American Federation of State, County and Municipal Employees said Wednesday. “All we can do now is just wait and see what the final framework looks like.”
As several Capitol sources reminded PennLive Wednesday, this is a classic case of “nothing is agreed to until everything is agreed to,” so, stay tuned.
This article was written by CHARLES THOMPSON from The Patriot-News and was legally licensed through the NewsCred publisher network.