Pension reform strikes right balance on benefits, predictability

(R., Centre) is majority leader of the Pennsylvania Senate

(R., Lehigh) is chairman of the Senate Appropriations Committee

For more than a decade, Pennsylvania's pension crisis has inflicted severe wounds on schools and taxpayers alike.

The commonwealth's contributions to school district pensions increased from $290 million to a whopping $2.1 billion in the last 10 years - a 618 percent increase. The result has been a crowd-out effect for tax cuts or other areas of state government where we would like to invest money - such as education. Consider that the proposed 2017-18 state budget includes $100 million in new money toward education, while the increase in the pension payment for school districts is $144 million.

Under Senate leadership, the General Assembly took historic action this past week to restructure the state's two public employee pension systems, which we believe will lead to a stronger pension system, budget stability, and taxpayer relief. The Pennsylvania School Boards Association has already said the plan provides the "stability our school districts have been calling for and need."

The legislative action is significant not only for how it restructures the retirement system for state employees and teachers, but for how it looks to the future instead of simply dealing with the challenges of the day. According to an analysis by the Pew Charitable Trust, the plan awaiting the governor's signature helps "ensure the commonwealth's retirement system is sustainable and secure for both taxpayers and public workers for decades to come."

Almost 10 years ago, the economy took a severe downturn that resulted in the state pension systems' losing $30 billion in value. Because the systems provide a defined benefit for workers, taxpayers are responsible for making up that difference.

The restructured pension system removes these risks in the future from taxpayers. Outside analysis suggests that the plan could shield taxpayers from billions in additional costs if investment returns by the pension systems continue to fail to meet projections.

For example, this plan would save taxpayers $13 billion if the investment return missed the mark by just 2 percent over the next 30 years. Looking further down the road, when every retiree is in the new system, these reforms would save taxpayers $43 billion. On the flip side, employees share in the benefit if the returns exceed expectations.

Outside analysis also estimated that the restructured pension system would save more than $5 billion due to the structural changes to the systems and their effect on the unfunded liability. An additional savings of up to $3 billion is projected in terms of reduced costs and fees for investment management. All of that is why Pew also called our action "the most comprehensive and impactful reform any state has implemented."

Under the new plan, current retirees will see no changes to their benefits. New employees, including lawmakers, will choose between three retirement options, including a full 401(k)-style plan or one of two hybrid plans that include both a smaller traditional pension and a 401(k)-style option. Current employees and lawmakers could opt into one of these plans as well.

One of the plan's most vital components is the embrace of portability, ensuring that employees can take their benefits with them if they choose a different career path. The current system is designed to benefit those who stay 30 years or more, but more than 75 percent of teachers and more than half of state employees leave their job before they reach 20 years of service. In fact, 47 percent of state workers left with less than 10 years of service in 2015. For teachers, that number was 61 percent in fiscal year 2015-16. Only 36 percent of new Pennsylvania teachers are expected to vest in the pension system.

Critics say this plan does not do enough to pay down the debt. But paying down the debt would mean a significant tax increase with negative economic impacts or changing the pension benefits for current employees. What critics fail to understand is that the Senate plan is designed to prevent future debt from amassing and to keep liabilities from growing to the point where they crowd out funding in other important areas of the budget. Instead of treating the symptoms, this plan is the medicine that reforms the system and makes the state fiscally healthier.

Public employees are important to the commonwealth and in our lives. We want good people to enter public service and thrive. Part of the challenge in modernizing Pennsylvania's pension system is finding the balance that provides realistic and competitive retirement benefits for employees while maintaining predictability and stability in our commonwealth and school district budgets. This bill accomplishes both of these goals.

@JakeCorman jcorman@pasen.gov

@SenatorBrowne pbrowne@pasen.gov