Gov. Tom Corbett's proposed pension reform package, which calls for new employees to be enrolled in a 401(k) and current employees to see some changes in the way their pensions are calculated, is being met with fierce, but predictable opposition from state teacher unions.
The governor maintains his proposals, which include lowering a multiplier used to calculate the pensions of current employees, will stanch the bleeding of the pension debt, which now hovers at around $41 billion, and shift the liability for pensions away from the state in much the way corporate America has done.
Without the pension reform, the governor said, deep cuts eventually will have to be made to the general fund budget and core programs and services in the state.
But critics say the plan puts the burden of paying off the debt solely on the backs of employees who have made their required contributions to the plans even during years when the state and employers, in many cases school districts, did not.
"Teachers and other school and state employees didn't cause the pension problem, but under the governor's proposal current and future state employees will pay for the mistakes that others made with significantly reduced pensions," said AFT Pennsylvania executive vice president Rosemary Boland, whose union represents teachers in Pittsburgh and Philadelphia.
Any changes proposed for current employees would require approval by the state Legislature and are certain to be met with legal challenges by union officials who maintain that pension benefits for current employees are protected by the state constitution.
"We will file suit without blinking an eye," said Mike Crossey, president of the Pennsylvania State Education Association, the state's largest teachers union.
Other changes proposed for current employees include lengthening from the final three to final five years of services to determine an average salary for retirement and a larger financial penalty for employees who take a lump sum of their contributions to the plan upon retirement. The multiplier change would see it reduced from 2.5 to 2.0 unless employees want to make higher contributions to get the higher multiplier.
There are two public pension systems that would be affected by the reform proposal -- the Public School Employees' Retirement System and the State Employees' Retirement System. The SERS plan is 65.3 percent funded, and the PSERS plan is 69.1 percent funded. The combined debt of the two systems is $41 billion but is projected to increase to $65 billion within several years.
The debt was created by several factors, including an increase in benefits that was given by the Legislature in 2001 when the two funds were flush with money and funded at more than 100 percent. That increase was followed by years of poor return on investments and contributions from the state and employers that were well below what was necessary.
In 2010, the Legislature approved Act 120, which was aimed at addressing the debt with a lengthy period of escalating pension contributions by employers and the state until the debt would eventually be paid off around 2045. Act 120 was created to avert a significant looming hike in pension contributions by employers and the state.
Under Act 120, the contribution rate for the state and school districts for 2013-14 is 16.75 percent, a 4.5 percent increase from the current year.
However, the governor has proposed reducing those contributions to a 2.25 percent increase or to 13.75 percent. The contribution would then be increased half a percentage per year until it reaches 4.5 percent or an amount equal to the required contribution rate.
While the reduction infuriates union officials, the governor's office said it would save the state $2 billion over the next five years and schools districts more than $1 billion in the same time frame, including $140 million in 2013-14 alone.
"That is money that can be used for programs and services," said Jay Pagni, a spokesman for the governor's budget office.
Nina Esposito-Visgitis, president of the Pittsburgh Federation of Teachers, said the governor's plan is flawed in that it does not address repayment of the debt and it punishes current members of the system, who maintained their required contributions to the plan even during years when the state and districts did not.
"This is not a sustainable plan for the system, and the taxpayers are going to be hurt in the end," Ms. Esposito-Visgitis said.
Union leaders have argued that switching new employees from the current defined benefit plan to a defined contribution plan will take their contributions out of the current system causing further underfunding.
But Mr. Pagni said the governor's plan would pay off the debt in roughly the same amount of time as Act 120 when cost savings from the reforms is factored in. And, more importantly, it will move the responsibility for pensions away from the state and onto the employee.
Under the proposal, new SERS employees hired after Jan. 1, 2015, and new PSERS employees hired after July 1, 2015, would be required to join a defined contribution plan, or 401(k). SERS employees would be required to contribute 6.25 percent while PSERS employees would be required to contribute 7.5 percent.
"What we are doing is shifting the risk. The defined benefit plan put the risk on the government with the commonwealth still on the hook. With the defined contribution plan it is on the employee," Mr. Pagni said.
Union officials aren't the only ones questioning the governor's plan.
"We remain skeptical that his proposed pension reforms will solve the financial issues surrounding state employee and teacher retirements systems," said Patrick Mannarino, North Hills School District superintendent.
Mary Niederberger: email@example.com or 412-263-1590.