The package proposed by Gov. Tom Corbett to address the state's more than $40 billion pension debt leaves 386,000 state employees and teachers wondering how it will change their retirement income.
Specific answers aren't easy to come by because of the complexity of the changes and the uncertainty over whether there is legislative support for some or all of the proposals.
There is uncertainty for school districts as well, as they prepare preliminary budgets without knowing precisely what their state funding will be, given that the governor tied his education funding proposal to getting approval of his pension package.
But a few things are certain under the governor's proposal: The changes wouldn't affect the pension of current retirees and would not take away benefits already earned by current employees. If enacted, the proposed changes won't take effect until Jan. 1, 2015 for state employees and July 1, 2015 for school employees.
That means they likely would have the greatest effect on those furthest from retirement.
The proposal is aimed at two pension plans: the Public School Employees Retirement System, known as PSERS, and the State Employees Retirement System, known as SERS.
Alarm since last week's announcement has prompted employees to call their pension systems and unions to ask how they will be affected. Both pension plans have posted announcements on their websites telling members that they don't have enough information yet to answer their questions.
"Part of the problem is a lot of people are really reacting as if they have to rush out and make a decision, and we've been trying to calm them down," said Jim Buckheit, executive director of the Pennsylvania Association of School Administrators.
"What people have to realize is nobody has to make any rash decision right now."
Changes on deck
Among the proposed changes for current employees is a reduction in the multiplier used to calculate pension benefits from 2.5 to 2.0.
In addition, the number of years used to determine an employee's final salary would be changed from the highest three years of compensation to the last five years of compensation.
All new employees would be placed in a 401(k)-type defined contribution plan. New SERS members would be required to contribute 6.25 percent of their income and new PSERS members 7.5 percent to the defined contribution plan. The employer contribution would be 4 percent. In the case of school districts, 4 percent would be split between the state and the district.
Two additional changes involve capping pensionable income at the Social Security wage base, which is $113,700, and capping pensionable income at 110 percent of the average salary of the four years prior to retirement. School superintendents and other top administrators likely would be affected by the proposed Social Security wage cap, as would state employees whose salaries are higher than the cap.
The 110 percent cap was put into place to prevent a practice known as "spiking" or artificially increasing an employee's wages during the final years of service through extraordinary overtime or extra-duty compensation.
Also proposed by the governor is a change to increase the penalty that employees experience when they take a lump sum of their contributions upon retirement.
The $41 billion pension debt was created by several factors that include the Legislature's decision to increase benefits in 2001 when the funds were more than 100 percent funded but just before the investment market crashed in the wake of the Sept. 11 terrorist attacks and the collapse of the dot.com industry.
The benefit increase was followed by years of poor returns on investments, which make up 71 percent of the fund, and contributions from the state and employers that were well below what was necessary.
However, state employees and teachers continued to make their required contributions.
To address the spiraling debt, the Legislature in 2010 approved Act 120, which initially lowered employers' pension contributions, which were on the verge of a significant spike, but created a lengthy period of escalating pension contributions by employers and the state until the debt eventually would be paid off around 2045.
While union officials and some legislators have argued that Act 120 should be permitted to run its course, supporters of the governor's plan say Act 120 does not shift the investment risk of pensions from the state to the employee as the governor's proposal does.
Jay Pagni, a spokesman for the governor's budget office, said Mr. Corbett's plan, like Act 120, calls for initially lowering pension contributions from the state and employers, starting with 2013-14, but then shows an increase in the contributions. The lowered contributions would save school districts about $140 million in 2013-14.
The long-term cost savings in the two pension systems that would be created from the reforms -- projected to be $200 million to $300 million annually over a nearly 20-year period starting in 2016 -- would be enough to pay off the debt in about the same time as Act 120. However with the governor's plan, all new employees would be shifted to a defined contribution plan, which takes funding responsibility away from the state.
There are 310,000 retirees drawing pensions from the SRS and PSERS plans. There are 386,000 active employees. Of the retirees, 195,000 are school employees as are 279,000 of the active employees.
"This is not about attacking the pension plan, it's about preserving it," Mr. Pagni said.
The governor's plan assumes a 7.5 percent return on investments, which is the same assumption used in the Act 120 payment plan, Mr. Pagni said.
Unions cite unfairness
Officials of both the Pennsylvania State Education Association and AFT Pennsylvania released statements earlier this week that it is unfair to make employees pay for the debt out of their future pension earnings, particularly because they made their required contributions during years the state and school districts did not.
PSEA president Mike Crossey said his union would take legal action against any changes to the benefits of current employees, maintaining they are protected by the state constitution.
"The governor's pension plan is unconstitutional, unpopular and incomplete. In fact, the system he has proposed would actually cost more to operate than the systems we have now. The Pension Reform Law of 2010 helped solve this problem. The governor's proposal will just make it worse," said PSEA spokesman David Broderic.
However, Stuart Knade, interim executive director of the Pennsylvania School Boards Association, told school officials gathered at a legislative session Thursday at the Allegheny Intermediate Unit that "it's widely believed" that changes can be made to current employees' future benefits while still complying with state law. He said he concurs with that opinion.
He said the PSBA will draft its own pension proposal for consideration. The PSBA supports changes to benefits and contributions of new school employees and current employees' future service.
Mr. Buckheit said his members realize the importance of reforming pensions because of escalating costs, but know that doing so affects their future pension benefits.
"Where things are heading would require such huge cuts in education funding to pay the pension liability, I think people understand that we have to make some reasonable compromises," Mr. Buckheit said.
Jay Himes, executive director of the Pennsylvania Association of School Business Officials, said his organization has not taken a position on the governor's pension proposals because it is still under review. But, he said PASBO supports some type of pension reform.
"We believe the circumstances are of such significance that we need to have immediate savings so you would have to include future benefits for current employees. I think they have a recognition that is far more important than their personal interests at this point," Mr. Himes said.
However, he said, his members did not anticipate the Social Security wage cap. He speculated that if it is adopted, school districts would have to provide superintendents and other top administrators with supplemental benefits at the district level to attract professionals to the positions.
An employee case study
While there aren't a lot of hard and fast numbers to explain how the changes would affect individual employees, the state budget office offered one example.
It describes a SERS member who has 20 years of service before the effective date of the proposed changes and then works 10 years after the changes. If the employee were to retire at age 60 with 30 years of experience, a final average salary of $50,000 under current calculations would be $47,000 under the governor's reforms. The resulting pension would decrease from $37,500 under the current method to $34,400 under the proposed one.
At the AIU forum, state Sen. Jay Costa, D-Forest Hills, said there is some support among his Democratic colleagues in the Senate for some of the changes the governor is proposing, but opposition to others.
He predicted it was unlikely the Legislature would change the multiplier used to calculate pensions but said there appears to be strong support for placing new hires in a defined contribution plan.
However, he repeated a contention earlier voiced by teacher unions that moving new employees to a defined contribution system would take their contributions out of the current system -- a move that could make it harder to support those in the current system.
Mr. Costa also said it's possible the lump sum change could have some support as well as the "anti-spiking effort."
But he said his caucus worried that lowering the employer contribution rates would extend the length of time to pay off the pension debt. He said his caucus wants to "allow Act 120 to do what it was supposed to do."
"We might see some of the more modest changes, but not the whole scale, particularly for workers who know they paid their contributions," Mr. Costa said. "It's quite frankly our fault. We have not properly funded the system and we should take responsibility."
Democratic state Rep. Harry Readshaw told the AIU audience the governor's budget proposal is the beginning of the process and that the real work on the state budget will be done in negotiations and discussions in the Legislature.
"The governor's presentation is a starting point," Mr. Readshaw said.state
Mary Niederberger: firstname.lastname@example.org or 412-263-1590.