Pension Reform Update


As June 30 approaches, the likelihood of an on-time balanced budget remains a question. And while there are many factors contributing to the commonwealth’s grim fiscal situation, there has been a lot of talk as of late about “pension reform.” Gov. Corbett has stated that he will end his streak of on-time budgets in order to find a solution to Pennsylvania’s pension problems.  But how did we get into this pension plight in the first place? A little background may be in order.

Pennsylvania has two state-administered pension systems: the State Employees Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS). Commonwealth employees and public school teachers who participate in the respective pension systems contribute a portion of their salary to their pension system; employers are also supposed to make a contribution on behalf of each employee. At the time of their inception, the pension systems were designed to be predictable, if nothing else.

However, a series of events over the last decade or so has left the pension systems with a rather large unfunded liability, meaning that they do not currently have enough money on hand to pay out the retirement benefits that current employees are due. The downturn in the investment markets from 2000 to 2002 is one such factor, as is the global economic crisis of 2008. Additionally, members’ benefits were increased in 2001, and cost-of-living adjustments were made in 2002. At the same time, investments made by the pension systems were realizing such great returns that the commonwealth chose to take a “pension holiday” with legislation assuming that returns on investments would be enough to cover what the state’s regular contribution.

The most recent round of legislative attention on the issue of pension reform was in 2010. That year, the General Assembly enacted the Pension Reform Act in an attempt to curb rising pension costs. Reforms included increasing the retirement age, reducing benefits for new employees and extending the vesting period. The good intentions, however, weren’t enough to ward off what this year has become the pension’s most significant deficit yet –$47 billion dollars.

In conjunction with this year’s annual state budget, Gov. Corbett has stated made it clear that he doesn’t intend to sign a state budget until the pension crisis is addressed.  But how? There are several possible fixes being floated, with Rep. Mike Tobah’s (R-Schuylkill) “hybrid” pension proposal receiving the most media attention right now. The highlight of the proposal is that new state employees would be required to enter into a system similar to a 401(k). This process would begin once an individual has worked for 25 years or reached $50,000 in salary. According to the Public Employees Retirement Commission, Tobash’s plan would save taxpayers nearly $11 billion over the next 30 years. Opponents of the Tobash Plan are mainly concerned with the lack of immediate effect on Pennsylvania’s current economic situation.

Rep. Glen Grell (R-Cumberland) has also put forth a proposal with three main components: the use of bonds to pay down the pension debt, moving new employees into a cash balance plan and lowering pension benefits. Another proposal by the Senate Democrats relies mainly on a bond issue to pay down the pension debt.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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