House Co-Sponsorship Memoranda

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House of Representatives
Session of 2013 - 2014 Regular Session

MEMORANDUM

Posted:	September 27, 2013 02:51 PM
From:	Representative Glen R. Grell
To:	All House members
Subject:	Pension Reform

As many of you know, I have been working on pension reform issues over the last several years. Throughout our summer recess, I have had the opportunity to study this issue further and to consult with House and Senate members; the Governor’s Office; our two public pension systems, PSERS and SERS; the Public Employee Retirement Commission; actuaries; taxpayers; state and school employees; investment bankers; academics; business groups; legislators and interest groups from other states; and a large and diverse group of Pennsylvania stakeholders.

As a result of these efforts, I plan to introduce in early October two bills to provide a more comprehensive approach to dealing with our $45 billion unfunded liability. The first bill will amend the PSERS and SERS Codes to establish a cash balance plan for new employees who begin service after January 1, 2015 (SERS) or June 30, 2015 (PSERS), and to propose modest modifications for current members of these systems in exchange for an adjustment to the required employee contribution rate. The second bill will authorize a limited borrowing in the event such modifications and adjustments can be accomplished, as an effective means to address the unfunded liability which currently threatens the stability of both systems.

I believe these proposals will enable us to reach a number of important goals:

We will offer a reasonable and sustainable retirement benefit for new and current members of both systems.
We will provide protection to employers and the public by moving to an investment risk paradigm away from the current defined benefit system in which the employer bears 100% of investment market risk.
We will avoid the transition costs that could accompany closing the existing DB plan for a switch to a defined contribution plan.
We will reduce the unfunded liability of PSERS and SERS on a firm schedule and in a systematic and fiscally responsible manner.
We will send a positive message to the bond rating agencies as to the viability and stability of both systems.
We will provide current members with an opportunity to opt-in to minor plan modifications in exchange for a reduced employee contribution rate, ensuring that we will not be faced with a constitutional contract impairment challenge.
We will offer savings to school districts through tapering the projected increases in employer contributions under the existing Act 120 rate collars.

Please join me in sponsoring this comprehensive approach to address our pension funding issues. Please contact my Capitol Office at 783-2063 if you have any questions.

Document #1

Description:	Bill #1 – Comprehensive Pension Reform (SERS and PSERS) The key factors under the first proposal are: New Plan Design (“shared risk”) -- New members of both systems would be enrolled in a “cash balance plan”, under which they would contribute 7% of salary; employers would contribute 4%, which would increase to a 5% employer contribution for employees who remain in the systems for 15 years or more. These contributions would be professionally managed and invested by PSERS and SERS, with a 4% guaranteed rate of return, with any amount earned over the funds’ assumed rate of return to be split equally between the employee and the system. Current active members of the defined benefit (DB) plan would be offered a lower employee contribution rate (at present, it is 6.25% for SERS members and 7.5% for PSERS members) in exchange for agreeing to the following modifications: an adjustment to the current “Option 4” lump sum withdrawal, in order to make it actuarially neutral; and a change to the “final average salary” calculation so that it will encompass the five highest salary years, rather than the current three highest years. This consensual (rather than unilateral) change would ensure that constitutional contract impairment issues would not arise. Existing Retirees (and employees retiring before or within 2 years of the effective date) would not be affected by any provisions of the bill. Public Officials will be subject to all provisions of the bill.

Document #2

Description:	Bill #2 – Borrowing Authorization to support Pension Reform legislation In order to make up for the approximate 10 years of Commonwealth underfunding of both plans, the second proposal would take a portion of the $45 billion unfunded liability and authorize General Fund borrowing in two steps, over a two or three year period. This is similar to how we recently addressed the Commonwealth’s unemployment compensation debt to the federal government. In the first step, up to $3 billion could be borrowed (up to $2 billion for PSERS and up to $1 billion for SERS) and amortized over 24 years. In the second step, up to $6 billion could be borrowed (up to $4 billion for PSERS and up to $2 billion for SERS), similarly amortized. The maximum amount to be refinanced would be $9 billion of the $45 billion unfunded liability. The actual amount of the borrowing would depend on the number of current DB members who opt to accept the Option 4 and final average salary modifications to their retirement benefits in exchange for a decrease in the amount they must contribute in each paycheck.