October 18th - Pension Bill HB 2497

State Senate OKs bill overhauling school pensions

Modified measure must go back to House for approval

Friday, October 15, 2010

By Tom Barnes, Post-Gazette Harrisburg Bureau

HARRISBURG -- A measure touted as a "reform" for financially stressed state and school district pension systems easily passed the state Senate Thursday, but the battling over the measure is far from over.

Read more: http://www.post-gazette.com/pg/10288/1095345-454.stm#ixzz12SwjxPtI

The following summary was received from Senator Greenleaf’s office:

Senate-Approved Pension Reform Measure (House Bill 2497)

Summary of Pension Revisions

Actuarial Funding Methodology Changes

• Re-amortizes all Public School Employees’ Retirement System (PSERS) actuarial accrued liabilities over a 24 year period and State Employees’ Retirement System (SERS) actuarial accrued liabilities over a 30 year period.
• Changes the asset smoothing period in which investment gains and losses are recognized for PSERS from 5 to 10 years. SERS asset smoothing period remains at 5 years.
• Funds any increases in PSERS and SERS accrued liability enacted by new legislation over a 10 year period, using level percentage of pay methodology.
• Imposes collars on the rate which employer contributions may increase each year over the previous years’ rate for PSERS and SERS. The collars are set as follows: for FY 2011-12, 3%; FY 2012-13, 3.5%; and, FY 2013-14 and each year thereafter, 4.5%. When the actuarially required contribution rate is less than the collared rate, the rate is to be set at the actuarially required contribution rate and the collars will no longer apply.
• Prohibits the use of pension obligation bonds to fund liabilities.

Shared Risk Defined Benefit Plan

·         Establishes a new “shared risk” defined benefit plan for all new members.

o   Every three years, this plan compares PSERS and SERS actual investment rate of return to the actuarial assumed rate of return for the previous ten years.

o   If the actual rate of return is less than the actuarial assumed rate by 1%, the employee contribution rate is increased by 0.5%. Conversely, if the actuarial assumed rate is greater than the actual rate by 1%, the employee contribution rate is decreased by 0.5%.

o   The employee contribution rate never drops below the regular contribution rate and the employee rate may not increase by more than 2%.

Benefit Changes: For New Employees Only

• Rollback of benefit enhancement enacted by Act 9 of 2001 for new employees only. The new retirement benefits become effective for new PSERS employees effective July 1, 2011, and for new SERS employees (effective December 1, 2010 for legislators and Jan. 1, 2011 for other members).
• New Membership Class 1: Reverses the 2.5% accrual rate multiplier benefit for all new employees to 2% of pay (Pre-2001 benefit level) and maintains the current employee contribution rate (Post 2001 level) which helps provide more funding to the systems. For PSERS, the rate is 7.5%. For SERS, the rate is 6.25%.
• New Membership Class 2: Allows for new members to elect the current 2.5% accrual rate multiplier while requiring a higher employee contribution rate so that the enhancement is cost-neutral. For PSERS, the rate would be 10.3%. For SERS, the rate would be 9.3%.

·         Increases the vesting period for new PSERS and SERS members from 5 to 10 years.

·         Increases the superannuation eligibility requirements for new members to a “rule of 92” with 35 years of credited service. The “rule of 92” is calculated by adding the members age and number of years of service. *(PA will have one of the strictest full-retirement standards in the country.)

·         Superannuation eligibility for classes of employees (i.e., legislators) who presently superannuate at 50 years of age will increase to 55 years of age.

·         Eliminates Option 4 “lump sum payout” upon retirement for new PSERS and SERS members.

·         Requires creditable non-school/non-state service to be purchased at the full actuarial cost, except for intervening military service.

·         Limits a new member’s annual retirement benefit to no more than 100% the member’s final average salary.

Senate Appropriations Committee Fiscal Note

Long Term Fiscal Impact of Pension Changes

• According to the Public Employee Retirement Commission (PERC) the combined effect of the changes made by House Bill 2497 to PSERS and SERS will result in $2.859 billion in employer costs savings through FY 2043-2044. Specifically, $1.382 billion in savings to PSERS and $1.477 billion in savings to SERS.
• Assuming that 55% of PSERS and 50% of SERS employer costs accrue to the General Fund, savings to the General Fund are estimated to amount to $1.499 billion. Assuming that 50% of the SERS employer costs accrue to other state funds, such as the Motor License Fund, savings to the other funds are estimated to amount to $738.5 million. School districts will realize the remainder of the PSERS savings which are estimated to amount to $621.9 million.
• Additionally, PERC provided information in its actuarial note showing the cost containment and benefit reduction changes made by the Senate Finance Committee in the current version of the bill save $32.979 billion in employer costs when compared to version passed by the House of Representative in June.

Short Term Fiscal Impact of Pension Changes

• The changes made by House Bill 2497 which re-amortize PSERS and SERS actuarial accrued liabilities, increase the asset smoothing for PSERS and impose collars on employer contribution rates will defer current liabilities, result in reduced employer contribution rates in the short-term and avoid the projected employer contribution rate spike.

Miscellaneous Provisions Fiscal Impact of Pension Changes

• The benefit changes made to new member benefits that provide for the “shared risk” defined benefit plan, decrease the annual benefit accrual rate from 2.5% to 2%, and increase vesting from 5 years to 10 years will have the effect of increasing the employees’ share of pension costs and reducing the cost to employers in the future as new members enter PSERS and SERS.
• The optional 2.5% benefit accrual rate for new members should not increase employer costs because the increased employee contribution requirement for PSERS of 10.3% and for SERS of 9.3% are projected to cover the costs related to the enhanced benefit.
• The benefit changes made to new member benefits which eliminate the Option 4 “lump sum” withdrawal, change superannuation eligibility to a “rule of 92” with 35 years of service, require creditable non-state service to be purchased at its full actuarial value and eliminate the purchase of non-qualifying part-time service will result in actuarial gains for both PSERS and SERS.