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TO:

House Democratic Members and Interested Parties

FROM:

Rep. Joseph Markosek, Chairman

SUBJECT:

SB 1071 (PN 1913) as amended by A#10803

DATE:

October 25, 2016

We have worked very hard to get ahead of the Republican pension reform proposal that has been
talked about. Its a bad idea, no matter its shape, and I am attaching a document that explains why
and will help you talk about this important issue with stakeholders, constituents and reporters.
The first part of the document, a Memo from the Chair, explains the intricacies of the expected
amendment to Senate Bill 1071. The second part of the document holds your talking points.
This document is fluid and we will continue to keep you updated as changes occur.

SB 1071 (PN 1913) as amended by A#10803


Overview of Proposal:

New Plan Design: The complex plan design offers future (new) hires the option of three (3), newly established
retirement plans. Two of the plan types are slightly different side-by-side defined benefit/defined
contribution hybrid plans and the third plan type is a 401k-style defined contribution plan. The following table
outlines the contributions made by the employer and employee as a percent of salary. It also reflects the benefit
replacement relative to the current law for new hires.

House Appropriations Committee (D)

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SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 1 of 7

Current Law
Act 120
SERS
PSERS

Option A (default)
Hybrid 1.25%
SERS
PSERS

Option B
Hybrid 1%
SERS
PSERS

Option C
DC Only
SERS
PSERS

Employee -- Defined Benefit


Employee -- Defined Contribution
Employee -- Total Contribution

6.25%
6.25%

7.50%
7.50%

5.00%
3.50%
8.50%

5.50%
3.00%
8.50%

4.00%
3.50%
7.50%

4.50%
3.00%
7.50%

7.50%
7.50%

7.50%
7.50%

Employer -- Defined Benefit*


Employer -- Defined Contribution
Employer -- Total Contribution
Defined Benefit Accrual Rate
Benefit Replacement vs. Act 120

4.52%
4.52%
2.00%
-

2.97%
2.97%
2.00%
-

1.88%
2.00%
3.88%
1.25%
82%

0.68%
2.00%
2.68%
1.25%
76%

1.70%
2.00%
3.70%
1.00%
70%

0.62%
2.00%
2.62%
1.00%
65%

3.50%
3.50%
50%

2.00%
2.00%
37%

*Normal cost only

Effective 2018: January 1 for SERS; July 1 for PSERS.


Exemptions: State Police, Corrections Officers and other hazardous duty personnel from participating in the
new hybrid plan (approximately 30 percent of SERS active membership); however, the amount of voluntary
overtime that may be included in the retirement benefit is limited to 10 percent of salary or wages earned.
o Note that for State Police, they do not participate in Social Security and the DiLauro award still applies
for PSP members accruing 20 or more years of service.
o Future judges would be in the plan, however it would be expected that this aspect of the proposal
could be challenged in court as an infringement of a unified judicial system.
Reduces Benefits: The benefit for future employees is reduced by roughly 20 to 35 percent by the hybrid
options and by 50 to 60 percent by the defined contribution option. This is in addition to a 20 percent reduction
made by Act 120 (2010). Labor market experts indicate that implementing a private sector style retirement plan
could have labor market implications and potentially put upward pressure on salary & wages.
Creates a 401(k): Sharply reduces retirement benefits and adds a 401(k)-style component to the retirement
plan. Satisfies the Republican majoritys requirement that a portion of an employees retirement benefit be
funded in part with a defined contribution benefit.
Complicated. Pension experts have indicated that this would be one of the more complicated plan designs in
the country.

Key Takeaways:

Unfunded Liability: The proposal will not pay down the unfunded liability any faster than the status quo (Act
120). Approximately 70 percent of todays unfunded liability resulted from policy decisions (Acts 9 & 40).
Long-Term Savings: All savings are generated from cuts to benefits and are estimated to save $1.9 billion
over 30 years on a cash flow basis and these savings are largely generated twenty years from now, when the
unfunded liability is fully paid. Over the next 10 years, the proposal will cost $337 million more than under
current law.
Short-Term Budget: The proposal will not generate any savings in 2018, however will generate $22 million in
budgetary savings for employers through 2022. These savings are quickly eliminated by the immediate, up-front
agency costs of roughly $19 million ($7 million PSERS and $12 million for SERS) and second year costs of $9
million ($5 million PSERS and $4 million SERS).
Retirement Benefits Reduced by roughly 20 to 60 percent, as compared to Act 120:
Hybrid 1%
DC Only
Hybrid 1.25%
PSERS
SERS
PSERS
SERS
PSERS
SERS
-24%
-18%
-35%
-30%
-63%
-50%

House Appropriations Committee (D)

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SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 2 of 7

Employee Contributions are Significantly Increased


Hybrid 1.25%
Hybrid 1%
DC Only
PSERS
SERS
PSERS
SERS
PSERS
SERS
13%
36%
0%
20%
0%
20%
Constitutional Implications: The proposal permits current, post-Act 120 members to receive an actuarially
neutral Option 4 benefit as well as participate in the shared-gain risk provision. Because these benefits are an
improvement upon the current benefit, contract impairment issues are unlikely to be a major issue.
School District Impacted: It is expected that each school district will incur significant up-front costs to
implement the changes, but have not yet been estimated.
Newly Created Commission: Five party commission intended to perform and publish a study. A10803
provides this authority to majority and minority leaders.

Plan Details:
Retirement Age
Vesting

Option 4
Final Average Salary
Disability & Death
Benefits
PSERS Healthcare
Premium Assistance
Shared-Risk /
Shared-Gain
Footprint Rule
Independent Legal
Counsel
Boards
Newly created
commission
Investment
Restrictions
Higher Education

Age 67 for both systems. Rule of 92 eliminated.


Defined Benefit Component: SERS will remain the same at 10 years and reduced
to 5 years for PSERS members.
Defined Contribution Component: 3 years for the employer contribution and
immediately for employee contributions
If participants in the hybrid plans withdraw contributions, the benefit offered will
be actuarially neutral. Provides this option to current post-Act 120 members.
Calculated using five years of salary including overtime, increased from the current
three years final average salary calculation. Volunteer PSP overtime compensation
for new hires is capped at 10% of salary when calculating the member's annuity.
Eligibility and benefits would generally be consistent with Act 120 provisions
applicable to members of the same class and category.
No change.
In the event of under investment performance, employee contributions are
increased by a maximum of 2%; conversely, in the event of over investment
performance, provides that employee contributions are decreased by no more than
2%.
If there is a break in service, current members would retain their pre-reform benefit.
Permits the legal counsel to the systems boards shall serve independently from the
Governor's Office of General Counsel, the Attorney General and the General
Assembly.
Both systems boards will expand to include the Secretary of Banking and Securities,
replacing one of the Governors current appointees.
The Public Pension Management and Asset Investment Review Commission that
will be composed of five members appointed by: the Senate President, House
Speaker, Senate Minority Leader, House Minority Leader, and Governor.
The provisions in the bill constrain the systems independent boards from
optimizing benefits offered to its members. This provision could add layers of
duplicative or unnecessary fees.
May continue to offer TIAA-CREF as an option to its employees.

House Appropriations Committee (D)

717-783-1540

www.hacd.net HDAPPROPS@hacd.net
SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 3 of 7

School Districts Will Pay More


Below is a chart reflecting the cumulative cost or (savings) relative to the status quo that is projected to be generated
for PSERS employers (school districts and state-share) over 30 years by the proposal, on a cash flow basis.
The following observations can be made, relative to the status quo:

PSERS employers will see an increase in their annual employer contribution over the next 22 years.

Within the first 10 years of the projection period, employers will have a net cumulative cost of approximately
$95 million. Of this amount, $53 million is state-share and $42 million from school districts.

Using todays dollars, or present value, the total cumulative savings for PSERS will be $7 million.

PSERS Employers: 30-Year Cumulative Cost/(Savings), Cash Flow


$200

(Million)

Over the next 10 years, the employers pension


contributions will increase by nearly $100 million
$100

$0

-$100

-$200

School Districts and the


state-share will not see a net
decrease relative to the
status quo for 22 years

-$300

In todays dollars, or
present value, the savings
over thirty years is only
$7 million.

-$400

-$500

House Appropriations Committee (D)

717-783-1540

www.hacd.net HDAPPROPS@hacd.net
SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 4 of 7

Time Period Analysis


Below is a chart reflecting the cumulative cost or (savings) relative to the status quo that is projected to be generated
over the course of 30 years by the proposal, on a cash flow basis.
The following observations can be made, relative to the status quo:

Cumulative net savings from the proposal do not materialize until 2040, or 22 years after implementation.

Years 0-10 (2018-2027) of the projection period reflects a net cumulative cost of $337 million (see inset chart
for details). This reflects $243 million of SERS costs and $94 million of PSERS costs.

Years 11-20 (2028-2037) of the projection period we see the costs peak at $359 million then a gradual decline
in the annual employer contribution occurs. By 2037, the proposals cumulative costs are estimated to be $165
million more than the status quo. This includes $117 million of SERS costs and $48 million of PSERS costs.

Years 21-30 (2038-2047) of the projection period costs begin to decline once the unfunded liabilities are fully
amortized and as the majority of pre-reform members retire and are replaced, reducing employer costs.

Over the thirty year period, of the $1.9 billion in net cash flow savings, $1.5 billion (79 percent) is borne by the
SERS system and $0.4 billion (21 percent) by the PSERS system.

The unfunded liability is approximately $65 billion, this plan offers a miniscule 3 percent reduction to the debt.

In todays dollars, or present value, the savings is dramatically put into perspective, with a total savings of $138
million over thirty years ($130 million for SERS and only $7 million for PSERS), an annual savings of $5 million.

Cost/(Savings) by System ($ billion)

Combined net savings


do not materialize until
2040 (22 years)

$0.5

$0.0

(Million)

$359

$354
$264

$259
$94

$95

$95

$122

$60
$79

$51
$45
2021

$94

2020

$93

$0

-$50

2025

2026

2027

2028

2029

In todays
dollars
(present
value), the
savings
over thirty
years is
$138
million

-$16

2019

-$6

$2
$11
$13

2018

$0

$33
$33

$2
$0
$2

$50

$67
$51

$100

$88

$139

$200
$150

-$1.5

$174

$211

$250

-$1.0

$214

$300

$243

$267

$308

$350

$337

-$0.5

Cost/(Savings), by System

$400

2022

2023

SERS

2024

PSERS

Net

-$2.0

SERS

House Appropriations Committee (D)

717-783-1540

PSERS

Net

www.hacd.net HDAPPROPS@hacd.net
SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 5 of 7

Useful Performance Metrics to Assess the Impact of the Proposal vs. Status Quo
Performance Metric
The Unfunded Liability is the
difference between assets and liabilities.
Currently, 70 percent of the employer
payment is used to pay down the pension
debt.

Chart
Unfunded Liability ($ billion)
$80
$70

The proposal does not


pay off the unfunded
liability significantly
faster than the current
payment plan

$60
$50
$40
$30
$20
$10
$0
-$10

Status Quo

The employer contribution rate is


calculated by actuaries and includes the
cost of the benefit plus the cost of the
unfunded liability.
School districts employer contribution
rates are expected to level-out at roughly
34 percent of payroll beginning in 2018
and remain at this level for approximately
20 years until the debt (principal and
interest) is largely amortized.

Conference Comm.

PSERS Employer Contribution Rate (% of payroll)


40%

35%

30%

25%

20%

15%

10%

The proposal will not reduce


employer rates. Rates will
continue to be at or near
35% for the next 20 years.

5%

0%

Status Quo

The total employer payment is the


projected dollar amount that employers
must pay per year.
In either case, going with the status quo
or with a stacked hybrid plan, the total
pension payment made by all of PSERS
employers will increase for the next 20
years from $5 billion (2016) to about $9.7
billion (2035). For the next 22 years,
districts will pay more than they pay
today - in terms of dollars spent.

Conference Comm.

PSERS Employer Contribution ($ billion)


$12

$10

$8

$6

$4

$2

The proposal does not


reduce school district
pension payments.
Payments will increase
for the next 20 years

$0

Status Quo

House Appropriations Committee (D)

717-783-1540

Conference Comm.

www.hacd.net HDAPPROPS@hacd.net
SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 6 of 7

Performance Metric
The employer cost to provide pension
benefits is calculated by actuaries and is
the cost today to provide an earned
pension benefit in the future. Also called
the employer normal cost.
Currently the cost for PSERS employers
and the school districts to provide a
pension benefit for its employees (i.e. the
normal cost), is less than 3 percent (2.97
percent). The proposed stacked hybrid
plan cost to provide a benefit will be 2.68
percent, which is a cost reduction of 10
percent.

Expressed as a percentage of a system's


liabilities, the funded ratio is calculated
by dividing assets by its liabilities. A ratio
above 80 percent is considered healthy
for state government pension plans
which operate in perpetuity. Compared
to private companies (which can be
dissolved at any time) that have pension
plans, ERISA requires any shortfall be
paid off in 7 years.

Chart
PSERS Employer Cost to Provide Pension Benefit
Not Including Debt (% of Payroll)
9%

The proposal cuts benefits by


25% to 35%, however the cost
to the employer is reduced by
only 10% to 12%

8%

7%

6%

5%

4%

3%

In 10 years, the
proposal will cost
less than the
current benefit

2%

Status Quo

Funded Ratio Projections


120%

100%

80%

60%

With or without the proposal, the


systems will achieve a healthy funded
ratio at roughly the same time.

40%

20%

As is shown in the chart to the right, both


systems will achieve an 80 percent
funded ratio at the same time with or
without the proposal.
The estimated benefit provides a

calculated estimate of what a typical


employee benefit will be under the
proposal relative to a comparable benefit
being currently earned.

Conference Comm.

0%

SERS-Status Quo

SERS-Conf Comm.

PSERS-Status Quo

PSERS-Conf Comm.

Benefit Estimate
$45,000
$40,000

$42,451

$35,000
$30,000

$33,750

$25,000

-22%
$26,265

-34%

$20,000
$22,439
The replacement rate is a term that is
$15,000
used to provide a number to help
$10,000
individuals plan for retirement and is
$5,000
expressed as a percentage that is
$calculated by dividing the estimated
Act 9
Current
Hybrid 1.25% Hybrid 1%
pension benefit by their pre-retirement
Replacement
income. A target replacement rate is
86%
68%
53%
45%
roughly between 75-80 percent. The Rate:
Example: PSERS member with 35 years of service and a final average salary of $50,000.
replacement rates shown do not include
Social Security.

-60%
$13,559

DC only

27%

House Appropriations Committee (D)


Miriam A. Fox, Executive Director

House Appropriations Committee (D)

Bernie Gallagher, Senior Budget Analyst

717-783-1540

Mark Shade, Communications Director

www.hacd.net HDAPPROPS@hacd.net
SB 1071 (PN1913) A10803: Memo
10/25/2016 Page 7 of 7

October 25, 2016

Pensions - Talking Points


The Senate, led by Lehigh County Republican
Appropriations Committee Chairman Pat Browne, is
amending SB 1071 to dramatically change the way
state employees and teachers pay for their
retirements.
In exchange for marginal savings decades from now,
school district costs increase in the near term, the
plan falls short of any meaningful reduction in debt,
and employees will experience dramatic cuts in
retirement benefits worth 20 to 60 percent. All of
this in the name of offering employees a more
private-sector-style choice of three retirement
options, but the devil is in the details.
The amendments, which are growing in number by
the day, would force SERS and PSERS participants to
pay more and increase costs for PSERS employers
(school districts) and the commonwealth by $100
million over the next 10 years. The proposal will not
pay down the unfunded liability significantly faster
than the status quo (Act 120).
Worse, Republican tinkerers are re-engineering the
actuarial science to neutralize costs in their re-bake
of a pension reform proposal to make it appear as if
savings will be realized in the first five years for SERS.
While lauding the effort to address a serious
financial issue, we believe the proposed changes
would fall far short of any meaningful reduction in
the unfunded liability.
We also believe the proposed changes would create
one of the most complicated pension systems in the
United States. Thats not good for state employees
and teachers; its especially unfavorable for
taxpayers.
Upfront, the plan will require extensive unfunded
administrative support (an unfunded mandate),
costing roughly $20 million before it takes effect.
School districts will also incur significant upfront
implementation costs.

How Republicans are representing the long-term


budget impact is deceptive. They discuss savings in
terms of the future value of money instead of
providing a more meaningful measure in todays
dollars. Additionally, they count extra years of
savings beyond the 30-year time horizon, contrary to
the industry standard.

The proposal saves a sobering $7 million,


estimated, in todays dollars for PSERS,
Pennsylvanias largest retirement system, over the
next 30 years (through 2047) compared with the
future value of $400 million (cash flow basis).
Worse, Republicans count an extra two years for
PSERS to inflate and double those savings in direct
conflict with industry standards that stipulate a 30
-year time period.
The proposal saves an estimated $130 million in
todays dollars for SERS over the next 30 years
(through 2047) compared with the future value of
$1.5 billion. Adding insult to injury, they count an
extra five years for SERS to inflate those savings by
an additional $590 million (in todays dollars),
again in sharp conflict with the 30-year industry
standard, resulting in a disingenuous headline
grabbing $2.1 billion.
All savings for the school retirement system and the
vast majority of the savings for the state retirement
system are generated from cuts to new employee
benefits.

Benefits will be cut between 20 and 60 percent,


depending on the selected plan. The 401k-style
benefit is only 37 percent of the current Act 120
benefit.
Employee contributions rates will remain the
same (7.5 percent) for the 1 percent multiplier
hybrid plan and for the DC plan. However, for the
1.25 percent multiplier hybrid plan, employee
contributions will go up 13 percent to 8.5 percent
of pay. Unfortunately, the benefit is reduced by
roughly 30 percent.

Roughly 70 percent of state employees will


shoulder the cost of the plan design changes. The
plan exempts most hazardous duty employees
including state police, corrections officers,
enforcement officers and all hazardous duty
employees other than psychiatric security aides.
Public safety employees make up about 30
percent of the total state workforce.
TALKING POINTS
In exchange for marginal savings decades from now:

School district costs increase over the next 10


years,
The plan falls short of any meaningful reduction in
the debt, and
Employees will experience dramatic cuts in
retirement benefits worth 20 to 60 percent.
The anticipated amendments to Senate Bill 1071
represent a wolf in sheeps clothing.
Currently

talked about changes would cost


school districts and the commonwealth $100
million more over the next 10 years
compared to what it will cost today, under
Act 120.
Worse: In the case of the state retirement
system, the proposed amendments suppress
actual expenses to make it appear as if
savings would be realized over the reform
plans first five years. This is due to delaying
an effective date for the newly proposed
formula.
The new pension system would represent a threeheaded monster if it succeeded, and it would quickly
be labeled as one of the most complex plans in the
country.

This proposal has not received the proper public


vetting through public hearings, which House
lawmakers have made a priority.
Plus, the Legislature already has a bipartisan bill to
consider. Additional Republican tinkering is not
necessary but is questionable.
If the plan is ever started, employees especially
state employees would have to pay more for far
fewer benefits. For example:
In

a home-buying comparison, the proposed


changes to SB 1071 would be like requiring
someone to pay $36,000 more for a $100,000
house (36 percent increase in cost) and then
being forbidden from using the kitchen and
dining room (20 percent reduction in
benefits), or the kitchen, dining room and
both bedrooms (80 percent reduction in
benefits).
The amendments would disproportionately
impact women participants because 75
percent of PSERS is female and has no
exemptions.
And, it would allow a little less than half of
state employees to avoid paying an equal
share to close the unfunded liability, and
close it sooner than prescribed under Act 120.
Under the anticipated amendments, there would be
no immediate budgetary relief.
School districts and the property owners who live
in them would be negatively affected by the
expected change. They will be paying more through
this proposal than if Act 120 is allowed to work.
The PSERS employers would not realize savings until
2040!

The amendments to SB 1071 are another in a long


line of historically bad pension decisions that
account today for 70 percent of the unfunded
liability.
Implementing the new plan would cost Pennsylvania
taxpayers $20 million in start-up and administrative
expenses in the first year, plus more at the local
level in school districts.

The

next eight years of newborns would grow


up and graduate from high school before the
PSERS unfunded liability begins to first decline
and then decline only marginally.
Most sitting lawmakers would be, at least,
retired before theres any positive
momentum towards a small reduction in the
combined unfunded pension liability.

House Appropriations Committee (D)


Miriam A. Fox, Executive Director

House Appropriations Committee (D)

Bernie Gallagher, Senior Budget Analyst

717-783-1540

Mark Shade, Communications Director

www.hacd.net HDAPPROPS@hacd.net
Pension Talking Points: Primer
10/25/2016 Page 2 of 2