Pittsburgh Post-Gazette: Pa. treasurer disputes purported savings in Corbett's pension overhaul

February 27, 2013

By Mary Niederberger
Pittsburgh Post-Gazette

State Treasurer Rob McCord, along with officials from the Keystone Research Center, contend that Gov. Tom Corbett's pension overhaul proposal won't cut costs, but instead will add $25 billion to the pension debt by 2046.

But Jay Pagni, a spokesman for the governor's budget office, said that if Mr. Corbett's entire proposal -- including changes to future benefits of current employees -- is approved, it will save $50 billion by 2043.

The one thing both sides agree upon is that it is difficult to conduct an independent analysis of Mr. Corbett's proposal because much of the financial information upon which it is based has not been made public.

Mr. Pagni acknowledged "there are numbers that I have that folks on the other side haven't seen." But he said all pertinent financial information about the pension proposal has been shared with "the leadership and the budget and appropriations folks in the Legislature."

The employees affected by the changes would be public school teachers and state employees who are members of the Public School Employees' Retirement System and the State Employees' Retirement System.

Mr. McCord, a Democrat, and Stephen Herzenberg, executive director of the Keystone Research Center, gave their views on the budget proposal Tuesday during a media teleconference.

Mr. Corbett, a Republican, has proposed a pension overhaul package to deal with a $41 billion pension debt that calls for new employees as of 2015 to be enrolled in a 401(k)-type defined contribution plan rather than the current defined benefit plan. It also calls for changes to future benefits for current employees, including a reduction in the multiplier used to compute pensions from 2.5 to 2.0 and an increase in the penalty for employees who take a lump sum of their contributions upon retirement.

The proposal also calls for changing the number of years used to determine an employee's final salary from the highest three years to the final five years, capping pensionable income to the Social Security wage base, which is $113,700, and capping pensionable income to 110 percent of the average salary for four years prior to retirement.

During the teleconference Mr. Herzenberg said the 401(k)-type plan will "dig a deeper pension hole" by -- among other things -- reducing contributions into the current defined benefit plan. The result will be less money in the defined benefit plan, which would result in a smaller return on investments and create a smaller pool of money to pay retirees.

Another factor decreasing investment earnings would be a need for the fund managers to move investments, as more people in the fund move toward retirement age, to "less risky and more liquid" assets that would have a lower rate of return.

Also driving up costs is the fact that Mr. Corbett's plan calls for employers to contribute 4 percent to the defined contribution plan for new employees, which is a higher cost than a 2.2 percent cost for new employees in the defined benefit plan, Mr. Herzenberg and Mr. McCord said.

The increased costs and decreased earnings would require employers, which are the state and school districts, to increase their contributions to cover the loss, they said.

However, Mr. Pagni said, Mr. Herzenberg and Mr. McCord only took into account the cost to switch new employees to the 401(k)-type plan and not the savings that would come from the governor's entire package of overhauls. "The Keystone Research Center and Treasurer McCord failed to consider the entire package," Mr. Pagni said.

The treasurer and Mr. Herzenberg also said it was irresponsible for the governor to promote a plan that is sure to face legal challenges. The Pennsylvania State Education Association has maintained that benefits for current employees are protected by the state constitution and has vowed a legal battle if the Legislature enacts Mr. Corbett's plan.

But Mr. Pagni said the governor's office believes the pension changes are constitutional because they do not take away any benefits already earned by employees. He also said the governor's plan relieves the state of the risk of the defined benefit plan once all employees are shifted to the defined contribution plan.

Mary Niederberger: mniederberger@post-gazette.com or 412-263-1590.