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House of Representatives
Session of 2015 - 2016 Regular Session

MEMORANDUM

Posted: February 2, 2015 12:04 PM
From: Representative Keith J. Greiner and Rep. Seth M. Grove
To: All House members
Subject: Cash Balance Municipal Pension Reform
 
On January 14th, Auditor General Eugene DePasquale released a report updating the commonwealth on the crisis in our municipal pension system. In his report, the Auditor General detailed a statewide increase in the unfunded liability of $1 billion in our municipal pensions over the last two years. Across Pennsylvania, the unfunded liability is now a staggering $7.7 billion. In a separate report, the Auditor General highlighted the dire situation facing the City of Scranton, which has less than 4 years until pension funds are bankrupt.

Addressing the rapid increase of pension costs now poses the single greatest challenge facing many of our local governments. In particular, local governments now struggle to fund essential services as growing pension costs continue to exhaust local budgets. These essential services include providing for public safety, as our police and fire fighters are often hardest hit by the pension crisis. Too often local governments are financially forced to delay hiring additional safety workers or even reduce the number of public safety workers to pay the increases in pension costs. This was recently evidenced in York City, as Mayor Bracey proposed a budget, which eviscerated police and fire departments. The reason for such an extreme budget proposal was due to increasing pension costs. The unfortunate result is an increased danger to the heroes who keep our communities safe and secure.

In order to address this growing problem, we plan to reintroduce House Bill 1581 as amended last session, which would provide a quality pension benefit for municipal public safety employees while ensuring predictable and sustainable costs for local governments. The cash balance plan established in this legislation would be for new hires only and have the following features:
  • Includes all townships and boroughs with full-time public safety personnel (Act 600) and all cities, except Philadelphia.

  • It has a prospective application to new public safety hires as of a certain date. Current employees maintain all existing rights and benefits; however these benefits will be frozen at current levels. Each municipality will maintain two plans until there are no more beneficiaries in the old defined benefit plan.

  • Cash balance pension plan is a defined benefit plan that operates like a 401(k).


  • New pension for member employees will be portable. As such, each member has an individual “account balance” within a larger, locally administered pension fund. Any member of a cash balance retirement plan, who is transferred may rollover their account into another municipality’s cash balance retirement plan.

  • Each member’s account balance is made up of mandatory employer and employee contributions and an employer guaranteed interest credit.

  • The guaranteed interest credit is tied to market performance, but set so that any interest earning over the rate guaranteed to employees can be directed to pay down the unfunded liability of the old defined benefit plan. Cash balance is the only plan type that provides an avenue for paying down the unfunded liability of the old plan without requiring new revenue from taxes or bonds. The plan authorizes an optional 457 plan as an additional employee investment tool; however employer contributions optional.

  • Full vesting occurs at 12 years and partial vesting at 8. A member is always vested in his contributions plus interest. Retirement age is increased to age 55 and 25 years of service.

  • Members of the cash balance pension plan are not eligible for post-retirement healthcare benefits, but do receive other traditional benefits including workers’ compensation, unemployment compensation, disability and death benefits.

  • 25-year modeling projections of municipal plans based on actuarial assumptions show a tremendous benefit just from freezing the current DB plan benefits. Then the additional ability to put interest earnings from the cash balance plan toward existing unfunded liability closes the gap even more.

There is no quick fix to the current pension crisis without a huge influx of revenue and even that won’t fix the underlying problem of the benefit structure. By addressing the crisis in our municipal pension system now, we improve the safety and quality of life in our local communities.

Please join us and cosponsor this legislation. If you have any questions, please contact Eric Reath by telephone at 464-5285 or via e-mail at ereath@pahousegop.com.



Introduced as HB316