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The Three Buckets Plan

The Three Buckets Plan. A Balanced Approach to Pension Reform . Pennsylvania Has Two Public Pensions. SERS. PSERS. Numbers reported by SERS in February 2013. Numbers reported by PSERS in April 2013. 229,908 state employees 106,152 active 117,061 retired $25.3 billion in assets

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The Three Buckets Plan

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  1. The Three Buckets Plan A Balanced Approach to Pension Reform

  2. Pennsylvania Has Two Public Pensions SERS PSERS Numbers reported by SERS in February 2013 Numbers reported by PSERS in April 2013 229,908 state employees 106,152 active 117,061 retired $25.3 billion in assets $2.5 billion paid/year 597,805 public school employees 273,504 active 202,015 retired $49.7 billion in assets $6 billion paid/year

  3. How do they work? Both are defined benefit plans. Employee enrolls upon employment. Employee pays 6.25% (SERS) or 7.5% (PSERS) of salary via payroll deduction. Employer contributes (annually) an amount based on a formula and actuarial review. SERS & PSERS invest these dollars.

  4. A “Benefit” Is Calculated at Retirement Annual Annuity Paid Monthly for Life * Average of the 3 highest years

  5. A Real Example of a Career Employee Meet “Pat” • Hired 35 yrs. ago @ $6,000/yr. • Retired in 2013 w/an $81,000 final salary. • Pat paid $89,500 into the system. • Pat’s account value was $152,710 at retirement (Present value = $867,245). • Pat withdrew all $152,710 and receives an annuity of $4,660/mo. for life.

  6. How Account Value May Be Drawn Provide maximum annuity. Provide reduced annuity with survivor benefits (such as a spouse). Lump sum withdrawal (with reduced monthly annuity).

  7. What Is the “Pension Crisis” All About?

  8. “Unfunded Liability” The gap that exists between what is necessary to meet the pension benefit obligations of future retirees and the actual dollars that will be available in the SERS and PSERS accounts. PSERS – 33.6% underfunded, or $29.5 billion SERS – 41.4% underfunded, or $17.9 billion As reported by SERS in February 2013 and PSERS in April 2013.

  9. Causes Act 9 of 2001 benefit enhancements. Investment market poor performance. Years of employer underfunding.

  10. 20-Year SERS Employer Contributions

  11. 20-Year PSERS Employer Contributions

  12. Rating Agency Reports (Part 1) Fitch Ratings July 16, 2013 “Pension Funding Demands: The funding levels of the Commonwealth’s pension systems, which have been historically adequate, have materially weakened, with annual contribution levels remaining well below actuarially required levels…..Maintenance of the ‘AA’ rating will require action over the next one to two years to make substantive progress towards addressing the state’s structurally unbalanced budget, restoring reserves, and addressing the rapid growth of fixed costs, including for pension funding……Unfunded pension obligations now represent the dominant share of the state’s long-term liabilities.”

  13. Rating Agency Reports (Part 2) Moody’s Standard and Poor’s March 29, 2013 “Due to recent investment losses and a seven-year history of low, statutory pension contribution levels, the Commonwealth’s unfunded pension liabilityhas increased substantially and funded ratios have declined below 70%.....What could make the rating go down: Growth in long term liabilities, increase in fixed cost pressures, or additional deferral of pension costs….” April 2, 2013 “The negative outlook on Pennsylvania reflects our view that growing expenditure pressures, primarily pensions, coupled with a slow economic growth environment and limited available reserves, could place downward pressure on the rating…..Should the Commonwealth make significant strides in addressing its pension liabilitiesor experience substantial economic growth that would mitigate the impact of these liabilities on the budget, we could revise the outlook to stable.”

  14. Options to Address the Problem • Close the defined benefit (DB) plan to new employees and direct them into an alternate plan: • Cash Balance Plan • Defined Contribution (DC) Plan • Hybrid Plans. • Put more money into the system(s). • Employee Contribution • Employer Contribution • Borrowing • Reduce benefits paid out. • Enhance investment returns.

  15. Obstacles to Reforms • Budgets • General Fund • School District Budgets • Contract Impairment – Pennsylvania Constitution • Prevents unilateral changes to current/active members and retirees. • Enhanced Returns • Chasing higher returns requires greater investment risk. • Borrowing • Risky if done incorrectly and unwise if done to avoid the problem without further reforms.

  16. Balanced Approach – Three Buckets Plan

  17. NOTE: Nothing affects anyone who is already retired!

  18. Cash Balance Plan • For New Members Enrolled after June 30, 2015 7% 4/5% 4% • At retirement turns into a monthly annuity

  19. General Borrowing • General Fund borrows $9 billion in two steps. • Step One: $2 billion to PSERS and $1 billion to SERS, amortized over 24 years. • Step Two: $4 billion to PSERS and $2 billion to SERS, amortized over 24 years.

  20. Current Member Modifications Lump Sum formula – “actuarially neutral”

  21. Current Member Modifications continued • Based on 5 highest years instead of 3 highest years. • Reduces final year “spiking.” • Final Average Salary Calculation

  22. Effects on Future Employer Contributions

  23. Cash Balance Plan

  24. Barriers to Achieving Compromise • Aversion to new debt • Is this really “new” debt? • Concerns of active members • Ongoing discussions with union leaders and others • Hardened positions • “Defined Contribution is the only answer.” • “Let Act 120 work.”

  25. The Cost of Doing Nothing If we just “Let Act 120 work.”

  26. Benefits to Achieving Compromise • Savings to the General Fund • Savings to School Districts • Savings to the Philadelphia School District • Positive message to bond rating agencies • Current employees retain a DB plan with minimal impact—with the the same multiplier and reduced employee contributions—all deferred until they retire. • Future employees have a reasonable and sustainable retirement benefit. • Provides a level of protection for employers (school districts, the state) when the markets have a downturn. • Avoidance of transition costs, which would be triggered by a switch to a DC plan. • Elimination of a constitutional contract impairment challenge.

  27. Rep. Glen Grell 3 East WingP.O. Box 202087Harrisburg, PA 17120Ph: 717-783-2063Fax: 717-705-7012 I Welcome Your Questions ggrell@pahousegop.com www.RepGrell.com

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