Pa. senators eye 401K-style public pension plan

HARRISBURG, Pa. (AP) -- Pennsylvania Gov. Tom Corbett's plan to slash $12 billion from the future pension benefits of current public employees is dead in the Republican-controlled state Senate after a key committee voted unanimously Wednesday to strip it from legislation.

Instead, the Senate Finance Committee, in a 6-5 vote with an all-Republican majority, advanced just one element of Corbett's far-reaching proposals to overhaul the state public pension system. That provision would shift most future state and public school employees into a 401K-style retirement plan and eventually whittle down the state's traditional pension benefit plan to a fraction of the more than 800,000 retired and state workers and public school employees currently in them.

"This was the best product that we could get out of Finance Committee," said Senate Finance Committee Chairman Michael Brubaker, R-Lancaster.

Corbett's plan to reduce the future benefits of current employees by $12 billion over 30 years ran into an immediate threat of a lawsuit by labor unions and opposition in the Republican-controlled Legislature over concerns that it would violate a principle of state constitutional law called the "impairment of contracts" doctrine.

Lawyers for Corbett, a Republican, had maintained that the concept was untested in the courts and believed it would be found constitutional. Hand in hand with the proposals to cut benefits was a plan to refinance the pension obligations to save money immediately and push off some payments into the future, but many lawmakers also opposed that concept.

Corbett's proposals to overhaul the public pension system were motivated by the state's rising annual retirement payments — a spike spurred by lackluster investment returns and inadequate state contributions over the past 12 years.

But even supporters of the bill that passed Wednesday acknowledge that the 401K-style shift will do nothing to address the state's short-term costs.

The future of the bill that passed is uncertain and it has a long way to go if it is to pass before July 1, when lawmakers traditionally leave Harrisburg for the summer. The wording of proposed changes to it was finished barely 12 hours before the committee met and it has yet to undergo a financial analysis to estimate its effect on the state's finances, Brubaker said.

The changes, approved Wednesday, would maintain the traditional pension plan for about 15,000 current state police and prison guards and their new hires, and switch current lawmakers, judges and executive branch office holders to a 401K-style plan if they are re-elected.

The change for members of the Public School Employees' Retirement System would occur July 1, 2015; and for workers in the State Employees' Retirement System, on Jan. 1, 2015.

Republican supporters say such a change will bring more certainty to the state's future costs. Democrats opposed it and cited calculations by consultants to the state's two major retirement systems that it will end up ballooning near-term costs by $42.4 billion because pension payments must accelerate to make up for the salary contributions that won't be coming from the new employees.

"Even if they were off by a little, I think those numbers are staggering," Sen. John Blake, D-Lackawanna, said.

Switching future employees into 401(k)-style plans might save money farther down the road. But there's no guarantee of that, pension researchers say.

A spokesman for Corbett said Wednesday that the governor will continue to work with the Legislature to find ways to reduce the year-over-year increases in the public share of pension costs.

The spokesman, Jay Pagni, also called the Senate bill "a great first step" that would shift some of the pension risk away from taxpayers and, at least for most new hires, end the reliance on projected rates of return on pension portfolios and potential underfunding of future pensions.

"It would structurally change the system," Pagni said.

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Associated Press writer Peter Jackson contributed to this report.