PENSION REFORM PROPOSAL — OCTOBER 2016 General Provisions: © Creates a new plan design for new employees on or after 1/1/18 for SERS and 7/1/18 for PSERS. © Three options will be available to new employees: o Aside-by-side DB/DC hybrid with a 1.0% accrual rate © A side-by-side DB/DC hybrid with a 1.25% accrual rate (this will be the default plan if no election is made by the employee) © ADC-only option ¢ New employees (1/1/18 for SERS and 7/1/18 for PSERS) have 45 days to elect one of the new hybrid tiers or the DC-only plan. Such election will be irrevocable and will cover all future non-exempt service regardless of breaks in service or terminations or withdrawals, e Exempts State Police Officers, Corrections Officers and certain other enforcement officers from side-by-side hybrid DB/DC or DC plans for new employees. © “Footprint” rule that was utilized for Act 120 remains for pre-hybrid workers who leave and retum. Therefore, members who have pre-hybrid tier membership who leave and return to service will be re-enrolled in the class of service to which they belonged prior to the new plan design. Establishes Pension Management and Asset Investment Review Commission (same as in SB 1 except membership increased from 3 to 5 members: one appointed by each caucus of the House and Senate and one appointed by the Governor). Includes employer funding mandate protection (same as in SB1). Adds Secretary of Banking to PSERS and SERS Boards as an ex officio member, replacing the next of the Governor’s appointees to have their term expire or to vacate their position. ¢ Requires eight hours of annual training for PSERS and SERS board members in investment strategies, actuarial cost analysis and retirement portfolio management (same as in SB). ‘* Legal counsel to the boards shall serve independently from the Governor’s Office of General Counsel, the General Assembly and the Attorney General. Shared Risk and Shared Gain apply to new hybrid classes: Every 3 years, system boards will compare the actual rate of return to the assumed rate of return for the prior 10 years: 1, Shared Risk: If the actual investment rate of return is 1% or more below the assumed rate of return, the employee contribution rate would increase by 0.5% per year, but never more than 2% above their initial rate. 2. Shared Gain: If the actual investment rate of return exceeds the assumed rate of return by 1% or more, the employee contribution rate will decrease by 0.5% per year, but never by more than 2% below their initial rate. Shared gain provision added for Act 120 members to potentially reduce employee DB system contributions (Act 120 members are already subject to shared risk provisions.) © Permits employees of PSU, PASSHE, and Dept. of Ed to continue to have the option of electing the alternative retirement plan (TIAA CREF).Caps voluntary overtime as a component of final average salary to 10%. Adds revenue-neutral option 4 lump sum withdrawal option for Act 120 members. The savings generated by the reform proposal will be re-invested into the systems. Moves SERS from a “new entrant” normal cost method to a more traditional blended rate model (which PSERS already had). Current employer contribution rate collar schedule remains in effect * No fiesh start for assets or liabilities. The current amortization schedules will remain in effect. eee ° New Plan Design Options: ide-by-Side DB/DC with 1.0% accrual rate: 1. Option 1: Defined Benefit (DB) Plan Design: 1.0% DB accrual rate Effective for new members 1/1/18 for SERS and 7/1/18 for PSERS Employee contribution rate of 4.5% to the DB component for PSERS, 4.0% for SERS 5 year vesting for PSERS; 10 year vesting for SERS. 5 year Final Average Salary (FAS) Shared Risk and Shared Gain apply to hybrid classes Employer contribution rate shall not drop below the normal cost Cost-neutral option 4 lump sum withdrawals Age 67 Superannuation Age 62 early retirement age occ ece eco e Defined Contribution (DC) Component: « Employee contribution rate of 3.0 % to the DC for PSERS and 3.5% for SERS Employer contribution rate of 2.0% to the DC for PSERS and SERS 2. Option 2: Side-by-side Hybrid DB/DC plan with 1.25% multiplier (Default plan): Defined Benefit (DB) Plan Design: 1.25% DB accrual rate Effective for new members 1/1/18 for SERS and 7/1/18 for PSERS Employee contribution rate of 5.5% to the DB component for PSERS, 5.0% for SERS 5 year vesting for PSERS; 10 year vesting for SERS. 5 year Final Average Salary (FAS) Shared Risk and Shared Gain apply to hybrid classes Employer contribution rate shall not drop below the normal cost Cost-neutral option 4 lump sum withdrawals eo eocce eeAge 67 Superannuation Age 62 early retirement age Defined Contribution (DC) Component: Employee contribution rate of 3.0 % to the DC for PSERS and 3.5% for SERS Employer contribution rate of 2.0% to the DC for PSERS and SERS 3. Option 3: Full DC-only plan: Effective for new members 1/1/18 for SERS and 7/1/18 for PERS Participant contribution is 7.5% for PSERS and SERS Employer contribution is 2.0% for PSERS and 3.5% for SERS PSERS Multiplier [Employee | Employee | Employer Contribution | Contribution | Contribution tothe DB__| to the DC 1.0 Hybrid_ | 1.0% 4.5% 3.0% 2.0% 1.25 Hybrid | 1.25% 5.5% 3.0% 2.0% DCOnly | N/A N/A [7.5% 2.0% ‘SERS Multiplier [Employee [Employee _ | Employer Contribution | Contribution | Contribution to the DB to the DC L.O Hybrid | 1.0% 4.0% 3.5% 2.0% 1.25 Hybrid | 1.25% 5.0% 3.5% 2.0% DC Only | N/A N/A 7.5% 3.5% Projected Actuarial Savings: (Participation: 55% 1.25 plan, 35% 1.0 plan and 10% DC Participation) SERS PSERS Before savings are reinvested into the trust: Savings - $2.138 Billion After savings are reinvested into the trust: $2.099 Billion Total Before savings are reinvested into the trust: Savings - $1.120 Billion After savings are reinvested into the trust: $ .809 Billion Before savings are reinvested into the trust: Savings - $ 3.258 Billion After savings are reinvested into the trust: $2 908 Billion$S9] JO Q'T JO Jal|diainivl gq adevany yu saiersHybrid Pension Reform Proposal FAQs (10/24/16) The information and analysis provided below is based on available information and is subject to change pending the final details of the proposal. Pew is available to discuss this material with any policymaker. Contact: Katle Selenski, kselenski@pewtrusts.org Does Pew support the proposal? Yes, The proposal scores well on the three factors we consider: full funding, risk mitigation, and retirerment security. It would mitigate ‘more risk than any state that has enacted pension reform while maintaining or improving retirement security for workers, and, combined with the Act 120 funding plan, constitute a major turn-around among states, What isthe current status of Pennsylvania's public pensions and how did we get here? ‘$838 swing: PA's persion funds went from a $208 surplus in 2000 to a $688 deficit as of 2025, This was driven by three primary factors: underfunding (49" among states), investments underperforming assumations, and unfunded benefit increases in 2001/02 (among biggest nationally, will cost approximately $508 in higher benefit payments over 30 years) What is the new pension reform proposal? The default olan for new workers is similar to the DB/DC side-by-side hybrid proposed in SB 1071 (2015), with several differences: sets the (DB multiplier at 1.25 (current DB is 2.0, original SB 1071 was 1.0); raises the minimurn retirement age to 62, as well as the required age for an unreduced benefit from 65 to 67%; and PSERS employee contributions increased by 1.0%, to 8.5% of pay (default plan only) to fund the 8 component, while SERS employee contribution rates increased to align with PSERS (in all cases)’. In addition, employees will also have {wo additional options: 2 401{(k}-style DC plan and a DB/DC side-by-side hybrid with a 1.0 multiplier at a lower employee cost. ‘What would be the fiscal impacts of the proposal? Full funding: Maintains commitment to full funding established in Act 120; Risk mitigation: Mitigates approximately 60% of risk if investments underperform, saving more than $108 if returns were 6%, which Is the current projected average (Wilshire TUCS} for public pension funds. Reduced economic tisk ~ the value of the investment return guarantee ~ by more than $208; Actuarially projected employer contributions under the proposed plan are reported to be $2.68 lower over 30 years than contributions under the current plan ifall assumptions are met. Why does the IFO report appear to show lower risk mitigation than Pew? “he FO risk transfer analysis compares employer contributions over a 32 year time horizon under current law to the proposed reform at both the currently assumed 7.5% rate of return and a lower assumption of 6.5%. However, the report shows an analysis that also includes the fixed costs associated withthe existing $636 legacy debt ~ which will continue to make up the majority of costs in the coming yeas. Pew’s analysis builds on the IFO report by isolating the risk mitigation on the plan design for new workers and also uses @ 6.0% return assumption ~ inline with recent 40 year results for Pennsylvania pension investments and consistent with independent estimates {Wilshire TUCS) of projected returns for public pension funds. We find that ata 6.0% long-term retura assumption, the employer contribution rate would increase by approximately 3.1% of pay under current benefits but by only 1.3% forthe proposed hybrid. T analysis applies standard actuarial methods to measure the sensitivity of service cost to changes in assumptions and would mitigate over 50% of higher costs or more than $10 bilion. We have shared this analysis with the IFO as a useful extension of their work Why does the IFO report show PSERS employer contributions going up in the first 10 years? “The cost inerease appears to be the result of @ change in actuarial methodology —rather than anything to do with the hybrid plan — that ‘would bring PSERS inline with actuarial best practices ands relatively low in any event. We estimate about $15,000 per schoo! district per year for several years only, with lower or no increase it Investment returns are below 7.5% asthe hybrid better mitigates higher costs; and over the medium: and long-term these changes would save money for school districts and also make their costs more predictable. How does the proposal score on retirement security? A career worker starting at 30 and retiring at 65 would expect approximately 90% of take-home pay in retirement under the default hybrid plan when including Social Security (compared to approximately 100% under Act 120). Most workers who leave service with 20 ‘years or ess would receive a better benefit than current policy due to portable DC savings {SEAS/PSERS data show more than 75% of teachers and over 50% of state employees leave their jobs before 20 years}. Didn’t Act 120 (2010) already reform pensions? Act 120 established a plan to achieve full funding of pension promises, reversed unfunded benefit increases on a prospective basis for new hires, and established a modest cost-sharing mechanism for if investments underperform. Given the scale and scope of the state's, fiscal challenges, additional reform is needed. | Pew’s analysis also includes assumptions on the early retirement factors applied for each year retiring before the age 67. ? Increase may only be 0.5% if employee contributions are increased under the Act 120 cost sharing provision to 8.0%. ‘The Pew Charitable Trusts= ayn aoennnuen 0 aH THE | 2900Crpstal Drive, Suite 640 AEM jFEREGN KN Te ee ocics October 24, 2016 The pension reform proposal currently under discussion in the General Assembly offers a victory for public employees and taxpayers by preserving retirement security for existing and future employees while putting in place a more sustainable benefit for new workers. If approved by the General Assembly and signed by Governor Wolf, it will help ensure that Pennsylvania moves toward a more sustainable pension structure for future workers. understand some legislators want a perfect solution to the unfunded public pension crisis in Pennsylvania. As a former Washington State legislator (1978-88), | am fully aware of how the “perfect solution” is sometimes not attainable. During my time in the legislature, | was never able to get a bill switching all public employees to a defined contribution model - which is the "perfect solution” and it works so well for many professionals in higher education around the country. But I did compromise and was able to work with legislators on both sides of the aisle to pass legistation that made significant progress in reducing the unfunded pension problem in Washington State. | didn’t allow my desire for a “perfect bill” to offset a “good bill.” Traditional pension calculations assume a high rate of return (i.e. 7.5 percent) and understate the real cost of these benefits. At State Budget Solutions, a project of the American Legislative Exchange Council, we have looked at market- based discount rates that more accurately capture pension costs by including the economic value of the risk guarantee provided by state and local governments in offering these benefits. When a more prudent, risk-free rate for pension liabilities is applied, Pennsylvania's unfunded public pension liabilities now total more than $211 billion (you can view the full report at ALEC.org/PensionDebt2016). Analysis in Pennsylvania by Representative John McGinnis has come to very similar conclusions. The difference between the risky liabilities based on traditional pension calculations and a risk-free approach shows the economic value of the risk taxpayers are effectively on the hook for. Fiscal conservatives know that a core issue in pension funding is risk, and that standard pension costs don’t cover the economic value of the taxpayer guarantee of a 7.5 percent return. The new plan design ~ which entails a defined contribution component for new state and public school employees ~ would diminish at least some of the risk currently borne by Pennsylvania taxpayers. Properly implemented, the proposal under consideration would result in a national model for reform and establish Pennsylvania as one of the brightest turnaround stories among the states. If you have any questions, or would like to discuss the issue in more detail, please feel free to contact me. ‘Thank you for your dedicated service, Bob Williams Senior Fellow | State Budget Solutions 253.884.4685 State Budget Solutions is a project of the American Legislative Exchange Council. Distribution of this letter was paid for by the Jeffersonian Project.\'s proposal would be largest reduction in taxpayer risk across states Alternative Plan Design By Size of Retirement System (measured by total pension liability of impacted plans) DD Reform covers state workers only $160 $140 $120 $100 $80 $ Billions PA MI VA OR TN IN UT KS AK GA KY RI OK NE ‘shybrid has low Iudes additional risk sharing on the OB side. Indiana has a longstanding hybrid with a tah provides an option of either a hybrid or OC plan. Kansas, Kentucky, and Nebraska have adopted cash balance plans for new hires.