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Report: Hybrid pension plan would lead to Pa. spending spree

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The proposed hybrid pension reform plan backed by Gov. Tom Corbett is a “non-starter” that doesn't address the commonwealth's public-sector pension debt, according to the liberal-leaning Keystone Research Center.

The Harrisburg-based research organization issued a new report on Monday, arguing that the latest pension proposal would force draconian benefit cuts on future state and school employees while producing little savings.

“What it doesn’t do is save the commonwealth substantial money, now or in the future,” said Stephen Herzenberg, economist and executive director of the KRC.

The unfunded liability of the two state systems is more than $47 billion.

Led by Schuylkill County Republican Rep. Mike Tobash, the hybrid plan would have the first $50,000 of an employee’s salary and first 25 years of service be covered by a defined-benefit plan. That threshold would rise by 1 percent each year.

A 401(k)-style plan would cover the other portions of employees’ salary and service above that threshold.

The KRC said lawmakers should build on reforms from Act 120 of 2010. That reform helped address an anticipated spike in pension costs by “smoothing” the increases over a long period of time. That law also reduced benefits for new hires.

Short-term budget relief through collar limits on scheduled employer contribution increases continues to be part of the dialogue.

“Deliberately underfunding the pension plan now would repeat the mistakes of the past,” Herzenberg said.

The KRC report suggests the savings of the plan would only be about $3.1 billion. However, those savings would be spent in transition costs tied to the hybrid move.

 Using those savings like a new credit card, to lower near-term pension contributions, would also eliminate over a third of them, according to the KRC.

The report also pointed out that the 1 percent annual increase in the salary cap would decrease the value of the defined-benefit plan over time. In addition, there is an expectation that the quality of public schools and services will erode as long-tenured employees leave public service when they stop accruing benefits in the defined-benefit plan.

This will likely lead to higher rates of staff turnover among those able to command higher compensation in the private sector, according to the KRC.

The conservative-leaning Commonwealth Foundation has recommended the state move to 401(k) plans for new hires.

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