Gov. Wolf’s early retirement proposal could hike PA’s public pension debt

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    During the Feb. 22  budget hearing for the state’s public pension systems, there were plenty of questions – but not a lot of answers – regarding Gov. Tom Wolf’s early retirement proposal for state employees.

     

    “The proposed budget assumes an early retirement incentive program,” according to a section on Page A1-14 of the governor’s massive 990-page FY2017-18 Executive Budget document. However that’s the only reference or mentioning of it in the entire document.

     

    When asked about the proposal, David Durbin, executive director of the State Employees’ Retirement System (SERS), said his agency has requested more details about the proposal, but has yet to receive anything from the Wolf administration.

     

    “All the details that you don’t have, we don’t have,” Rep. Daryl Metcalfe, R-Butler, said to Durbin during the hearing.

     

    “It sounds like the administration hasn’t spoken with the retirement systems related to that proposal, and the company they contracted with did not come to you, is that correct?” asked Metcalfe.

     

    “That’s correct,” said Durbin. PSERS executive director Glen Grell said it was his understanding school employees would not be part of the early retirement option.

     

    When asked for comment and any available details regarding the early retirement option, Wolf spokesman J.J. Abbott responded by email: “In the governor’s proposed budget, savings are assumed for a ‘30 and out’ retirement incentive program. As several classes of employees, such as state police, have different retirement age and years of service requirements, they would not be captured in the savings calculation. However, we intend to work with the legislature and SERS to further address these nuances and provide a retirement incentive as part of the final budget resolution to realize these savings and minimize employee impacts.”

     

    Abbott ended his email stating, “I do not have projections as these details need to be worked out.”

     

    The study – done for the Wolf administration by consultant McKinsey & Co. – suggests that as part of the Wolf administration’s efforts to manage the size of the state employee complement across agencies, “The Commonwealth could also consider managing supervisory span of control and offering an early retirement program to reduce the workforce complement.”

     

    McKinsey estimates the state could realize $15.2 million in savings during FY2017-18, with recurring annual savings of approximately $15.8 million thereafter.

     

    The McKinsey report describes the Early Retirement Incentive Program (ERIP) to generate that amount of savings as follows: “The program would provide full annuity at 30 eligibility points regardless of age. The Administration has assumed a 50 percent participation rate, 80 percent backfill rate, 16 weeks on average to backfill, and backfilling positions at 75 percent of the retirees’ rate, to estimate approximately $24.5 million in total FY17-18 General Fund savings, and approximately $25.1 million in recurring annual General Fund savings across all agencies. As the program is rolled out, the Administration could consider adjusting backfill targets, both in terms of number of positions and pay grade at which to backfill, to reflect operational needs agency by agency.

     

    “Other initiatives estimated in this report could use ERIP as a mechanism to reduce complement; as such, the ERIP savings estimate presented here has been reduced to avoid double-counting savings, resulting in approximately $15.2 million in FY17-18 General Fund savings, and approximately $15.8 million in recurring annual General Fund savings.”

     

    Having only limited details restricted the questioning and answering about the proposal Wednesday, but Metcalfe tried anyway.

     

    “If we went with the governor’s program allowing an early retirement and, based on the study they’re expecting to backfill 80 percent of those positions, out of the 50 percent they expect are going to take the early retirement – from my perspective that’s just going to increase pension costs,” said Metcalfe. “You’ve got new employees coming into the system that are going to get into the pension system, and then you have the other employees that are pulling lump sums out and retiring and pulling cash flow out, and not contributing the system anymore.”

     

    “Is that the case? If we’re just going to add more employees, even though we let people retire – we’re just swelling the amount of people you have to pay?” Metcalfe asked.

     

    Durbin answered: “From this perspective, this is where the details really matter, and we haven’t seen those details. But we know in the past the pension system has had an increase in the liability they have had to pay as a result of early retirement incentive programs.”

     

    According to Durbin, SERS’ unfunded liability is currently $19.5 billion. In its budget hearing documents, SERS states the Commonwealth’s contribution to the system is expected to be 31.8 percent of payroll in FY2017-18, which represents approximately $2 billion of which 43 percent originates from the General Fund from employers under the governor’s jurisdiction.