Cash Balance Plan - Pennsylvania Municipal League

PA Municipal League Jan 2013 Municipal Pension Reform: Coalition for Sustainable Communities’ Cash Balance Plan This Cash Balance Plan will over time reduce employer pension costs. It also has the potential to provide a stream of revenue devoted to paying the unfunded liability of current pension plans. This plan applies to all townships and boroughs with full-time public safety personnel (Act 600) and all cities, except Philadelphia. It has a prospective application to new public safety hires as of a certain date. Current employees maintain all existing rights and benefits; however these benefits will be frozen at current levels. Each municipality will maintain two plans until there are no more beneficiaries in the old defined benefit plan.

Cash balance is a defined benefit plan with formula based on percentage of pay that provides less of a pension benefit than is currently given under Act 600 or the Third Class City Code. Each member has an “account balance” within a larger, locally administered pension fund. Each member’s account balance is made up of mandatory employer and employee contributions and an employer guaranteed interest credit. The guaranteed interest credit is tied to market performance, but set low so that any interest earning over the rate guaranteed to employees can be directed to pay down the unfunded liability of the old defined benefit plan. Cash balance is the only plan type that provides an avenue for paying down the unfunded liability of the old plan. The plan authorizes an optional 457 plan as an additional employee investment tool; however employer contributions are not required. Full vesting occurs at 12 years and partial vesting at 8. A member is always vested in his contributions plus interest. Retirement age is increased to age 55 and 25 years of service. Members of the cash balance pension plan are not eligible for post-retirement healthcare benefits, but do receive other traditional benefits including workers’ compensation, unemployment compensation, disability, and death benefits. 25-year modeling projections of municipal plans based on actuarial assumptions show a tremendous benefit just from freezing the current DB plan benefits. Then the additional ability to put interest earnings from the cash balance plan toward existing unfunded liability closes the gap even more. There is no quick fix to the current pension crisis without a huge influx of revenue and even that won’t fix the underlying problem of benefit structure. The cash balance concept draws a line in the sand on the existing DB plans, reduces benefits for new hires and has the ability to provide a source for additional revenue for unfunded liability....

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