The 49-0 vote sends the bill to Republican Gov. Tom Corbett, who is expected to sign it into law. The House approved the measure earlier this month.
Sen. Stewart Greenleaf, an outspoken advocate of prison reform, said the recent explosive growth in the prison population underscores the need for change.
The prison population has grown by more than 500 percent since 1980, largely because of laws designed to get tough on crime, while the state's population expanded by only 6 percent, the Montgomery County Republican said. The recidivism rate stands at 44 percent, he said.
The legislation is designed to divert more non-violent offenders and parole violators into non-prison settings. Greenleaf said it will reduce crime and save taxpayers $253 million over five years.
"We can be tough on crime, but we also have to be smart on crime," he said.
Sen. Mary Jo White, a member of the Pennsylvania Commission on Sentencing, said the reforms took years to develop.
"We're not winning any wars on crime," said White, R-Venango.
Consultants from the Council of State Governments worked with state officials, legislators, judges, lawyers and victim advocates to develop the "justice reinvestment" initiative.
While more than half of the savings in the first five years is expected to be plowed back into the prison system, the Department of Corrections estimates that more than $120 million will be available for other purposes.