Yes, Pennsylvania There is a Pension Crisis – Now What Are We Going to Do About It?

Yes, Pennsylvania, there is a pension crisis.

No amount of political rhetoric can alter the fact that years of hefty benefit increases, fund losses and negligent underfunding have left the state’s two largest pension funds–covering both teachers and other
state workers–in a huge budget hole.

The $27 billion Pennsylvania State Employees’ Retirement System and $51.7 billion Pennsylvania Pubic School Retirement System are more than $50 billion dollars in the red.

A curious footnote in the discussion is the actual amount of the unfunded liability. Estimates vary widely, in fact by billions of dollars. A quick look at the week’s newspapers showed estimates ranging from $47 billion to $60.12 billion.

To paraphrase the late Sen. Everett Dirksen, “a few billion here and a few billion there and pretty soon you’re talking about real money.” No matter which estimate you choose, we’re talking about real money.

Although candidate Tom Wolf denied there was a pension crisis, the reality of governing has Gov. Tom Wolf and his administration at least talking about it.

Talk won’t solve the problem, however.

Last week the Senate of Pennsylvania took action.

The chamber voted, largely along party lines, to approve a pension reform package that was marked Senate Bill 1.

The numbering of the bill suggests how high a priority the legislation is to the chamber’s majority Republican leadership.

“There are lots of fiscal problems facing the commonwealth. None is more important than our pension crisis,” Senate Majority Leader Jake Corman, R-Centre County, said before the vote.
The Senate plan shifts new state and school employees into 401(k)-type plans (defined contribution as opposed to the current defined benefit) as well as in a cash balance plan.

Current retirees’ benefits aren’t affected by the Senate plan, nor are benefits already accrued to current employees.

The Corman bill also gives employees some new choices. Under the bill employees can choose to keep the increases of Act 9, passed a decade ago, or choose a reduction in benefit and contribution.

The proposal will save taxpayers an estimated $18 billion dollars over the next three decades.

The Senate legislation was passed along nearly strictly partisan lines 28-19, with a single Republican voting with a solid bloc of 18 Democrats in opposition.

The pension crisis was bi-partisan in the making. Fixing it should be bi-partisan, too.

Unfortunately the partisan rhetoric ramped up quickly. Sen. Vincent Hughes of Philadelphia went so far as to claim, “It is the destruction of the middle class…” Really?

Ninety percent of Pennsylvania’s workers are already enrolled in 401(k) plans. They are what younger workers expect and want.

These 401(k) plans have been the norm in the private sectors for the couple of decades since the Financial Accounting Standards Board made employers fully disclose their pension obligations.

The board is now pushing for the same requirement in the public sector. That would show what those who are in defined contribution plans will be required to pay for the roughly 10 percent (hardly the “middle class”) who are in public sector defined benefit plans.

There’s plenty of blame to go around. The pension crisis was largely created in the closing days of the 20th century and the early days of the new century. Prior to that the pension funds generally enjoyed surpluses.

But then the state used those surpluses for program funding and lawmakers on both sides of the aisle, along with then-Gov. Tom Ridge, dramatically raised benefits for themselves and the judiciary together with teachers and other state employees.

At the same time they pared down the commonwealth’s contributions to the two big public pension funds. Ed Rendell continued the underfunding of the pension funds, contributing to the unfunded liability.

The blame game doesn’t resolve anything. It’s time to create a solution. Without reform, pension expenditures are projected to be nearly $5 billion in 2016 and more than $7 billion by 2025. We simply can’t afford to do nothing.

The Corman bill may not be a magic wand solution to a staggering problem. It is a good starting point. There’s going to be serious debate and negotiation before a final resolution is accomplished.

After the floor debate, Corman said the GOP “would be very comfortable if this was the final product. We think it works…to achieve savings both long-term and short-term.”

The bill now moves to the House where some observers believe that momentum from the strong vote in the Senate will boost its fortunes.

There are also House plans that are similar, although not identical, that will get increased attention.

The time is upon us to squarely address the pension emergency and its devastating impact on school property taxes, funding for other priorities and the state’s bond rating.

By restructuring the system state government will be able to adequately fund vital programs without massive new taxes, local school districts will have more money to spend on kids in classrooms, and taxpayers will be able to keep more of what they earn.

Charlie Gerow is CEO of Quantum Communications, a Harrisburg-based public affairs firm.

This originally appeared in the May 17 edition of the Harrisburg Patriot-News.

The views expressed here are those of the author and not necessarily those of The Susquehanna Valley Center.

Nothing contained here should be considered as an attempt to aid or hinder the passage of any legislation.