State pension costs to taxpayers to take huge jump
HARRISBURG, Pa. (AP) – When the state and schools can least afford it, it seems, the cost of helping support the state’s two largest public pension funds could begin heading upward in earnest this summer. Unless investments turn around, contribution rates for the employers – i.e., taxpayers – to the Public School Employees’ Retirement System and the State Employees’ Retirement System could hit record highs within a few years.
The increasing contributions come at a time when Pennsylvania and many other states are facing tough choices as slack revenues are necessitating either budget cuts or tax hikes.
Some blame the stock market, which has performed poorly for three years, helping to drag both retirement systems into two years of negative returns. Some blame the state Legislature, which in the past two years fattened pension benefits for themselves and state and school employees and retirees.
Regardless, SERS is projecting a record 20.7 percent employer contribution rate in the fiscal year beginning July 1, 2006. For the following year, PSERS is projecting a record 21.97 percent employer contribution rate.
Based on today’s payroll figures, that could come to a combined taxpayer burden of roughly $3 billion annually, or one-seventh of this year’s state budget.
Will that come to pass? Neither PSERS’ executive director, Dale Everhart, nor Anthony Salamone, executive director of the Public Employee Retirement Commission, were willing to hazard a guess.
“It’s not knowable,” Salamone said. “But (the projections are) the only way you can plan things. It’s the only way you can operate.”
Stephen P. Schappe, a professor at the Penn State University School of Business in Harrisburg, noted that the employer contribution rates are magnified right now by the stock market’s unusually steep plunge.
The market’s performance should change for the better – and possibly lower those contribution forecasts – but the only question is when, Schappe said.
“Forecasts are only accurate as long as things don’t change,” Schappe said, “but things inevitably will.”
By examining recent trends in indicators such as total payroll and the life expectancy of retirees and workers, the retirement systems gauge how much money they’ll need to pay out benefits for the life of the retirees and active workers. They try to balance streams of revenue from investments, employees and the state and schools to meet the benefits promised to the approximately 580,000 retirees and workers who participate in the two systems.
State Treasurer Barbara Hafer, who chairs the PSERS trustees board and sits on the SERS trustees board, said she has heard considerable concern over the projected contribution rates.
If the stock market turns around, those concerns will dissipate, she said.
Little call for change is brewing among retirement system board members and legislators right now, Hafer noted. But some change is needed, she said, like establishing a “rainy day fund” that could collect excess money during good times to smooth out years in which employer contributions are highest.
In the 1980s, employer contribution rates for the two plans were in the double digits – but dropped steadily and remain well below what the retirement systems view as normal, thanks to the stock market’s meteoric rise in the late 1990s.
In this fiscal year, taxpayers are supposed to contribute nothing to SERS and 1.15 percent of payroll, or more than $100 million, to PSERS.
For the fiscal year beginning July 1, the employer contribution is projected to rise to 2 percent, or about $100 million, for SERS and 3.77 percent, or roughly $395 million, for PSERS.
In the following years, employer contributions are supposed to keep rising, according to the retirement systems’ projections.
Hafer said she expects some examination of the retirement systems in the coming year by lawmakers and board members. How well the market performs in the next 12 months may dictate what kind of changes become necessary, she said.
“We need to have this next year to see what happens to the market,” Hafer said. “I think we have a year’s window before we do anything drastic for future employees.”