Pa. lawmakers pressured to pare pension debt
HARRISBURG — Gov. Tom Corbett is urging state lawmakers to overhaul Pennsylvania’s bloated pension systems this spring, with the taxpayer tab for pension debt at $50 billion and climbing.
“Billions in new debt to our state is the cost of doing nothing,” Corbett said as he unveiled his 2014-15 budget earlier this month. “The only question is whether we will do it now, when it’s still a manageable problem, or let others do it later, when it’s an all-out crisis.”
But billions of dollars in new debt is also the cost of Corbett’s latest pension proposal — at least in the short term.
Pension fund officials told lawmakers at state House and Senate budget hearings last week that Corbett’s proposal to defer $300 million in scheduled payments would rack up $4.7 billion in new pension debt over four to five years, and could amount to $9 billion in debt in future years. The House Democratic Appropriations Committee, using different assumptions, estimated it could create much as $13 billion in new debt.
“He’s talking about making less than the minimum payment on a credit card only to pay through the nose later,” said state Rep. Madeleine Dean, D-Jenkintown, a Montgomery County lawmaker who sits on the House Appropriations Committee. “To me it is not reform.”
Corbett calls for reducing temporarily the “collars” that set the pension contribution rates for the state and its 500 school districts. The governor says his plan would save school districts $131 million, and free up $170 million for the state’s general fund. Those “savings” wouldn’t erase pension debt, but rather push back the payments.
Deferring payments is just one piece of Corbett’s preferred approach to addressing the pension problem this year. He also wants to offer new hires a hybrid model that uses a defined-contribution, 401(k)-type plan, in an effort to shift some of the financial risk away from taxpayers. Unlike the plan Corbett failed to advance last year, this time around, the governor is not pushing the legally questionable move of reducing benefits for current employees.
The Corbett administration estimates the governor’s approach would amount only to about $2 billion in new debt, Corbett spokesman Jay Pagni said. And Corbett’s camp estimates that over 30 years, the governor’s reform plan could save the state about $7.4 billion. Including school districts, the long-term savings would amount to an estimated $15 billion.
“Tapering the collars alone would be exacerbating the problem — that is not what is being proposed,” Pagni said. “What is being proposed is a short-term relief in terms of our growing year-over-year obligations, and coupling that with long-term reforms to the systems that more than offset those initial costs.”
School districts, to be sure, would welcome a reduction in pension payments to help stave off tax increases and program cuts. But school business managers are wary of lower payments now resulting in even higher bills later.
“This is exactly the same kind of bad policy which created Pennsylvania’s pension debt in the first place,” said Wythe Keever, spokesman for the Pennsylvania State Education Association, the state’s largest teachers union.
Indeed, the primary driver behind Pennsylvania’s bloated pension debt was the General Assembly underfunding the state’s two public employee pension systems for years. The retirement funds are supplied by three sources: employee contributions, employer contributions — school districts and the state — and investment returns.
Actuaries express concerns when pension funding levels drop below 80 percent. Pennsylvania’s two systems combined are now funded at about 62 percent, and aren’t predicted to reach that 80-percent level until 2031 or beyond.
How did we get here?
The problem can be traced to the early 2000s.
With Gov. Tom Ridge at the helm and Pennsylvania’s pension funds flush with cash, the state Legislature increased retirement benefits for employees while lowering the amount that the state and school districts had to chip in. The plan was to offset those changes through an increase in employee contributions and future investment returns.
The lower rates freed up cash for schools and the state’s general fund — but also contributed to a combined pension debt that now tops $50 billion. The unfunded liability is at $32.6 billion for the Public School Employees’ Retirement System, and $17.9 billion for the State Employees’ Retirement System, 2014-15 budget reports show.
“They’ve had the benefit of suppressed rates for years. This is the payback,” PSERS executive director Jeffrey Clay told lawmakers at a budget hearing last week. “When you finally have to make those payments it’s very, very, very painful.”
About 70 percent of the pension debt can be attributed to the reduced employer contribution rates and enhanced benefits, Clay said. The remaining 30 percent can be blamed on poor investment performance amid the dot-com bubble burst, the Sept. 11, 2001, terrorist attacks and 2003 and 2008 recessions.
When asked about pension reform, most Democratic lawmakers have a response that echoes state Rep. Deberah Kula.
“Give Act 120 time to work,” said Kula, D-North Union Township.
Act 120 of 2010 increased contributions for new employees, increased the retirement age to 65, eliminated the lump-sum withdrawal option and set a schedule for increased employer contributions over the next several years.
“There is no silver bullet out there to solve the problem by pension reform,” Clay said. “The bulk of pension reform has already been done with Act 120.”
The problem with doing nothing more, local school officials say, is that already cash-strapped schools fear they can’t meet the rate spikes without raising taxes and scaling back personnel and classroom resources.
Under Act 120, school district retirement contributions are scheduled to climb to 21.4 percent of payroll in 2014-15, up from 16.93 percent this year. By 2017-18, pension payments are set to eat up nearly 30 percent of payroll.
That means the Uniontown Area School District, which paid $1.4 million into employee retirement last year, will owe $4.43 million in 2017-18, or more than 10 percent of the southwestern Pennsylvania district’s $40.4 million budget.
If the state hadn’t underfunded the system, the PSERS rate would only be at 9.69 percent, Clay told lawmakers.
Pay now or later
The “Let Act 120 work” proponents say that if lawmakers really want to provide relief to school districts, they should find revenue to help districts make the spiking payments, such as by charging a severance tax on natural gas drillers or reducing tax perks for businesses.
“We still believe Act 120 of 2010 is a better reform solution than any we’ve seen or heard about in Harrisburg recently,” Keever said. “What’s needed instead is for the commonwealth to provide adequate funding for K-12 education and for pensions, which the governor could do if he would seek additional sources of revenue by asking corporations to pay their fair share of taxes.”
Bucks County state Rep. Scott Petri said the state should consider dedicating more general-fund money toward helping schools pay for retirement. That could mean not pumping $200 million into the governor’s proposed Ready to Learn block grant program. Or perhaps the Department of Public Welfare and other agencies should get less funding so the state can prioritize the pension issue, he said.
There’s at least one important point that Corbett and the pension fund leaders agree on: Reductions to pension payments should only be made alongside reforms that offset the growth in debt and get the funds on track to solvency.
Governor-backed approach
The Corbett administration is using as its starting point a pension reform plan by Schuylkill County state Rep. Mike Tobash, R-Pottsville.
Tobash is pushing a hybrid model that combines elements of defined-contribution and defined-benefit structures.
His plan would preserve the defined-benefit option for lower-salary employees, and shift benefits based on earnings of more than $50,000 annually into a 401(k)-type plan, like the one commonly used in the private sector (View more details here at www.reptobash.com/pensionoverview.aspx).
All employees hired on or after Jan. 1, 2015, would have to enroll in the hybrid plan. Benefits for current employees would not change.
Tobash has not yet introduced his legislation formally. He said he’s still working out some of the details and seeking more input as budget talks evolve.
“We’re at the beginning of the budget process,” Tobash said. “At this point in time, I am just really focused on a pension design that’s reasonable and responsible policy for the Commonwealth of Pennsylvania, that develops long-term savings, shifts some risks and should be able to ultimately address budgetary concerns and the unfunded liability. I’m not sure exactly how that will flesh out.”
Competing proposal
Many lawmakers have expressed interest in a competing pension reform proposal by Cumberland County Rep. Glen Grell, R-Hampden Township.
Grell is pitching a combination of borrowing, voluntary concessions by current employees and a new “cash balance plan” for future employees. The cash balance plan would incorporate elements from a 401(k)-type plan, but also promise employees an annual return of at least 4 percent (View more details here).
Corbett has expressed concerns about the portion of Grell’s plan to borrow up to $9 billion in general-fund bonds to drive down the debt. Grell is adamant that taking out those bonds would not create “new debt.” That’s because the estimated bond payment figure, about $500 million, is close to the $600 million the state is already paying into pensions annually. The bonds would also prevent lawmakers in future legislative sessions from delaying payments, he said.
“All we’re doing is converting the existing debt we have into a forced payment schedule,” Grell said. “I think it’s the height of fiscal responsibility to do that.”
Grell estimates the cash balance portion could save up to $7 billion over 30 years, the borrowing could save up to $15 billion over 30 years and the voluntary member changes could save up to $15 billion over 30 years.
There have not yet been independent actuarial studies performed on either Grell’s or Tobash’s plan.
Next steps
Grell said he believes the fate of any pension proposal hinges on the backing of the state’s biggest unions.
“I’m still discussing various aspects of it, especially with employees and employee groups, hoping that when it’s introduced it’s a plan that has labor support. We don’t have that, and I’d rather work on getting that support before we introduce something instead of introducing something and having to re-write it.”
Grell said he is not “adverse” to a hybrid approach like the one outlined by Tobash, but he has concerns that Tobash’s plan affects only future employees.
“You can only do so much in addressing this problem if you’re only looking at creating yet another new plan design for future employees,” Grell said. “We did that four years ago in 2010.”
Tobash said he could be interested in incorporating parts of other proposals into his plan. He noted that “one of the most desirable elements” of Grell’s plan is getting employees to make long-term concessions in exchange for a bump in their take-home pay.
“That idea doesn’t seem to have much appeal to state employees,” said David Fillman, executive director of the American Federation of State, County, and Municipal Employees Council 13, based on informal surveys of state employees. “Most of them are very reluctant to make any kind of changes.”
Several times during last week’s budget hearings lawmakers asked the pension fund’s top officials to weigh in on the specific proposals being floated – or at least warn them if a particular move would be a “big mistake.”
But the PSERS and SERS executive directors emphasized that their policies are to answer questions and provide facts – not decide on a particular legislative approach. They noted the pension problem is just part of the state’s larger structural deficit, and it’s up to lawmakers to decide how to prioritize spending.
The pension fund officials did say that a proposal by Corbett to transfer $225 million in Tobacco Settlement Funds to help offset pension costs could pose a liquidity problem, since the transfer wouldn’t be the same as cash. They also said that credit agencies will be watching to see how the state is addressing all of its financial challenges.
The General Assembly has until July 1 to pass a budget, after which much political attention will shift to campaigning. Corbett, the entire state House and half the state Senate are up for re-election in November.
Natasha Lindstrom may be reached at nlindstrom@calkins.com.