June 26, 2013

PSEA President: On pension legislation, ideology doesn't trump math

Independent experts advise that pension bills under consideration in both the House and Senate will cost taxpayers an additional $40 billion.

PSEA President Mike Crossey pointed out that the Public Employee Retirement Commission (PERC) advised that House Bills 1352 and 1353 will cost at least an additional $37 billion. Actuaries for the Public School Employees' Retirement System (PSERS) and the State Employees' Retirement System (SERS) reported that elements of Gov. Tom Corbett's pension plan, which are contained in Senate Bill 922, carry a $42 billion price tag. 

House Bills 1352 and 1353 were reported from the House State Government Committee on June 25. The Senate could begin consideration of Senate Bill 922 as early as June 26. 

“There is no reason for any lawmaker to vote yes on these bills, but there are 40 billion reasons to vote no,” Crossey said. “In addition to raising costs for taxpayers, these bills would weaken the retirement security of 800,000 middle-class Pennsylvanians – people who teach our children, keep our streets safe, and care for our elderly and people with disabilities.”

Crossey added that the findings of the Public Employee Retirement Commission (PERC) validate similar studies which found Gov. Tom Corbett's proposal to close the current public pension systems would dramatically increase the cost to taxpayers.

“Gov. Corbett should listen to the experts who are hired to be independent, impartial and mathematically certain,” Crossey said. “The governor's numbers don't add up. They never have, and now we have even more evidence to prove it.”

Cheiron, a McLean, Va.-based actuarial firm, did a review of House Bills 1352 and 1353 for PERC. The review confirmed that “any anticipated cost savings (from these bills) may be offset by the closing of these two Systems.” The review projected a $33.7 billion increase in costs for the Public School Employees' Retirement System (PSERS), and $3.2 billion for the State Employees' Retirement System (SERS).

The Cheiron analysis confirmed the validity of conclusions of the previous actuarial study Bucks Consulting conducted for PSERS and one performed by the Hay Group for SERS. It is also consistent with the results of 12 other studies in other states that have examined the financial impact of implementing a defined contribution system. 

Much of this increased cost stems from projections about the impact of closing PSERS and SERS to new employees, an approach at the heart of both the House and Senate bills and fundamental to Gov. Corbett's own plan.

“All three actuarial studies of the Pennsylvania pension systems concluded that the additional cost of closing the defined benefit plans would mean billions more on the taxpayers' tab,” Crossey said. “The only actuarial firm that agrees with the governor is the firm his administration hired.” 

Crossey noted that the firm hired by the governor has on two other occasions – an actuarial note of a 2010 Senate bill and in a 2013 study in Florida – acknowledged that the method all the other actuarial firms used to determine the costs of closing the defined benefit fund is sound practice. 

Cheiron in its June 24 letter to PERC made pointed criticisms of the methodology employed by Milliman, the actuary hired by Gov. Corbett.

“What Milliman fails to represent in their argument is that when there is negative cash flow the actual return is biased downward because in down markets there are more funds leaving the Systems than coming in,” the Cheiron letter states.

A Baltimore City Circuit Court judge in 2010 ordered Milliman to pay $39 million to the Maryland state pension system for allegedly miscalculating the amount of contributions the state should have paid into the fund. Milliman was also cited for errors in its work for retirement systems in Ohio and Florida, Crossey noted.

The PERC memo attached to the actuarial note on the two House bills cited negative cash flow in a closed defined benefit plan and lower investment returns as factors contributing to the increased costs.

“Legislators need to understand that these bills aren't a solution; they create a new revenue problem,” Crossey said. “Nothing that costs the taxpayers another $40 billion with no return on investment should be considered reform. This new pension plan is a bad deal for taxpayers, and lawmakers should reject it.”

Learn more at www.psea.org/pensions.




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