March 27, 2014

Pension proposal repeats past mistakes

Voice: March 2014

Leave it to Gov. Tom Corbett to take a bad idea and make it worse. 

As if proposing to move new public school and state employee hires from a secure and proven pension system to an inferior and more costly system wasn't enough, he now wants to reduce the state's contribution to the funds for current employees and retirees.

That's right. The governor wants to do exactly what caused the combined $50 billion in unfunded liabilities in the Public School Employees' Retirement System and the State Employees' Retirement System in the first place.

“This is the exact same kind of bad policy that created Pennsylvania's pension debt in the first place," said PSEA Vice President Jerry Oleksiak. “The fact that the governor wants to repeat the same mistake is baffling."

The state pension systems were overfunded at the turn of the century after the heady Wall Street returns of the late 1990s. It was at this point that former Gov. Tom Ridge and the Legislature effectively began what became a “pension holiday” when they stopped making the required contributions needed to sustain the funds in future years. The holiday continued for a decade as the pension funds' surplus turned into a deficit, and the unfunded liabilities have grown to more than $32.5 billion for PSERS and more than $17.7 billion for SERS.

Despite school employees paying their full share – most contributing 7.5 percent of their salary – and having nothing to do with the unfunded liabilities that resulted from that “holiday,''  school employees made concessions to future benefits under the Pension Reform Act of 2010.

That law also set up “collars" for employer contributions each year to work toward reducing the unfunded liabilities. In the case of PSERS, the collar allows for a 4.5 percent increase in the pension rate for the state's 2014-15 fiscal year which will bring the total rate for employers to 21.4 percent.

In his proposed 2014-15 budget, Corbett wants the Legislature to reduce the collar by 2.25 percent – half the increase required to keep up with the payments called for under the 2010 law.

In a bit of election year gimmickry to address outrage over his nearly $1 billion in public school funding cuts over the past three fiscal years, the governor would direct the savings toward an education block grant program. Not the critical basic education funding formula – that would get no increase – but a narrow program with a lot of strings attached.

“It's robbing Peter to pay Paul," Oleksiak said, noting that the unfunded liabilities of the two pension systems will get worse. “The governor's new proposal will run up the credit card bill again, and dig an even deeper hole."

Oleksiak and many others, including respected independent voices, have said the 2010 law should be given time to work.

In his budget proposal a year ago, Corbett called for putting new public school hires in a 401(k)-type defined contribution system.

The governor failed to get legislative approval for that proposal, and he did not make a formal recommendation in that regard during his 2014-15 budget address.

But the idea is very much in play, and the governor remains on record as favoring a new system for future employees that differs from the defined benefit plan current employees and retirees have (PSEA contends any change in benefits to current employees is a violation of the state constitution and has vowed to legally challenge any such law).

Legislative committees last spring approved 401(k)-type plans. These proposals spit in the face of research and experience in other states that have shown 401(k)-style or defined contribution plans are more costly to administer, and provide far inferior benefits for most annuitants. That was the experience in three states that tried defined contribution plans – Alaska, Michigan, and West Virginia.

An independent analysis of the legislation that passed House and Senate committees last spring stated that they could cost taxpayers an additional $40 billion.

In addition, last fall Rep. Glenn Grell, R-Cumberland, put forth a complicated “cash balance" plan which features individual accounts similar to a 401(k) as a key feature. Grell himself acknowledged his proposal could have transition costs, and the Harrisburg-based Keystone Research Center said it could “dig a deeper hole for taxpayers."

“Everyone overlooks that the unfunded liabilities have to be paid regardless," Oleksiak said. “The 2010 law addressed the unfunded liabilities. Give it a chance to work."  

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