Corbett offers a few ideas on the PA General Fund
Capitolwire: Corbett offers a few ideas to limit the impact of pension payments on the PA General Fund.
By Chris Comisac
Capitolwire
HARRISBURG (Feb. 4) – The state’s contribution to Pennsylvania’s public pensions is to grow by $610 million in the coming fiscal year, but Gov. Tom Corbett is hoping to not have to pay a good portion of that with 2014-15 state revenues.
As part of his 2014-15 budget proposal, the governor not only proposes trimming – also known as tapering the collars – the state’s total contribution to the two pension plans – the State Employee Retirement System (SERS) and the Public School Employee Retirement System (PSERS) – but he’s also looking to use a one-time transfer of funds to cover what’s left over after the tapering.
As he did in his 2013-14 state budget proposal, Corbett suggests tapering those payments limiting the annual employer contribution to 2.25 percent, not the mandated 4.5 percent. The proposal would increase the employer contribution by a half a percentage point per year until reaching 4.5 percent.
Under current state law, the state’s contribution rate is scheduled to increase by 4.5 percent each year until it reaches about 30 percent, where it will stay until the public pension plans reach sufficiently funded status, which is not expected to occur for several years.
The proposed tapering would, according to Corbett administration estimates, cut the $610 million pension payment by approximately $170 million. School districts would also receive a benefit from the tapering of about $131 million.
The savings to the state during the time the payments return to their mandatory percentage – it would take five years – would likely be in excess of $2 billion. School districts would realize approximately $1 billion in savings from not having to pay the required contribution amount during the same time frame.
But, as anyone who has been paying attention to the state’s public pension issue can tell you, if you cut back on what you are supposed to pay, that adds to your future liability. That’s part of the reason why the state is currently facing a more than $47 billion unfunded pension liability, and why it is still scheduled to grow to $65 billion in a few years.
Tapering the collars as proposed by the governor is expected to add about $3 billion to the current unfunded liability, according to the administration.
However, House Appropriations Committee Minority Chairman Joe Markosek, D-Allegheny, in a review of the governor’s budget proposal, said the cost of the tapering is far more.
“If the pension collars are reduced, it will add roughly $9.5 billion to the debt (unfunded liability) over 24 years for the teacher’s pension system and about $3.3 billion over 30 years to the State Employees’ Retirement System,” wrote Markosek. “The combined additional debt for the two systems will reach nearly $13 billion.”
Last year, when he proposed the tapering, the governor intended to more than pay for those long-term costs by altering the future benefits of current public employees.
However, since no agreement could be reached on those future benefit changes – and concerns about the constitutionality of altering the benefits of current employees could not be allayed – the collar-tapering idea was dropped.
Unlike the governor’s 2013-14 proposal, this time around the governor isn’t suggesting changes to current employees’ pension benefits.
Instead, during his budget address, the governor directed state lawmakers to come up with a plan to make changes to the benefits of new employees, changes that would save money in the very distant future, and, he said, be enough to warrant additional tapering of the collars.
There’s been no consensus reached yet regarding such a plan, but lawmakers have been discussing several ideas, including a hybrid defined benefit/defined contribution plan.
CLICK HERE for more about that. Those close to the pension discussions said the hybrid plan under development would reduce the current unfunded pension liability by about $7 billion.
But a consensus needs to be reached, said the Senate GOP’s ranking member of the chamber’s Appropriations Committee.
“The General Assembly needs to get the point that this is a must, and get around to doing it,” said Senate Appropriations Committee Majority Chairman Sen. Jake Corman, R-Centre. “I think some of the proposals out there are very workable.”
And if that consensus can be reached, the state’s pension payment could be reduced further by Corbett’s proposed budget.
The governor proposes transferring $225 million from investments related to the state’s Tobacco Settlement Fund to partially pay the state’s PSERS pension contribution. That would reduce public pension impact on the General Fund from $610 million to $215 million, if the collars are also tapered.
According to the Corbett administration, the investments, most of which are in Pennsylvania private venture firms that in turn provide financial resources to start-ups and emerging life sciences companies in the Commonwealth, will be transferred to PSERS for that agency to continue to manage, instead of the Tobacco Settlement Investment Board (TSIB). The administration also anticipates asking for the dissolution of the TSIB since the funds will now be managed by PSERS.
But Markosek cautioned that using the one-time source of funding could create problems in the not-too-distant future.
“The effect will be to leave Pennsylvania scrambling next year to find a way to replace those funds,” wrote Markosek.
When asked about the effort, Corman said it’s unique, and will run into legislative difficulties if a consensus can’t be reached on altering new employee benefits.
“The cornerstone of all this is doing pension reform,” said Corman.
He continued: “If we don’t do the reforms, lowering the collars is unacceptable. If we don’t do the reforms, even sending this money for a one-time shot that maybe gets you a little bit this year but just sets you up for a problem next year.”
“Necessity is the mother of all invention,” said Corman. “We’ve gone to different areas of revenue we probably never would have in the past during this recession just because circumstance dictated it.
“Is that something you’d normally like to do, to take those dollars and put it toward the pensions? No. But, when you’re facing the costs that we have in the pension funds, you do things you wouldn’t do under normal circumstances, but these aren’t normal circumstances,” he said.
Another bit of pension savings for the state would come from the proposed elimination of the “pension double dip,” a situation where the commonwealth sends a duplicate retirement contribution to charter and cyber-charter schools. The administration projects the elimination of that payment would save the state an additional $63 million.
However, the state House of Representatives and the state Senate have yet to reach an agreement regarding the legislation that would have to be approved to eliminate that payment.
For more about that impasse, CLICK HERE
Robert Storm
Eastern Region Vice President
www.pscoa.org