Pension Challenge and Reform
Pension Challenge and Reform
The pension challenge continues to be a key topic of discussion in nearly every corner of the Commonwealth. It is a question on the minds of many, and increasingly on the minds of Pennsylvania taxpayers who ultimately bear the cost of the system through their tax dollars. All of these stakeholders, while representing diverse interests, recognize the budget crisis facing Pennsylvania – that the commonwealth’s growing pension obligations are crowding out funding for core governmental programs.
The fiscal reality is that absent meaningful structural pension reform, the state’s budget is on a path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government on which our citizens rely.
Just as it impacts at the state level, this same dynamic plays out in nearly every school district across the commonwealth. Increasing pension contribution obligations claim a greater share of school district budgets, crowding out funding for education, whether it is direct classroom instruction, extra-curricular activities, facilities and maintenance, and will ultimately put pressure on districts to increase property taxes.
Failure to enact meaningful reform also impacts the commonwealth’s ability to attract and keep job creating businesses within its borders and will negatively affect the credit rating of the commonwealth, costing taxpayers more money in increased interest rates for bond issuances.
Unfunded Pension Liability
Pennsylvania has two public pension systems: the Public School Employees’ Retirement System
(PSERS) and the State Employees’ Retirement System (SERS). The two systems’ total liabilities (future retirement benefits to be paid) exceed the total assets of the combined plans by $50 billion. This unfunded liability is essentially a state debt owed to state workers and public school employees.
Actuarial valuations show that SERS is 58.8 percent funded, while PSERS is 63.8 percent funded. When the valuations of the two systems are combined, they are approximately 62 percent funded. A healthy funding ratio is considered 80 percent. The funded ratios of the two systems are expected to continue to decline in the next several years.
Growing Total Commonwealth Employer Contributions
To fund the current cost of pension benefits as well as the unfunded liability, the commonwealth’s total required employer contribution rates have and will continue to rise quickly. The employer contribution rate for SERS, which was just 5 percent of payroll in 2010-11, is now 16 percent, and will grow every year, reaching 31 percent in 2017-18. Likewise, the PSERS rate, which stood at 5.64 percent of payroll in 2010-11 is at 16.93 percent for the current fiscal year and is expected to increase every year, reaching 30 percent in 2018-19. Both rates will remain at these high levels for several years before retreating. These numbers are staggering, but the pain imposed on the state budget comes in the year-over-year cost growth as pension contributions claim a growing share of the General Fund and of available new revenues (detailed in the next section). Costs have more than doubled in the past two years. In the 2014-15 fiscal year, total contributions are expected to increase by more than $600 million.
Commonwealth Employer Contributions as a Share of Available Revenue
Rising pension costs will claim a significantly larger share of new revenues, threatening to overwhelm the budget and the vital programs and services that it funds. If pensions alone were the only area of state government growing, the challenge posed here might be less acute. But, pensions are not the only area of state government seeing substantial cost growth.
As pension costs grow significantly for the next several years without pension reform, the future is likely to include program and service reductions as more and more pressure is put on the commonwealth’s budget.
A Framework for Success
The pension reform plan must recognize that the commonwealth cannot correct its pension problem all at once. Significant changes are required to make real and lasting pension reform. In the short term, the plan includes measures to help smooth contribution increases that are consuming an ever-growing Key components of successful pension reform:
Protect Retirees and Employees
Retirees will see no change to their current benefits; they will continue to collect the benefits they have earned. Pension benefits earned by current employees will not be affected by pension reform. What employees have earned, they will keep. For future employees, pension reform must provide for an adequate retirement benefit.
Equitable Risk Sharing
Currently, taxpayers bear the full financial risk of the pension plans. Pension reform should reduce the risk on Pennsylvania’s taxpayers by offering a defined contribution, 401-k style retirement plan for future employees.
Reduce the Burden on School Districts
The escalating pension costs affect school districts’ ability to fund critical education programs. Increasing pension contributions means fewer dollars make their way to direct classroom instruction, essential to promoting student achievement. Pension reform should provide relief to our school districts at a sustainable rate, while paying for the relief through reforms.
Address the Unfunded Liability
Pension reform cannot “kick the can down the road.” Shifting the problem into the future exacerbates the already significant unfunded liability, making it more difficult to achieve a financially sustainable pension system. With pension reform, employer contributions to the pension systems can be reduced, providing much needed budgetary relief without “kicking the can down the road”. This relief can be achieved through reducing the current pension collars to 2.25% in 2014-15, then increasing the collars by 0.5% per year until the collars reach 4.5% or the collared rate is equal to the annual required contribution rate. Savings generated by reducing the pension collars will be more than paid for by enacting pension reform. The budget funds operating appropriations at levels consistent with reducing the pension collars to 2.25%. It is critical to the financial sustainability of the pension system to implement a pension reform plan that includes the key components discussed here, provides budgetary relief and that does not “push off” the costs to the future.
Robert Storm
Eastern Region Vice President
www.pscoa.org