Auditor General, Advocates Discuss PA Pension Situation
AUDITOR GENERAL, ADVOCATES DISCUSS PA PENSION SITUATION
By Jason Gottesman
Auditor General Eugene DePasquale was joined by advocates to discuss Pennsylvania’s pension system and related costs in advance of the governor’s budget address.
DePasquale said the governor is presenting his budget tomorrow and while not all of the details are known, he is hopeful, but cautiously concerned there will be a different approach in comparison to the last three budgets, which he said cut schools and public services. He stated the cuts to these sectors have kept the economic recovery slow, with many workers leaving the workforce. He said making cuts to pension obligations is a “false choice” and said if there is a pension issue it is because the state government, legislature, and school boards did not do their fair share of funding the pension system over the last decade. He said cutting pension obligations will not help the long-term fiscal health of the Commonwealth and noted a current audit of the Department of Community and Economic Development, which will look at which tax breaks help middle income job growth. He stated he hopes the audit will provide a roadmap to help figure out which tax breaks have value and which do not, eliminating those which do not help grow middle-income jobs.
Philip Mattera, Research Director of Good Jobs First, said he is concerned about the “crusade against public employee retirement benefits” which he said is happening throughout the country. Specifically to Pennsylvania, he said his organization believes the extravagant subsidy of tax breaks demands that companies are making with the promise of creating jobs has a greater negative impact on revenues than pension obligation payments. He noted incidents of this occurring throughout the country, especially discussing the Ethane Cracker Plant Tax Credit recently enacted in Pennsylvania. He stated his organization found current retirement costs were far outweighed by corporate tax breaks and subsidies in those states where the pension debate is most vocal.
He said the adoption of combined reporting can make up the pension cost demand for the required annual contribution, but noted his organization is making no specific proposals. He called for looking at pension costs in context.
Stephen Herzenberg, Executive Director of the Keystone Research Center, discussed the need to put the pension discussion in context, looking at all the different budget line-items the state funds. He said the bottom line is that recent estimates underscore the basic point that it is the loss of corporate revenue, more than pension costs, that is challenging to state budgets. He further noted recent studies do not account for the impact the collection of a true natural gas excise tax could have on General Fund, and thereby pension, obligations. He also explained the underfunding of pension obligations over the last decade has caused the current problem where Pennsylvania is 48th of 50 states in funding pension obligations. “The failure to make the contributions over the decade had a lot to do with the corporate tax breaks that were occurring year after year,” Herzenberg stated. He said it would be “remarkable” if the governor chooses to “kick the can down the road once again” in terms of not making mandated pension obligation payments.
Responding to questions, DePasquale said it is important all parties have a discussion about how to create a solvent pensions system. He said there will be a performance audit soon looking at how money spent on outside pension managers benefits the system. He called for looking for other ways to make savings before having the discussion about cutting benefits to employees. He said it would be a bad idea to reduce the funding collars and argued it would make future pension liabilities more difficult to deal with, despite providing more breathing room in the current budget.
Herzenberg endorsed the idea of taking a look at how much money is being spent on outside fund managers. He noted his organization’s support for Rep. Glen Grell’s (R-Cumberland) proposal of pension obligation bonds and reforms for current employees, despite his organization’s opposition to a cash-balance approach. He stated there are things that make sense in having a conversation about pension system solvency and how to make pension obligation payments. He cautioned against creating a new pension system that lessens benefits and creates less security, something he said would be a cure worse than the current problem. Auditor General DePasquale agreed.
Discussing possible changes to current employees, DePasquale said it is a good thing the governor’s anticipated proposal might move away from taking all current employees out of the system. He also stated it is important to see the details of any plan and whether the plan will be good for the fiscal health of the Commonwealth. Herzenberg added his organization will look at any plan, but questioned if the proposal expected to be offered by the governor will address the basic problems faced by the pension system today. Auditor General DePasquale said some of the legislative pensions get the public the most upset, but are significantly out of line with what most state employees receive.
Mattera noted the discussion today is happening because pension costs are being looked at in a vacuum without other budget variables being looked at. Herzenberg said the Commonwealth is getting close to having a “three-dimensional discussion” about pension costs and noted the recognition last year that corporate tax cuts create some budget difficulties. DePasquale said one of the items of a performance audit of the state employee pension system would be looking at the cost of outside fund managers, but noted no decision to conduct the audit has been made. Herzenberg opined such a review is overdue.
DePasquale said Act 120 of 2010 was a critical reform at the time it was instituted and argued it has bought a lot of time for the state and put in cost saving reforms. He said it is always important to have comprehensive discussions on improving things, even with Act 120 being out there. He stated the same approach taken with Act 120 should be taken with all reforms, both within and outside the pension discussion. Herzenberg explained Act 120 made the cost of pensions relatively low going forward. He said the reforms made in that legislation are working and will work going forward, but Act 120 falls short in dealing with the pension debt side, which is why his organization supports pension obligation bonds.
Robert J Storm
Eastern Region Vice President