Underfunded Pennsylvania Pension Funds Need Real Reform

Pennsylvania is facing a multi-billion dollar public pension crisis – now is the time for pension reform in Harrisburg.  The Public School Employees Retirement System (PSERS) and the State Employees Retirement System (SERS), the two systems administering retirement accounts for state and public school employees, are severely underfunded and will become insolvent without an increase in taxpayer contributions.

In discussing the need for pension reform, in December 2010, I wrote . . .

“did you know that more than half the state’s municipal pension plans are less than 90 percent funded?  Calculated as the ratio of assets to liabilities, 644 municipal pension plans are labeled as “distressed” by the state’s Public Employee Retirement Commission (PERC).  Of those, 26 are less than 50 percent funded and branded as “severely distressed.”

I cannot speak for the accuracy of those numbers thirteen months later, but I have to believe that they have not improved.

One of the last bills signed into law as Gov. Rendell was leaving office was HB 2497, which became Act 120.  But instead of reforming the defined-benefit pension system, this legislation ‘kicked the pension can’ further down the road, by deferring pension payments and increasing the unfunded liability by billions of dollars in lost investments and interest – in essence, leaving the problem on the shoulders of our children and grandchildren.

In the old days, the nature of traditional pension coverage in the private and public sector was quite similar; the majority of all employees were covered by a defined benefit plan where the liability of the pension lies with the employer. However, there is a reason why in the last decade that the vast majority of private sector employees have turned away from defined benefit plans to some form of a 401(k) type plan – the challenge of keeping a defined-benefit plan, particularly in our unstable economic climate, has proven too great for most companies to bear.

Defined-benefit plans may provide the best financial safety net for employees, but most private sectors can no longer afford to maintain them – the strain on the company balance sheets has proved too large for firms to withstand.  And even in the case where a company struggled to keep a traditional defined-benefit plan in place, the economic downturn has prompted plan changes whether they were preferred or not.

Teachers and state workers should not be targeted as public enemies because of their benefit packages. However, I just do not see how their defined-benefit plan (in its present form) is sustainable for the future.  Clearly, pension reform should not affect any vested state employees or pensioners already in the system – changes should only affect future employees.

From the taxpayer side, we are angry because we have to make up the state’s pension fund losses as we watch our own 401(k) accounts depleting. The teachers argue they never took a vacation from paying into the system and that a pension is necessary to attract and keep good teachers.  Pennsylvania State Education Association (PSEA) the state’s largest teachers union is on record that will oppose any proposed changes to Act 120, such as a 401(k) type of defined contribution plan. This is a catch-22 situation; we want to maintain a high quality of teachers and state workers in Pennsylvania, but we cannot afford the current pension price tag.

During the last election cycle, there was much discussion from school board candidates about the District’s financial situation and possible solutions, including imposing an earned income tax.  Some candidates believed that because the financial problems were caused by Harrisburg, that it should be up to the state to find the solution, not the school districts (taxpayers).  Candidate and now re-elected school board president Karen Cruickshank called on the state to “fix your mess” and suggested that residents contact their legislators and the governor to push for pension reform.

State Rep Warren Kampf (R-157) has an editorial, “Change the pension system to help taxpayers” in today’s Phoenixville Patch. In the article, Kampf states that his pension reform legislation,

“will require all new state employees and those hired by school districts to participate in a defined contribution plan (like the 401k-style plan that is prevalent in the private sector) where the taxpayer would  be required only to match the employee’s contribution. This would be in lieu of the traditional defined benefit pension plan”. 

Under Kampf’s plan, state employees would have a system similar to the private sector where an employee owns their 401(k) plan and takes it with them if they leave the job.  In a Community Matters article from December 2010 (cited earlier) I wrote,

“. . . As another form of fiscal responsibility, Kampf announced that he would not be taking the state’s defined-benefit pension plan and will work on the creation of a defined 401K-type plan for legislators and state employees.” 

I have not agreed with all of Kampf’s votes since he took office, but to give credit where due . . .  Kampf’s promise to work on pension reform were made prior to his taking office in 2011, and today we learn that he plans to introduce his proposed reform legislation this spring.  (Click here to read the Phoenixville Patch editorial).

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15 Comments

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  1. I do commend Rep Kampf for addressing this issue, and attempting to align the pension system for state employees with that of the taxpayers who provide the funding for it. It will be interesting to see how legislation emerges from the inevitable lobbying assault in our post Citizens United world.

    Here’s the problem (focusing just on education here, and leaving aside the probability that this will do nothing for the coming PSERS “spike”) that remains to be solved. The full weight of Rep Kampf’s solution falls on the next generation of teachers; nothing on the existing tenured staff, with guaranteed employment and a 75% pension, increased by a quarter with the stroke of a Governor’s pen.

    So let’s see how our local school officials can respond. Can our new contract achieve a significant transfer of benefits cost from the district to the employees, cap the top $90,000 – $100,000+ of the salary scale and invest some of the savings in performance-based compensation that benefits the high quality next generation of teachers that the district needs to attract?

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  2. As long as Americans allow the Federal Reserve to depress interest rates to negative levels pension plans will be unable to pay their promised benefits. Nobody who currently expects a pension on retirement will receive it. Local government has no say over the matter. The Fed has decided to steal from your savings to bail out bankers and you didn’t have a vote.

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    Ray Clarke Reply:

    This is an important point. The PSERS funding assumptions assume a 7.5% rate of return; anything less will require additional taxpayer contributions.

    The current Fed policy of financial repression is one of the tools that authorities can use to mitigate the impact of a recession. Government stimulus spending is another. Both are in play now as we try to adjust to the bursting of the 2000’s asset bubble. [To which the Fed under Greenspan arguably made a major contribution with unduly low interest rates at that time].

    Both stimulus/deficit spending and negative real interest rates are unsustainable in the long term. [As is above-market public sector compensation]. The key question is: can they revive “animal spirits” sufficiently to get the economy growing again, which in turn allows equilibrium to be restored?

    In the meantime maybe we have to look overseas and to higher credit risk for positive rates of return.

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  3. We have to stop offering public employees a defined benefit retirement program like PSERS and SERS. Why?
    .
    It’s not because they can’t work. There are many private defined benefit plans that are solvent even in today’s difficult investing climate. They used reasonable long term investment return assumptions (6% vs. PSERS 8%) and resisted increasing benefits when things looked rosy in the early 2000s.
    .
    The problem with public defined benefit programs is that they are susceptible to political manipulation.
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    Public pensions are too frequently used as political capital. When a pension surplus accrues, it is used to improve benefits for unionized employees. When a pension fund runs deficits, taxpayers are blamed for underfunding them. Politicians get a high political rate of return from government employees for maintaining or improving benefits, but they receive little return for actually funding them.
    .
    As evidence: We had the politicians manipulating the the pension system in 2001 by increasing retirement benefits for all public employees by 25% – including their own pensions. In 2003 and, again, in 2010 the legislature manipulated the pension system by artificially reducing payments into the pension system, thus, pushing the burden off onto future generations.
    .
    Let’s get public employees into a defined contribution plan ASAP.

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    jc Reply:

    sorry but totally disagree. i am a public worker with a dbp and took the job for that reason, its about 60% of my retirement with 30% on my own and 10% from social security, so, your saying i should have this adjusted to a 401k … laughable … i don`t have that kind of money laying around to even come close to making up for this and social security of course is screwed up as well so i could lose that too! this because idiots who run these funds don`t know what the hell there doing and other issues at all levels so they broke it now get it fixed .. it`s not our fault i`m not working till i`m 80 because of other peoples incompetence, i want what i signed on for period and will not vote otherwise nor will my co-workers they broke it`s their problem not us the workers put your over educated, lack of common sense heads together and fix it.

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    margaritiville Reply:

    good point.. as an example of incompetence in investing and savings, my parents were put into an illiquid investment fund that also has lost 50 percent value. They are not wealthy and they were mismanaged. gtheir money should have been in exxon and T bills. Pure investor mistake and my parents not being savvy agreed to it. I have to think the motivation was commissions. So if this happens to small investors, I can imagine those big investment groups getting screwed by their managers. We can’t forget the politicians who set these agreements up too…. Yale? Harvard? Stanford? Not always so wise.

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  4. Pattye,

    I don’t see a catch 22 in today’s world. 40 years ago when teachers made so much less than the private sector, these pensions were a tool to attract people. As Rep Kampf pointed out, that is no longer the case; and I suspect that the figures he cites are even higher for teachers than the average public employee.

    Plus, I think people go into teaching because it is their calling, not for the money. If they go into it for the money, I don’t really want them as a teacher anyway.

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    Township Reader Reply:

    FTW — first part is fine, but your second paragraph is a problem for me. People go to work for the money. If we forget that, we dishonor the notion of work.
    Confucius said “Find a job you love and you’ll never have to work a day in your life” — but the presumption is that you found a job. Please don’t lump teachers into that “love of teaching” pool — that’s not fair. Everyone that has a career hopes to have one they love. Teaching might be a gift — but so is nursing, and any personal interaction. If they went into it for the money, they wouldn’t go into teaching, or nursing, or any of those. So it’s moot.

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    From the West Reply:

    TR —

    Didn’t mean to imply people don’t work for the money, more that when one looks at potential careers based on income possibilities, teaching is not the tops (nor the bottom.)

    I did mean to say that anyone who chooses teaching simply for money reasons isn’t in it for the right reason though.

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  5. This is an extremely well written article and looks at the pension issue in a way that is very objective. It is true that mismanagement of the pensions is a significant reason why the public pensions are in crisis today. There were actuaries screaming that the plans needs to worry more about immunizing future liabilities than managing to market benchmarks that are, in reality, irrelevant for defined benefit pension plans. For 20 years they didn’t listen, and the worst thing that could have happened, did in 2008. The equity markets tanked and rates on fixed income instruments plummeted. For funding ratio’s this was akin to a nuclear bomb.

    There is no way to go back and fix that problem retroactively and the public will be pretty much tapped out on taxes. At the fed level we will all be paying more as a result of the spending binge we are currently on and to fund SS and Medicare for the future. The math doesn’ t lie in the end.

    Retired teachers are living much longer. There aren’t enough tax payers who can fund this arrangement forever. They need to figure out a formula for retirees and those within 20 years of retirement and immunize those assets at 80 to 90% of what the formula stated for benefits. They won’t get 100% but with the path we are on, some will inevitably get close to nothing. This is not sustainable.

    All new hires should be in a 403(b) arrangement that is contributory with a match. Those who have been teaching but are more than 20 years from retirement can be placed in a special hybrid with benefits accrued as of now, payable at 80% of the promise with a new 403(b) built on top.

    DB plans will be a thing of the past very soon. The public just can’t afford them and the demographics make it extremely difficult to keep any promise.

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    From the West Reply:

    Couldn’t agree more about doing something about current retirees (and like your proposal), but I don’t believe that it would ever get through the legislature and, even if it did, not certain how it would stand up to an inevitable court challenge.

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  6. It is true that people work for money in the end unless you are born into wealth. 99.9% of us don’t have that issue.

    That is why I have no issue with TE teachers being paid very well relative to other school districts. They deliever in the end. I wish we could afford a gold plated DB plan and all expenses paid healthcare forever. The reality is that we cannot.

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  7. I hear you West but PA simply can’t print money and the Fed gov is broke as well. The citizens can’t afford all the needed tax increases that would have to happen to fund all the promises made at all the different levels.

    In the end, something has to get done and just hoping things will get better won’t do it. The demographics of too few workers for every worker are undeniable. They either get less or will have to deal with special excise taxes on the payments which will have the same effect. I agree that a judge will rule against it. That won’t matter in the end. It will go all the way to the top.

    This all could have been avoided with proper management. The politicians were too involved. Same thing with SS but the gov can continue to print money (with serious side effects) to deal with that issue.

    A complete mess in every way. Both parties to blame.

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  8. MD — how does your suggestion comply with the constitutional protection against a loss of prospective income? I’m asking. That’s always a major issue when talks of pension adjustments come up. This state is the Quaker State — and we are operating the same way we were designed. sigh.

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  9. There are several court rulings on pension reduction.
    .
    Article I, Section 17 of the Pennsylvania Constitution states that the legislature shall pass no law impairing the obligation of contracts. Pa. Const., Art. I, §17. The statutory terms of the Retirement Code are deemed to be contractually binding on the Commonwealth. Cianfrani v. State Employees’ Retirement Board, 505 Pa. 294, 479 A.2d 468 (1984). Thus, the Retirement Code is in the nature of a
    contract for pension benefits. For that reason, unilateral modifications in the retirement system may not be adverse to a member who has met retirement eligibility requirements. Association of Pennsylvania State College and University Faculties v. State System of Higher Education, 505 Pa. 369, 479 A.2d 962 (1984).
    http://www.courts.state.pa.us/OpPosting/CWealth/out/850CD05_1-24-06.pdf

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