Public Pension Reform Needed in Pennsylvania

I attended Rep. Warren Kampf’s town hall meeting, which focused on the state pension system and its impact on the budgets at the state and local level, with specific attention on the additional burden for our school district. Kampf provided an in-depth overview of the state pension system for state workers and teachers and the need for reform.  By the use of a slide presentation, Kampf offered background and history of the state retirement system and a timeline as to how we arrived at the current underfunded pension crisis and proposals for reform.

(To review Kampf’s town hall meeting pension reform slides, click here. There are 19 slides, so it takes a couple of minutes to load.)

What are the reasons that Pennsylvania is now facing a multi-billion dollar public pension crisis?  Kampf offered three – benefits, stock market/rate of return and underfunding. The stock market declined in 2001 and then we saw the substantial losses of the market in 2008.  The declining rate of return from the stock market had a direct impact onPennsylvania’s public pension plan.

As Kampf explained, the state has no ‘raining day’ fund to help with the pension crisis whereas T/E School District has one of the largest fund balances of all school districts in the state — $30 million.  Trying to manage their budgets, the state’s pension crisis has pushed school districts across the state to the edge of the cliff.  There was praise to our school district for the good job they have done in spite of the pension crisis.

Many in the audience wanted Harrisburg to ‘fix’ the current pension plan and change it not only for future hires but for those workers currently in the system. Kampf explained that due to the state constitution, that although not legally impossible, it would take years to change the constitution to enact any change affecting state workers vested in the current retirement plan.  Realistically speaking, any proposed pension reform legislation should focus on future employees in the system.

Various options for changing the current pension retirement plan were offered and discussed – (1) a defined contribution 401(k) type of plan, (2) a hybrid plan with a defined benefit as a component.  This plan sounds like social security and is viewed as a ‘half’ measure; it gets you somewhere but not far enough, and (3) a cash balance plan with mandatory employer contribution shared between shared between the state and school district but was not viewed as solving liability.

According to Kampf, the proposed pension reform legislation that he plans to introduce will suggest a 401(k) type of retirement plan. He was clear that the current retirement plan needs to change – the state needs to stop adding additional workers to the current system.  As he says, the bottom line is that there is no easy way out and any pension reform will require discipline.

Kampf understands the pension crisis and appears to have a vision for how the state needs to move forward to correct the problem.  The traditional package of retirement benefits for state employees and teachers has become unaffordable and I support pension reform – and sooner rather than later. For future pension benefits, I think that the state should switch solely to a defined-contribution model, akin to a 401(k) model, for new hires.  This will help prevent the underfunded-pension liability problem from worsening while the state climbs out of its present multi-billion dollar hole. For the record, I do not support any change for those public workers vested in the current retirement plan; only for new hires.

If Kampf’s proposed legislation for pension reform includes a 401(K) type of retirement plan, his plan will have my support.  State and local governments around the country are taking similar steps to reduce retirement costs, often prompting battles with labor unions. Structural and long-term reforms to the pension system could go a long way toward improving the fiscal outlook of state and local government.  However, the issue of pension reform could be a political minefield for state legislator. Kampf’s pension reform is probably not going to be him in a favorable position with the teacher’s union (PSERS) or the state employees union (SERS).

Pennsylvania is not alone in its need for pension reform.  According to the National Conference of State Legislatures, from 2009 to 2011, 43 states enacted major changes to retirement plans for public employees and teachers.  I hope that through pension reform legislation, the burden pension systems place on state budgets and taxpayers can lessen, while still ensuring a stable financial future for government workers.

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13 Comments

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  1. The state and local levels need to hold up their promise to the employees they hired. The government made a mistake and has to learn from it and own up to it, not punish the people that work for them. The people they hire in the future can accept the jobs knowing the change in the pension.

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    Pattye Benson Reply:

    Absolutely agree — changes to the retirement benefit plan should only be for new employees.

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    From The West Reply:

    As Pattye reported, Rep. Kampf’s proposed legislation is for all new hires, not existing members of the pension system. I know there are other proposals out there that would revise benefits for current pensioners, but as Rep. Kampf pointed out, there are legal and legislative hurdles that probably won’t be jumped to make that happen.

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  2. “The state and local levels need to hold up their promise to the employees they hired.”

    The promise made to many at the time they were hired was in fact much less than the windfall received from Harrisburg in 2001.

    “The government made a mistake ….. and has to own up to it”

    Well, the government is us, and a whole generation of our children and grandchildren who will receive a less rich educational program because tax dollars are being diverted to pay the future compensation of their teachers (and administrators, etc.). Plus, with so much of the pie going to retirees, new teacher quality will inevitably suffer.

    So, how hard would it actually be for retirees to go back to a multiple of the original 2% rather than 2.5%? That $100,000 a year, 30 year employee has to get by on a pension of $60,000 a year, rather than $75,000? [For 25 years of retirement even the lower figure is $1.5 million.]

    I was encouraged to hear that at least one of the TE representatives has a little courage to take on this issue. Rep Milne reported at the TE Budget Workshop that he is a co-sponsor of a Bill to require the House to fully examine all the legal possibilities around this issue.

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    Township Reader Reply:

    Ray
    While it’s good to applaud Rep. Milne, and I do, I also think it’s wise to recognize the litigation exposure any effort to attack the constitution might cause. Rep. Kampf was very clear in his presentation that he believes a constitutional convention to change the constitution would be an option, so while your conclusion that “at least one” has courage is correct, I think “both” local Reps are on the same page. Dr. Milne in fact has a PhD in Political Science, while Rep. Kampf has a JD. I think their backgrounds are reflected in their approaches and we are well served in this area to have both.

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  3. Ray,
    .
    Fully examining the legal possibilities is excellent news. In 2010 the PA Association of School Board Officials (PASBO) issued a report with their recommendations on how to “fix” PSERS.
    http://www.pasbo.org/PSERSReport.pdf
    In that report they suggested, not rolling back the 2.5% multiplier retroactively for current employees, but just rolling it back to 2% for future years. This may be a solution to the “contract impairment” ruling from the PA Supreme Court.
    .
    From the PASBO report:
    We understand the sensitivity of state appeals courts to the contract impairment doctrine for public employee pensions; however, we believe that the General Assembly should consider a roll back of the multiplier for existing employees. Current employees would be credited with benefits determined by using the 2.5% multiplier for completed years of service. The multiplier roll back would only apply to future years of service…

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  4. One of the more interesting slides Rep. Kampt shared was relating to the rising cost of administration vs. enrollment. I propose a “luxury tax” on administrative pay into PSERS, to keep districts from bidding up the costs of administrators, which is not a negotiated but a “meet and discuss” cost. Pay the admins what you want, but since admin salaries are truly boosting the PSERS liability (admins stay in their jobs and get raises and accrue additional pension liabilities ), then generosity in their base salary needs to slow down or end.

    [Reply]

    Keith Knauss Reply:

    TR,
    .
    Looking at the slides posted on this web site, I don’t see any slides relating to administrators. Did I miss something? I did see a slide relating to staffing which includes teachers, support staff and administrators. (administrative salaries are the smallest segment) But none relating specifically to administrators.

    [Reply]

    Township Reader Reply:

    Sorry KK. Not in the handouts. I had a follow up discussion with him on the notion of administration — which while the “smallest segment” is a proportionately growing cost.

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  5. I am very pleased that Mr. Kampf seems to be focusing his greatest effort on public pension reform and prevailing wage. He is taking on special interest groups (construction and public employee unions) on behalf of the rest of us, the taxpayers. We sent him to Harrisburg to work for us and he is doing so.

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  6. I am very frustrated with all the solutions ‘offered’ to the pension issue. They almost always involve cutting benefits for future employees by huge amounts. Sabotage the future while keeping current employees (and certainly retirees) subsidized with clearly over-generous pensions compared to just about what everyone in every other walk of life gets. I don’t want public employees to retire with meager benefits, but a system which allows for an employee that works for 30 years to get 75% of salary in retirement is over-generous and is basically unaffordable (not just in PA, but in state after state). This is especially true because the private sector (businesses, private colleges, foundations–anything that is not public) have basically fazed out defined-benefit pensions and give their employees 401K/403B ‘pensions’ that are not generous at all.

    It’s easy for these state legislators to posture and talk about reforms that we will see results in about maybe forty or fifty years, but in the meantime those current pensions will have to be paid out. I know those obligations are ironclad (except in the case of default) so we could have a crazy system where eventually huge portions of the state and school districts budgets could go to retirees while current teachers/employees/students basically have to do without anything near adequate resources. I remember that vote in 2001–proposed by a Republican sate legislator in the middle of the state (the legislators made out best of all), when the legislature was under GOP control, and then signed by Governor Ridge. Not many people spoke out–this was a ‘bipartisan’ affair that I wished had turned partisan since it was so unwise.

    Ridge swept to re-election in 1998 with a lot of union support. I have always suspected (but certainly don’t know) that there could have been some sort of tacit understanding when he received all those endorsements and the Democrats abandoned their own nominee, Ivan Itkin, who ran a campaign with almost no money.

    I have no solutions and have not seen any remotely owning up to the severity of the problem offered either except to make drastic reforms for the distant future (pardon this image, but I keep thinking of a metaphorical middle finger salute to future generations embraced by so many now). I find this all unsettling, a lot of unwise decisions from the late 90s and early 2000s (at so many levels of government) with no real concern of consequences.

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  7. I do not want to ‘filibuster’ but this is one more relevant aspect to this discussion reported recently in the NY Times: the poor performance of the retirement fund in investing. What makes this particularly aggravating is that PA paid out $ 1.35 billion in private management fees in a five year period–far more than any other state for the size of assets (just over $26 billion). Despite all the private-sector ‘expertise’ the returns on the PA retirement fund have lagged–at 3.6% annually compared to a median of 4.9% for other states (and this number seems to not include the hefty fees paid to the management companies if I read the article correctly). This is far below the goal of 8% or whatever. PA also puts a larger amount of assets in clearly risky investments. Now, the best run pension system in the world will not solve all the problems of promised pensions–but it certainly could help. I guess the best thing that could happen is for the economy to start growing rapidly so that more tax revenue flows to the state and the the pension fund to start making big returns. I kind of think that sort of hyper-charged growth very unlikely and if it did occur it would be because of some unsustainable ‘bubble.’ Here’s the NYT article:
    http://www.nytimes.com/2012/04/02/business/pension-funds-making-alternative-bets-struggle-to-keep-up.html?scp=1&sq=pennsylvania%20pensions&st=cse

    [Reply]

  8. JJ
    I’m just speculating, but I think much of the money of the state is managed by groups that have an association with the governor (whoever it is). So, if the fees are unreasonable, how do we challenge them? Are those fees payback?

    [Reply]

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