Long-Term Pension Reform … Only Solution For Pennsylvania Taxpayers

As school boards across the state are scrambling to balance their own budgets, it’s also crunch time in Harrisburg. At this point, it is unclear how much help the Governor and his administration is willing to provide in the budget for education.  Even if Corbett restores some of the education funding in the state budget, it seems impossible that the economic crisis in school districts will be solved.

School boards have been put in the difficult position of making tough decisions on educational programming cuts, staff reductions, increased class sizes, etc. in an attempt to balance budgets.  But looking ahead, how does the state and local school districts handle the inevitable … the pension tsunami. Whether it is the pensions of the state government workers or the public school teachers, how is it possible to solve this seemingly impossible situation?

The State Employee Retirement System (SERS) and Public School Employment Retirement Association (PSERS) enjoyed huge investment gains in the 1990’s and the pension funds climbed to 123 percent. In their wisdom at the time, legislators decided to reduce the state’s contribution in May 2001 (known as Act 9).  However, without the benefit of crystal ball forecasting, four months later the world plunged into a recession and the pension funds balances began to fall.  Unfortunately the state’s pension problems were increased with the passage of Act 40 in 2002, which allowed the state to continue to lower their contributions to the pension, increased the employee contribution rate to 7.5 percent and provided for a cost of living adjustment (COLA).

The next round to pound the state pension plans was the recession of 2008.  As a result, the once overfunded pension system plummeted and is currently funded at around 80 percent.  Couple the underfunded pensions with the fact that a wave of baby boomers are set to retire this year thru 2016.  How are the school districts (taxpayers) going to make up the unfunded liabilities?  Pennsylvania school boards are left to manage the 800-lb gorilla in the room – Harrisburg’s public pension crisis.

We know that the only solution to the problem is a long-term pension reform plan.  I have written several articles on the absolute need to overhaul the pension system of Pennsylvania’s state workers. (If interested, enter ‘pension reform’ in the search box on the home page of Community Matters).  It is no longer possible for the state to fund a traditional defined-benefit plan; a change to some type of 401(K) pension plan is needed (required) for all future state employees and public school teachers.

The move away from traditional defined benefit pension plans, where the investment risk is borne by the taxpayer, is long overdue. There really is no other way.  Many legislators have addressed the need for pension reform, including our state representative, Warren Kampf (R-157) who held a town hall meeting on the subject this past March. (Click here).

The school districts do not control teacher pensions – Harrisburg does. The precarious, ‘at the edge of the cliff’ situation of school districts will continue as long as there is no pension reform. There is no ‘new’ news on the pension disaster; it has been staring lawmakers in the face for some time.  But now that the pension crisis is upon us, the real question is … how do we get Harrisburg to act … and to act quickly!

41 Comments

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  1. Here is the one issue that has me so “MAD”!!!!!! The folks in Harrisburg knew this was coming, so they did NOTHING to try and fix. And here we are, most of the school districts in this state are in some kind financial trouble, and still nothing, guess who is going to end up paying for there mess!!!!!!!!! MAD!!!!!

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    Township Reader Reply:

    They did something — they deferred dealing with it….which is what using the fund balance will do in TE.

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  2. Anyone here know if the legislators could try to impound “fund balances” to prop up PSERS? Maybe Districts could make a capital transfer in lieu of climbing rates? THAT would alter the accounting instability…kind of like paying points to reduce your mortgage rate?

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    Kevin Grewell Reply:

    Not sure if some kind of “points” is workable, but it is a good idea – I hope the folks in Harrisburg are thinking creatively like that, maybe they might come up with a solution . . . . . as for impounding the fund blances – I have heard that there is that possibilty. That would be a major power grab by the state vs. the local, and would end up in huge litigation – money paid by local taxpayers for the benefit of their local school district under authority of Act 511 (the local tax enableing act) being taken by the state . . . . . huge legal problem. Therefore I think that is unlikely. Passage of a bill to prevent school boards from raising taxes until their fund balances are used (like the one proposed, discussed in another thread on this blog) seems more likely to me.

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  3. I’m a former resident of PA I moved out 3 years ago since I could not longer afford my school tax bill Conewago township, York County,
    Now back OT. There may not end up being a short fall if the stock market continues to grow. I would do some checking to see how those funds are distributed in the market. who is managing those funds would be something I would want to know.
    I no longer live in PA but would like to return I am now raising 3 grandchildren but I’m not sure I can afford to live there.

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    MD Reply:

    Pattye – great article. Sorry, I took so long to read it. That time of year.

    Tom – the larger issue here is the interest rates being earned on fixed income investments. Most pensions of this type attempt to immunize future liabilities with a stream of steady, predictable income. Basically they match the investment with the liability. The trouble now is that fixed income is paying essentially nothing after inflation is accounted for and that situation has only gotten worse. The rates being so low has caused an acturarial crisis. Without going into mind numbing detail, the math geeks can only assume a very low future return now. This has crushed the funding status of most DB type plans.

    Some of this will be alleviated when rates start to rise. However, we don’t know when that will happen. Last year, if you had told me that the 10 yr treasury rate would dip below 1.5%, I would have told you that we would be in a global depression. The economy isn’t great but we aren’t in a global depression either. While it is OK to have a portion of a pension plan in equities, having too much simply leads to volatility that makes it unpredictable as to whether the promises made will be kept.

    Making this problem much worse is the fact that the politicians are in this type of plan as well. Think they want the gravy train to end?

    Sadly, we are now way past the point where simply reforming benefits for future employees will be enough to fix the system. There are way too many coming up on retirement in 10 years or less in addition to those retired already. In short, there are not enough working citizens to fulfill these promises. This is not only true with TE but everywhere. Look at San Jose as an example of what is going to happen everywhere.

    I know people don’t like when I type this but the Math simply doesn’t lie.

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  4. We are the middle east of oil shale. The state should be able to solve it’s financial problems.

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    Township Reader Reply:

    I was just in Texas with several friends in finance and in oil…and that is what they said…that PA should see the kind of revenues that have traditionally bee in oil rich states (no income tax in Texas and much better educational college support). Where will we look for signs of that? Georgia pays for college for B and above students with their lottery proceeds. Who knows what PA does with ours “for seniors”

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    MD Reply:

    The price of nat gas now is so low that it can be difficult to justify the drilling costs. Also, many want to place additional taxes and regulatory burdens on this as well. So, I wouldn’t count on that as a panacea.

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    flyersfan Reply:

    North dakota is flush with cash. Tax revenues are way up with OUT raising rates. Thinking of doing away with real estate taxes.. From WSJ.. while that may not come to pass, this is a great example of how the private economy should work. Raise all boats possible. 100%? only in Utopia, which doesn’t exist. But this is pretty good.

    While NG prices may be low, there is an expanding market for it. Take note PA.. NY. et. al

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    MD Reply:

    Yes and the supply they are bringing to the market is decreasing the price. PA represents a big risk for energy firms since certain groups want to add new taxes and regulations in order to get the nat gas out of the earth. Actually, they really want to shut it down completely.

    They do have a point though that I believe is valid. In ND, much of the state is rural and the process doesn’t harm or affect many people. In PA, it is a different story altogether. A balance needs to be achieved but don’t think for a second that this is a panacea for PA.

    flyersfan Reply:

    I shudder to think that if todays mindset existed 100 years ago there would be no industrial revolution. There would be windmills and green grass, all very nice but no modern way of life. No one wants contaminated water, air etc. so lets get a way to make it work. Will accidents happen:? Maybe.. but lets minimize them and try to trouble shoot in advance to be able to fix when it happens.
    natural gas may be more expensive to extract here in Pa for the reasons you sighted.. regulations and taxes, over burdening.
    thats a ,metaphor for why pa is last or close to last in business friendly environ ment… We deserve what we get.

  5. I remember talking to Karen Cruickshank about PSERS when she was campaigning door to door last year. She explained to me that TESD contributed to PSERS what they were required by the state to contribute. Which was not enough to cover the actual amount needed. Teachers did contribute what they needed to contribute. Also, another problem that we discussed was that the state legislators voted themselves a “raise” for their retirement plan that also covers our teachers (no fault of anyone local). The amount of return needed to cover this raise cannot be attained in the current market conditions. How can anyone fix a situation where legislators can give themselves a retirement raise with no one to answer to? Vote them out? According to all of this pension talk – once it’s on the books you can’t take it away. Someone has to stop pension that are funded by taxpayers when the taxpayers have no control over increases. Even those that are currently covered.

    I think teachers may have paid an additional amount more than what was required to PSERS. Correct me if I’m wrong. From my conversation with Karen and conversations with teachers it sounds like the school board knew they weren’t paying in enough but as long as they were paying in what was required that was good enough.

    Our teachers are great but when you look at what they are paid and the benefits they receive they need to take a step back and clearly look at what they get. Where can you find a job that you make more than $55K (which I believe is around the starting TE salary and above the average US salary) have 18 holidays during 182 days of teaching and 5 in service days and have 10 weeks vacation for the summer and have personal days and sick days that can roll over year to year and healthcare coverage and an unbelievable guaranteed retirement plan. Many people in our area work before and after the required hours in order to prep for the next day or meeting. That is life. If you don’t like being a teacher or think the compensation is too low go ahead look elsewhere. I don’t think you’ll find anything better. I really don’t have a problem with what the teachers get paid or most of the benefits. I just wanted to point out that it’s a pretty good gig. It’s the retirement that is the deal breaker.

    As far as donating to the Fund for our district with millions of dollars in reserve that I already contributed to via my taxes -I don’t think I can do it. Great Valley School District doesn’t have a surplus fund. So I can understand people donating to it. Can’t wait until the next school board election! I will vote for anyone who is not currently on the board.

    link to the fund…
    http://tesd.net/site/default.aspx?PageType=3&ModuleInstanceID=2466&ViewID=047E6BE3-6D87-4130-8424-D8E4E9ED6C2A&RenderLoc=0&FlexDataID=9866&PageID=1

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    Kevin grewell Reply:

    You make it sound as if the school board could have contributed more to cover psers over the years to prevent psers deficits. I do not think that is correct. Everything about the retirement system is controlled by the state. You are correct when you point out that the legislature increased the pension benefit multiplier (including the legislators’ own pensions) and that subsequent stock market returns could not keep pace with the new increased pension obligations. But I don’t understand the blanket statement “I will vote for anyone who us not on the board”. As you yourself recognized in your comment, the pension crisis is made in Harrisburg – the local board past or present (and several of them have been on the board only a very short time) did not create this problem. What the board (past boards, mostly) can do and did do was maintain a fund balance and designate it for projected expenses including psers obligations. The existence of the fund balance is actually evidence if foresight on the part if boards over the years. Vote for or against people individually based upon their views, qualifications, and records, but please do not just vote against incumbents en masse.

    I was on the board from 1999 – 2007, and served as legislative chairman most of that time. I addressed the looming pension crisis in my remarks at almost every board meeting during my legislative report, beginning in 2003 or 2004 (if not earlier). I, and a number of other board members over the years spoke about this issue to our legislators at our annual legislative breakfast, town halls and other public forums held by legislators, Pennsylvania school board association conferences (held annually and usually attended by state legislators, state senators, and various state officials including department if education officials). In addition, I, and numerous other board members wrote letters, sent emails, and made phone calls to our legislators, urging them to address the upcoming pension crisis and other school finance and funding issues.

    I think it is fair to say that boards over the years have tried to do what they can, but the problems we now face will require state action to fix.

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    Kevin grewell Reply:

    Pardon my typos – doing this on an I-phone and it is difficult. Want to clarify my prior remark – unless I am very much mistaken, my understanding of the pension system is that there is no mechanism for an individual school district to voluntarily pay more than the state requires and thereby fully fund that individual district’s pension obligation and avoid future deficits. That was never, ever discussed or presented to us as an option, and I believe it is because there was no way to do that. It simply did not exist as an option in the state controlled pension system. Setting aside money in the fund balance was discussed and done every year. We might have been ok but for the recession- bear in mind that projected budget deficits are also the result of revenue losses due to lower transfer tax revenue and successful real estate assessment appeals – plus act 1 2006 caps taxing authority.

    You are also correct to point out that teacher benefits are not affordable or sustainable under current economic conditions- that’s where the focus needs to be going forward.

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    Township Reader Reply:

    PSERS has actuarial tables to stay in balance. Even at next year’s 12.36%, this districts are not funding PSERS at the level the retirement forecasts requires. Act 120 put a ceiling on the speed with which the state can levy the contribution.

    Where Mrs. Cruikshank is not quite accurate is that the board has known for a decade that these major spikes were coming, and while they put some money away, they are ignoring that and asking for the full exception to tax for the increase. I refer you to the well written piece in this week’s MLL on the Letters to the Editor page where the writer makes a very cogent argument in support of recognizing that the community does not have the income to support whatever tax the board throws at us.

    But regardless — If you saved 7.5% of your income and your employer matched it year after year, you would still be at the mercy of the financial markets to produce your pension. Teachers are guaranteed 2.5% for every year they teach of the 3 highest years of teaching. It’s simply not possible unless the markets way overproduce….which in all our legislative glory, some I guess thought they would.

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    Kevin Grewell Reply:

    TR – you made a good point, and one I have raised before. I always thought that the “exceptions” in Act 1 were a hollow and illusory promise.

    Taxing more than the inflation cap year after year will prove, in time, to be politically unfeasible. There is high potential for backlash at two levels: locally, the board could be turned over in a couple election cycles to an anti-tax majority. At the state level, I fear that the legislature will begin to modify or eliminate the exceptions.

    It is problematic to have fund balance designated for PSERS and still tax for the PSERS costs annually using the Act 1 exception. The board may feel that it has no choice, but in so doing they inevitably hand a can of ammunition to those who would slash and burn public school programs. And those people are out there. Some very intelligent and educated people I know (I will not name them) believe that the whole agenda is to make the public schools fail across the board so that they can be replaced with private schools and charters.

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    version Reply:

    Totally agree with the public school fail agenda, they can replace with private or charter schools. Just one problem with that, they still need to be paid for them!!!!

  6. Kevin can you synopsize for us what Warren is trying to do, and our other elected officials? Thanks (if you know)

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    Kevin Grewell Reply:

    I think the plan is to go to a 401k type plan going forward for new employees. The problem is there does not seem to be any way to deal with the current employees and the deficits that are already loaded into the pipeline – not sure if Warren has any ideas on that – I have not spoken to him or researched the issue, but I have heard that the problem is changing the multiplier back is not possible legally. My guess is you could call his office and if he is not available one of his staffers could probably tell you what is under discussion legislatively.

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  7. thanks Kevin.. this may sound dumb but if it is illegal to change the multiplier retroactively can it some how be made legal.. say with a lump sum one time in exchange for reworking the law? Assuming the lump sum would work to mollify the unioners and help the districts in the commonwealth?

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    Kevin Grewell Reply:

    I don’t know if that is possible. But we have certainly identified a very key issue – I was just watching the news and there was a segment on litigation filed by the public empolyees’ union in San Jose California. San Jose voters recently approved a reduction in pension benefits. The issue in the litigation is that the reduction applied to current empolyees – not just future hires. We will have to see how this plays out in the courts.

    The tide is running in favor of the taxpayers – with Gov. Walker surviving the recall in Wisconsin and with two cities in California approving voter referendums reducing pension benefits (I think the other was San Diego), but it remains to be see how this effort survives legal challenges.

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  8. I’m surprised the Legislature has not investigated the recommendation from the Pennsylvania Association of School Business Officials (PASBO) and written a law to roll back the 2.5% multiplier to 2% for future years of service.
    .
    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
    http://www.pasbo.org/PSERSReport.pdf

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  9. Someone needs to do some research and see what the latest developments are – I have not done so (kind of busy at work last week – my boss actually expects me to do things for him, not for the public good – how unreasonable of him!) but I think I recall a proposal (there may be a bill proposed, although I may be thinking of the PASBO proposal) to change the multiplier from 2.5 back to 2 going forward for new hires. I think it is legal to do so – the comments I have heard regarding illegality refer to retroactively changing the multiplier for current employees. If an effort was successful – changing the multiplier retroactively (i.e., applicable to current employees) I think we can expect a court challenge. I have no idea how that would go. If I can make some time to do it, I may look into this and post a more detailed comment. (Right now I have a long list of stuff my wife wants to get done this weekend . . . . .)

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  10. Kevin, don ‘g get your wife mad! I too understand the sanctity of contracts. But with negotiation they can be amended. Especially if not doing so would be more detrimental to the aggrieved party(unions) in terms of changing work rules, layoffs or whatever you call it, and more. While it is always give and take, I am wondering how far the union if not the teachers themselves would go to incur ill will of the community. I have fond memories of good relationships my kids and my spouse and I have had with many teachers. But I do wonder how i will go forward in so far as my feelings towards them.. We shall see. Thanks for your input. and don’t get your boss mad either!

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  11. The reality is that there cannot be a multiplier going forwward, but Kampf’s proposal acknowledges status quo for existing employees is the only thing that makes sense. The costs of litigation etc….but that should not stop immediate legislation from changing the plan for all new hires. They did it two years ago by creating a “Z” class of employees (or something equally creative) for people hired after a certain date and reduced their plan compared to the existing one. At the time, so many people here and elsewhere credited them for foresight, but many here and elsewhere also pointed out that they were only shaving costs from a plan that doesn’t work. Bottom line — we need defined contributions, not defined benefits. Which is why the fact that districts continue to negotiate health benefits, instead of health contributions, MAKES ME CRAZY! (Not that I need to point that out….but it’s such small thinking, and yet boards and unions continue to do it.) DEFINED BENEFITS, regardless of the cost sharing proposals, is totally unfair to taxpayers. There is no cap on our exposure..

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    Keith Knauss Reply:

    The cost of litigation is infinitesimal compared to the possible gain from reducing the multiplier going forward. Let’s remember PSERS is a statewide plan underfunded by billions of dollars. The cost of litigation is borne by taxpayers statewide; not just in TE. I’d at least be asking the advice of a lawyer familiar with PA constitutional issues.

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    Township Reader Reply:

    At his town meeting, Kampf went over these issues. His focus is to introduce a new program, but perhaps there will be some movement to modifying the existing program. I’m assuming that the PSEA will spend every dime in their account to prevent any changes — remembering that the PSEA is the largest lobby in Harrisburg. A taxpayer revolt might help, but PA is one strong pro-union state.

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    flyersfan Reply:

    It seems to me that leaving the existing Pension in place and changing it for new hires will work if there is a mass exodus of current teachers. Not likely so we will go further in debt while waiting for some teachers to retire?

    Since this appears to not be a contractual issue negotiable by the board, it appears this will have to be settled by the legislature. I know I am stating the obvious, but keith brings up a point. Maybe litigation, if wise, will pay. What is the breaking point, when the debt gets so large the obligation cannot be met. I think we are there?

    I bet the solution will be the legislature allows more taxing authority to local boards. So we will pay and the unions will continue.. Depending on how high the taxes would be, I would think there would be flight out of TE especially by older community members. Florida anyone?

    From the West Reply:

    The cost may be small comparatively but Rep Kampf showed some case law at his town hall meeting that seemed to indicate a lawsuit would not be successful. Will have to look back at the slides Pattye posted to see if it is in there. I do believe,however, that his legislation offers some incentives for current enrollees to switch to the defined cont plan now.

    Even Rep Kampf said his legislation is not a panacea but is the best first step. I just hope the other legislators in Harrisburg have the courage and sense to take that step with him. Especially when you know the PSEA and other labor unions will fight it tooth and nail.

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    Keith Knauss Reply:

    After reading the PA Supreme Court ruling I concede that changing the multiplier would fail.

    ASS’N OF PA. STATE COLLEGE v. STATE SYS.
    505 Pa. 369 (1984)
    479 A.2d 962
    http://www.leagle.com/xmlResult.aspx?xmldoc=1984874505Pa369_1842.xml&docbase=CSLWAR1-1950-1985

    flyersfan Reply:

    so then keith, the solution, without approval of the union to lower the multiplier, which wont happen, is ultimately our taxes go up. And while new hires will have a new type of contract, the hole will get deeper and the burden will be increased on the taxpayers. Some may not care about that here, some will. But how about the poorer districts in the state.. and the teachers will smile as they drink from the trough on the shoulders of the taxpayer.
    Perhaps when the economy rebounds, hopefully after the next election, a small increase in taxes will be even less painful. Whoever gave away the farm with the current legislation vis a vis the pensions ? What were they thinking? Just about the good times but not about sustainability in tough economic times… Poor planning

    Keith Knauss Reply:

    FF,
    The retirement contributions are but one of several components that comprise a teacher’s compensation. The two other major components are salary and health care. The District may not be able to change the terms of the retirement contributions, but the district does have a say in the other two. To compensate for escalating retirement contributions, the other two components may have to remain level or go down. That’s easier said than done – witness the mess in Neshaminy. This is where the legislature can help by “leveling the bargaining table” with a few changes suggested by the PSBA.
    http://www.psba.org/issues-advocacy/advocacy-services/legislative-testimony/2011/testimony-strike-free-education-boland-082511.asp

    Note: I do not support HB1369 – Strike Free Education Act. We deserve a more comprehensive solution; a nudge like PSBA’s legislative suggestions; not a whack with a sledge hammer as in HB1369.
    .
    I’m wondering if the Walker recall election and the attention drawn to the Neshaminy district will move the legislature to meaningful reform.

  12. http://www.psers.state.pa.us/publications/general/cafr.htm

    Only for those who can bear it…but as they told us in business school—the statements are boring but the footnotes are enlightening. Here you can see that the expenses associated withPSERS are half a billion…and the benefits/insurance costs of PSERS employees are about 35% of salary costs. legal and consulting is a little over $4M….and Act 120 has kicked the can even further down the road, with the hope that newer employees will supplement with much higher contribution rates…
    I found it a bit discouraging to see what looks like $5B in derivatives. Any finance people up for reviewing and analysis?

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  13. This is a very heady and significant matter to be resolved. One has only to look at the crisis in Greece and Spain to see the danger of out of control public sector entitlements.

    This is an significant economic issue that has to be addressed by legislative leaders who are elected. WHO HAS THE COURAGE TO GET THIS REFORM STARTED!!!!

    This require courage, wisdom and lots of analysis. Our lawmakers need our encouragement to address this outside the arena of political wrangling. It would be great if the public sector collective bargaining units would also come forward with some ideas for reform.

    Is this happening? Can it happen? How do we move forward the agenda of reform?

    Forums like this are a great tool to let local legislators know the concerns of the electorate. SPEAK UP!!!!!!

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  14. Call me cynical, but this is the result, this problem of the unions doing a better job of lobbying past legislators and some current ones too perhaps, of the legislators giving way the store. They should represent us, and they were bought and sold by the unions. Who represented us?

    Crony capitalism? How about crony government.

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    From The West Reply:

    Sadly, FF, the legislators back in 2000-2001 helped themselves first. As I recall, they increased the multiplier for themselves, then added the public employees to garner their support for the legislation. It was a self-serving political deal on both sides, made when people (idiotically) thought the economic boom would never end. Of course, like all booms, it did – and left us with an even bigger mess than the system already was.

    The “solution” passed when Drucker was in the House wasn’t a solution at all — it simply kicked the can down the road by (once again) reducing the amount districts/state government had to contribute now while making the end-game contribution even bigger.

    I give Kampf some real credit on this. He didn’t take the DB pension like he promised and seems to have been working hard at crafting a smart approach. Can’t wait to see the legislation and what he’s actually proposing.

    I also feel bad for him: he just made himself an even bigger target of the PSEA, AFSCME and the other public sector unions in his very first re-election. That’s got to be tough, but shows me he is in this job for the right reasons.

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  15. I am a bit sad about this post because I think we really need to act on this pension easy really soon. It can benefit a lot of people and they deserve it anyway.

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