pension reform

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!

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Should School Districts (TESD) Use Fund Balances Instead of Educational Cuts and Teacher Demotions?

Should school districts, such as TESD use fund balances instead of educational cuts and teacher demotions?  The answer according to Governor Corbett and some other Pennsylvania lawmakers, is yes.

Tredyffrin Easttown School District has amassed an enviable fund balance – $32 million; one of the largest in the state.  There are those in the community that support the school board holding on to the “rainy day” reserve funds; primarily because of the dramatically increasing PSERS contributions over the next few years.  We understand that the traditional package of retirement benefits for state employees and teachers has become unaffordable and pension reform is sorely needed (and sooner rather than later).  I support the state switching to a defined-contribution model (401(k) type model) for new hires but that only prevents the underfunded-pension liability problem from worsening … the state has a current multi-billion dollar hole.  But unlike T/E, the state has no “rainy day” fund.  Trying to manage their budgets, the state’s pension crisis has pushed school districts across the state to the edge of the cliff.  There are those that praise T/E for the good job they have done in holding onto their fund balance in spite of the pension crisis.

But not everyone in our school district supports T/E holding onto the $30+ million fund balance; suggesting that this money represents past overtaxing and belongs to the taxpayers and should be returned. Then there is the teacher union’s position that the fund balance should be used before utilizing budget strategies such as demotion or increasing class size.  Some residents fear that as school district’s budget woes push them over the cliff, the state will look to Districts (such as T/E) to bail out their fellow school districts.

Governor Corbett has sent a message to Pennsylvania’s school districts; he believes that they should tap into their reserves instead of cutting programs or laying off teachers and staff. During a recent radio interview with Dom Giordana on CBS channel WPHT, Corbett said if school boards want to cut programs instead of spending more of their financial reserves, than the public should blame them – not his budget.  According to Corbett, “Well, I look at the reserves as – it’s a rainy day fund. And this is a rainy day – we are in a rainy day.” If you are a supporter of our governor, then the message to T/E school board would be no educational cuts, spend the fund balance.

Taking Gov. Corbett’s message for school district’s to use their fund balances, a step further are State Rep. Mike Vereb (R-Montgomery County) and Mario Scavello (R-Monroe County).  These two Republican lawmakers are developing legislation that would force school districts to use their reserve funds to balance their budget before they would be allowed to raise taxes.  Vereb and Scavello want to either limit the amount of money that districts can hold in their “rainy day” reserves or ban the school districts from raising taxes if the money needed to balance the budget is available (in the fund balance).

In an article on Watchdog.org , “Pennsylvania School Districts have Tripled Savings in 15 Years”, it was stated that Pennsylvania school districts have more than $3.2 billion in reserve funds. Data from the PA Department of Education indicates that the reserve accounts have nearly tripled from $1.1 billion in 1996-97 to more than $3.2 billion last year.

The article included an interesting table listing the largest reserve fund increases in Pennsylvania since 1996-97; Tredyffrin Easttown School District has the distinction of coming in 7th in the state.  In 1996-97, T/E had $4,333,661 and in fifteen years increased by more than $26 million to a current total of approximately $32 million.  Amazing.

  Largest Reserve Fund Increases Since 1996-97
  Rank District 1996-97 2010-11 Increase
  1 Pittsburgh $47,013,209 $148,871,185 $101,857,976
  2 Downingtown $183,005 $50,803,447 $50,620,442
  3 Abington $1,509,021 $45,937,675 $44,428,654
  4 Lower Merion $6,584,556 $43,405,136 $36,820,580
  5 Altoona $1,509,021 $45,937,675 $44,428,654
  6 Bensalem $1,674,721 $28,564,360 $26,889,639
  7 Tredyffrin-Easttown $4,333,551 $31,026,455 $26,692,904

 

 

 

 

 

 

Vereb is “furious to find that many of the state’s school districts that are crying poor and blaming the state for their fiscal problems are sitting on surpluses, including one that totals $148 million.”  Although Vereb supports school districts having an emergency reserve, he feels that the taxpayer is deserved an explanation as to why school districts with large fund balances are cutting programs and teachers and raising property taxes but refusing to use fund balances.  That’s the reasoning behind the legislation that he and Scavello are working on — forcing the hand of school boards to use their fund balances before raising taxes.

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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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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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