SERS

PA Pension Crisis: A Vote to Change the Pension Laws is a Vote to Protect the Taxpayers

Unfunded pension liabilities are the dark cloud hanging over the state budget. Years of underfunded retirement promises to public employees has plunged the state into a financial black hole that is approaching $50 billion. The cost of doing nothing increases on a daily basis, and translates into higher property taxes, an inability to fund public education in the manner in which it deserves and painful cuts to critical government programs. The time is now for meaningful pension reform.

Facing huge shortfalls in the two public pension systems in Pennsylvania – PSERS (Public School Employees’ Retirement Systems) and SERS (State Employee Retirement System), State Rep. Warren Kampf (R-157) turned to a strategy that a lot of private companies adopted years ago – moving workers away from the guaranteed pension plans and toward 401(k)-type retirement savings plans.  In 2013, he introduced two pension reform bills to move the public pension systems toward a defined benefit plan with defined contribution systems for all new hires while protecting the benefits of employees currently in the system.

Working with Mike Tobash (R-125) from Berks County, Kampf’s House Bill 1353 was amended to a hybrid pension reform plan that would not change benefits for current employees but would place new employees in a “stacked” pension system, including both a defined benefit and a defined contribution component. An overview of the proposed hybrid plan, including details on the defined benefit and defined contribution aspects, from Tobash website indicates:

  • Benefits of current employees would not change
  • All new state and public school employees would be subject to the same plan
  • The plan is a combined traditional, defined benefit plan and 401-K-type defined contribution investment plan
  • Bill would include provisions to allow absences for leaves of absence, furloughs, military service, disability, maternity leave, Family Medical Leave Act while remaining in the system
  • Employee contribution would be 6 percent
  • Defined benefit for first $50,000 of salary, indexed 1 percent annually
  • Defined benefit is fully earned after 25 years of service
  • Participants are vested after 10 years
  • Defined benefit cannot be collected prior to age 65 without penalty
  • No different classes of service
  • Employee contribution of 1 percent and employer contribution of .05 percent on all compensation up to $50,000
  •  Employee contribution of 7 percent and employer contribution of 4 percent on all compensation more than $50,000
  • Employee contributions vest immediately and three-year vesting of employer contributions

Private employers decided years ago to terminate traditional pension plans in lieu of 401(k) plans and likewise, it is time for government to shift the pension plan’s risk to the worker.  Some employees prefer the 401(K)-type retirement system because it gives more control over the retirement assets, including the ability to take the money with them when they change jobs.

Pennsylvania’s pension reform bill was on a roller coaster ride this last week.  Gov. Corbett has been urging the legislature to pass pension reform, indicating that he would not pass the 2014-15 budget without its inclusion.  But rather than approving HB 1353, the General Assembly voted 107-96 to send it to the House Human Services Committee.  Sending it back ‘to committee’ could have meant the death knell for the bill.  Fortunately, that was not the case and the House Human Service Committee voted to send HB 1353 to the full House for final consideration when the legislators reconvene in the fall after summer recess.

According to Tobash website, the plan is “estimated to save between $11 billion and $15 billion over a 30-year project period” but it is not without its naysayers.  Some who oppose the proposed pension reform plan suggest that it will not solve the current underfunding problem and that it will reduce pension benefits of new employees. Although it is correct that under this plan, new employees will not have the same retirement benefits as those currently in the system, I would ask what is the alternative … do nothing and continue to feed the ballooning unfunded retirement black hole?

Doing nothing to affect the pension obligations is not acceptable, because it only allows a very bad situation to deteriorate even further.  Taxpayers in Pennsylvania are on the hook for almost $50 billion in unfunded pension liability.  The staggering pension debt should concern all of us — it threatens our state’s economy, our citizens and future generations.  Now is the time for meaningful pension reform and lawmakers need to take action.  A vote to change the pension laws is a vote to protect taxpayers – support House Bill 1353.

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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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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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T-E School District has Projected $16 million Budget Shortfall but Underfunded Pension not the Only Factor

Over the next few years, Tredyffrin Easttown School District will be faced with a $16 million budget shortfall; but the pension crisis is not the only contributing factor.

For many years, a growing economy propelled increases in stock prices, enhancing the coverage of many pension plans, public and private. 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.

Pennsylvania, like many states in the country, is facing a multi-billion dollar public pension crisis and now is the time for pension reform in Harrisburg.  The Public School Employees Retirement System (PSERS) and the State Employees Retirement Systems (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.

Pension reform will be to the topic of Rep Warren Kampf’s town hall meeting on Sunday, March 18, 4 PM at the township building.  The school district’s public budget workshop on Monday, March 19, 7:30 PM in the Conestoga High School auditorium, will include discussion of the pension crisis and its impact on the school district.

Kampf plans to introduce legislation that would move state workers and school employees to a 401(K) style retirement program.  All lawmakers should embrace fundamental pension reform but this type of reform legislation is likely to be met with significant political barriers in Harrisburg.  A key driver of ever-rising retirement benefit costs is their hidden nature; it is easier today to promise retirement benefits that will not have to be paid out for years.

The true extent of the unfunded liability of the state pension plan needs to be fully understood. Most of the funding for pension payments – 69% over the last 25 years – comes from investment earnings. The state and school districts combined for 17% over those years, with employees contributing 14%.  The causes of the pension-rate jump, PSERS officials say, were pension-payment increases made over the last decade or so that the legislature did not fund adequately, and investment-market declines in 2001-03 and 2008-09. A Pew Center study shows that the Commonwealth has contributed only 40% of what is actuarially required — the lowest percentage of any state government.Pennsylvania’s two major pension funds were 116% and 114% funded in 2001, but dropped to 83% and 79% by 2009.

We can accept that the pension crisis contributes to the projected school district’s $16 million budget shortfall over the next few years but is not the only factor that led to the current economic situation.  Because school districts are so reliant on property taxes to fund their respective budgets, the last few years and the next several years will show an ever-decreasing revenue stream as property values and real estate transactions have tumbled. The unfunded and underfunded mandates serves only to exacerbate the already difficult fiscal situation faced in the school district.

Looking back at the last teacher contract, the economic picture in the Tredyffrin Easttown School District was very different in 2007 than it is in 2012 — the school board signed a contract that guaranteed 5%+ salary increases each year. Add to that the rising healthcare costs plus the required PSERS contributions, and the total yearly compensation increase package is much higher.  Therefore, it is impossible to balance that increased expenditure when the Act 1 index plus exceptions is below 4%.

Rising healthcare costs and PSERS contributions coupled with decreasing real estate revenues and state and federal support … equals the unprecedented new fiscal reality of our school district.

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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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Public Pension News Out of Harrisburg Today

Following up on the discussion from last night’s school board meeting, there was some interesting news out of Harrisburg today.  The House lawmakers made a first stab at addressing the impending public pension crisis by voting to reduce pension benefits for future state and school district employees.

The House passed an amendment that, among other things, would raise the standard retirement age to 65 for both the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS). The retirement ages now are 62 and 60, respectively. It also extends the vesting period to be eligible for a pension from five years to 10 years.  If I understand the components of the amendment correctly, it would offer the taxpayers short-term relief but also incorporate long-term reform.

The size of pensions for people who are hired in the future would be cut by one-fifth, unless the employees agree to have more money taken out of their paychecks. Retirees would no longer be able to withdraw their own contributions, plus interest, in a lump-sum cash payment upon retirement.

All the proposed changes would affect new employees only. The bill would have no effect on pension benefits for 200,000 current and retired state employees and 500,000 members of PSERS or change the format of both systems’ defined benefit pension plan, under which a retiree collects a percentage of his or her salary based on a formula that weighs age, years of employment and their own contributions.  If enacted, the new pension rules would take effect January 1 for new state employees; July 2, 2011, for new school employees and December 1, 2011, for lawmakers who take office after the fall election.

The underlying bill — which could get a vote on final passage in the House as early as tomorrow — would add to the long-term cost of the pension systems by restructuring them financially but reduce the projected size of crippling payments due into both systems in two years. Should it pass, the bill would gradually limit the amount of a single year’s increase in costs to governments and school districts (taxpayers) to eventually reach no more than 4.5 percent of payroll.

It is my understanding that the prospects of passage in the House appear positive (given its wide support by both political parties).  A positive vote will send it on to the state Senate.

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