Underfunded pension

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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