Pa. Pension Crisis Reforms Get First Vetting Tuesday

By Eric Boehm | PA Independent

HARRISBURG – Lawmakers in Pennsylvania may be ready to take a small first step toward reforming the state’s pension systems.

A joint hearing of the House State Government Committee and the House Finance Committee — scheduled Tuesday morning — will begin the process of reforming state pension systems. Nine bills are on the agenda, but no votes are expected during a session that is likely to focus on building consensus on how to address the $40 billion – and growing – public pension liability.

Lawmakers will hold a summer hearing at the state Capitol to begin addressing pension reforms

Two proposals by state Rep. Warren Kampf, R-Chester, figure to highlight Tuesday’s meeting.

Kampf wants to create a system modeled after the 401(k) plans more commonly found in the private sector.

“The state government has demonstrated its inability to properly manage a pension fund,” he told PA Independent on Thursday. “We are significantly underfunded not just because the economy is down, but because very generous benefits were granted in 2001 and then really not adequately funded anywhere near where they should have been.”

His proposals would move all future state and school district employees into the so-called “defined contribution plan” and give current workers a bonus if they chose to leave the existing system for the new plan.

In Kampf’s plan, the state would have a set contribution rate of 4 percent for new workers, but current workers could opt to join the new system in return for a 7 percent contribution from the state.

In the current defined benefit system, the state contribution varies from year to year while employees also contribute a share of their pay toward benefits, with investment earnings filling in the rest.

Starting in 2001, the state artificially set its contributions lower than necessary to divert that spending elsewhere in the hope that investment returns would make up the difference.  That approach may have worked if not for the 2008 crash, in which the pension funds lost about 40 percent of their value.

As a result, contributions from the state are set to explode in coming years – from about $1.6 billion this year to more than $4 billion by 2016.  Put another way, the state contribution will climb from 8 percent of payroll this year to more than 25 percent by 2016 to make up for the years of underfunding.

The unfunded liability at the State Employees Retirement System is more than $14 billion, according to its most recent report from December 2011. The unfunded liability at Public School Employees Retirement System is more than $26 billion, according to its most recent report in June.

Kampf and other advocates of the switch say it would make the pension system more sustainable, as well.

But unions generally oppose a change to defined contribution plans, as it puts more risk and responsibility for investing on the individual worker.

Gov. Tom Corbett has said he believes pension reforms must be enacted before the next budget year begins in July 2013 as the costs to the state are increasing faster than Pennsylvania’s ability to pay.

The state’s pension obligations were cited by Moody’s last month when the credit rating agency downgraded Pennsylvania’s debt rating from Aa1 to Aa2.

Bill Patton, spokesman for House Democrats, said there is widespread interest in resolving the pension crisis, which could include moving future employees into a new pension plan.

“A number of members agree that it’s something that needs to be looked at, but even if we were to do that, it would not address the existing costs that have to be paid,” he said.

Restructuring the pension system for future workers is a good first step, but lawmakers have to also consider funding reforms to address the existing liability, said Rick Dreyfuss, a retired actuary and pension expert for theCommonwealth Foundation, a free market think tank here.

The options are not good ones: raise more revenue through taxes or fees, borrow money to replace one kind of debt with another, or cut spending on other things to pay down the liability, he said.

“There is a very low political rate of return in funding the pension system properly,” he said. “I’ve never seen a candidate run for office on the platform of, ‘Elect me, I’ll pay off the pension liability.’”