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How to Halt Pennsylvania's Pension Crisis?

GOP Senators have a plan to change the way Pennsylvania pays for pensions of future workers

By Melissa Daniels | PA Independent 

HARRISBURG — Pennsylvania Senate Republicans are thinking long term: Halt the pension crisis by changing the pension system.

But so far:

  • Proposed reforms don't address billions of dollars in annual contributions or the unfunded liability.
  • Nor do they address additional pension costs borne by local governments.

No plans are announced for those looming matters, but for now, they've come up with a plan to change how the state pays for pensions for future workers. 

Last week, a group of Republican leaders in the Senate sent a news release announcing plans to reform the state’s pension system. No proposal is on the table yet, but lawmakers expect to introduce legislation in early June.  

The reform would switch public employees from a defined benefit plan to a defined contribution plan. The former determines fixed employer contribution rates based on years of service. The latter is a 401(k)-style plan requiring larger employee payroll contributions. 

The proposed Public Employees’ Retirement System would kick in for employees hired on or after Dec. 1, 2012. The state's pension contributions are scheduled to hit $1.6 billion in next year’s budget and as much as $10 billion by 2035, all of which will not be funding education, transportation or public safety. 

Senate Majority Leader Dominic Pileggi, R-Delaware, acknowledged that switching plans is just a start to addressing the crisis. Senate leaders say they'll bring up legislation in June. 

“This bill is not a total solution but an important part of the solution, one that is achievable, one that’s easy for people to understand, and one that, in my view, is long overdue,” Pileggi said. “We need to start the process that new employees participate in the same kind of pension system the private sector has completely moved to.” 

The new plan would cover state and public school employees, including elected officials, who would otherwise enroll in the State Employees Retirement System or Public School Employees Retirement System.  Some doubt a new plan would cause a ripple of savings.

If new employees go into a different plan, they would no longer be contributing to the defined benefit plan that is the source of the crisis, said David Fillman, executive director of the Pennsylvania council of American Federation of State, County and Municipal Employees, a union for public and nonprofit employees. By law, the state is locked into paying legacy costs for existing employees. 

“This does not help the problem,” Fillman said, “it helps the problem maybe 30 years from now.” 

In addition to the annual payments into the pension systems, an unfunded liability could be as high as $50 billion. Rick Dreyfuss, senior fellow with Pennsylvania think tank the Commonwealth Foundation, said switching to a defined contribution plan doesn’t eliminate the deficit or reform the plan as a whole.

Funding reform is just as essential as plan reform, Dreyfuss said. For example, whose obligation is it to pay for a pension in the first place, this generation of taxpayers, or the next? 

Defined contribution plans could save approximately 2 percent of payroll, but an accurate estimate is hard to come by because contribution rates vary based on the type of employee and plan, Dreyfuss said.

More importantly, the switch takes the "politics out of pensions." “This is certainly not a magic wand, but that said, I think it’s indicative that these programs don’t work particularly well in a political domain, and that’s why we need to go into a different direction going forward,” he said. 

But as lawmakers talk about statewide reform, it’s important to look from the bottom up. Dreyfuss said while the pension argument is often focused on state employees, local governments are not exempt from the pension crisis. There are 2,200 different plans statewide, with no mention of a potential overhaul coming from the state.

"Pittsburgh and Philadelphia have very significant deficits in absolute dollars,” Dreyfuss said. “They’re not as large as PSERS and SERS, but, proportionally speaking relative to the size of their government, they’ve got some significant challenges.” 

The proposed legislation would not take municipal pensions into account, though legislators have tried to address that problem with separate bills in the past. 

To this point, Pileggi said it’s better to lead by example. “Local government pensions are an issue that we need to address,” Pileggi said. “… . If state House members and senators and state employees are not participating in a defined contribution plan, it’s hard to turn to municipal governments and say their employees and their local elected officials should participate.”

bill frome June 10, 2012 at 08:10 PM
This is why the republicans will win this election by a land slide. I was going to vote for tim holden but the democrats replaced him with a extreme left hypocrite lawyer. Yeah not voting for him. Looks like its going to be the republican candidate for me.
Amend June 10, 2012 at 11:54 PM
I find it perplexing that someone would support pension reform, yet doesn't take issue with a presidential candidate who made millions of dollars last year, and placed in an offshore bank so that they could skirt U.S tax liabilities and end up paying less 15% rate. Sure, we should address unsustainable pensions, but being wealthy shouldn't allow you to work the system in your favor anymore than collective bargaining should.
truth seeker June 10, 2012 at 11:57 PM
Bill and Friends are not interested in the serious waste of money going on this country. He is only worried if it deals with public workers.
LMTnative June 11, 2012 at 12:33 PM
I find it interesting that every article regarding the PSERS funding issue fails to disclose the origin of the problem. When the PSERS was created it was based on equal contributions from the teachers, schools districts, and the state. When the stock market was booming a few years back the state and school districts reduced and eliminated their contributions for a few years and only the teachers were left contributing to the fund. Now that the stock market has busted and the state and school districts must resume regular contributions and make up for their delinquent payments everyone is pointing the finger at the teachers. Guess what folks, the teachers held up their end of the agreement and made their payments, it's the bureaucrats in Harrisburg that caused the problem.
ted.dobracki June 11, 2012 at 12:50 PM
I agree with almost everything that LMTnative says, but I do put some of the onus on local school boards since they spent the money that was saved. While the ultimate decsions were made by the legislature, it was heavily influenced by school boards who urged it to pass Act 38 of 2002 (and later Act 40 of 2003), which deferred pension costs to the future (now). More specifically, in 2002 after PSERS actuaries recommended raising the employer contribution rate from 1.09% to 5.64%, it was later foolishlly reduced to only 1.15% of payroll after complaints from school boards and other lobbying groups about raising the rate by and "unprecedented" 460%. Unprecedented my foot - the contribution rate was close to 20% for most of the early 1990's when I was on a school board. It didn't have to go that high again, but probably it will now after the extended pension cost holiday that both the state and local districts enjoyed. At the time (in 2002), I commented publicly about how that this would be disasterous, both at an EPSD school board meeting and also in the MC letters to editor page, not to mention several other school boards, including some in other counties. I was shocked by this action since the normal pension cost was about 8%, but people were complaining about 5%, and I could see trouble coming down the road. I even suggested that the money saved by avoiding contributions should be reserved rather than being spent, but of course that didn't happen.
Rob Hamill June 11, 2012 at 08:12 PM
PSERS is giving the defined benefit public pensioners a guaranteed 7.5%. Their plans have more than doubled since 2002 thanks to the guarantee. Mark, it is time to take 50% from current pensioners to address the problem, complain all you want, but the public ain't standing for your pensions when they are broke.
Liberalism is a mental disorder June 11, 2012 at 09:43 PM
It's going to be real fun in about 5 years... the state will be going broke, and they will have to declare bankruptcy when they can't meet all the pension obligations. Once they do that, bingo, all the agreements are GONE. HA! Then the greedy public workers will take 50 cents on the dollar, and go cry in their coffee and march around with picket signs every day. It will be TOOO LATE. None of them will be reasonable now, so I will delight in the collapse of the system. Can't happen too soon.
Liberalism is a mental disorder June 11, 2012 at 09:46 PM
Who cares who is at fault. We have a problem. We are not going to tax our way out of it. Start cutting the pensions for current employees. Anybody under 50 gets the cut. Too bad. Just like the rest of us who have lost our pensions or had them cut way back. We pay your wages, you deal with reality just like us.

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