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Thehardtruthofpensionreform

JimPawelczyk,PhD
2

BoardofSchoolDirectors,StateCollegeAreaSchoolDistrict
StateCollege,PA
July26,2014
Withcombineddebtsapproaching$50billion,thePublicSchoolEmployeeRetirementSystem(PSERS)
andStateEmployeeRetirementSystem(SERS)areintrouble.Theblamegameisinfullswing:Itsthe
legislaturesfault.Itsthegovernorsfault(insertanygovernorofthiscentury).Itsschoolboardsfault.
Itsunionsfault.
Takeyourpick.Tosomedegree,eachassertioniscorrect.
GovernorCorbettissoundingthealarmformeaningfulpensionreform.Reform,however,hastwo
differentmeaningsinlegislativedoublespeak:Reducecostsbychangingbenefits,orprovidebudgetary
relieftoemployersbydeferringpayments.
Harrisburgisbuzzingwithproposals.CurrentlythemostpopularpoliticalfootballistheTobashplan;a
hybridpensionmodelfornewemployeesthatwouldcapdefinedbenefitsat$50,000peryearfor
qualifyingretireesandwouldcreateavariableannuityforbenefitsinexcessofthecap.
Dependingonwhomyoutalkto,theTobashplanwilleithersavetheCommonwealthordestroyit.Lost
inthebloviatingisthisfact:Assumingallassumptionsholdtrue(atenuousassumptionitself)actuarial
studiescommissionedbythePublicEmployeeRetirementCommission(PERC)showthatanypension
reformproposalunderconsiderationwill,atbest,reducecostsby23%overthenext30years.
Cappingmaximumpensionsforonlynewemployeeshasnoappreciableimpactonpensionbillsforat
least20years,ifatall.And,asearningsassumptionsarescaledbacktomorerealisticexpectations,its
likelythattheseproposalswillgrowthepensiondeficit,justastheAct120reformsdidin2010.
Thatsnotmuchcauseforcelebration.Moodys,theinvestmentservicethatjustreduced
Pennsylvaniasbondratingtothethirdlowestinthenation,seemstoagree.
OneofMoodysconcernsisthatcurrentproposalsdontreducetheseaofredinkthatthepension
systemsface.Despitequadruplingemployerpensioncontributionsoverthepastfouryears,the
systemsstillrequiremassiveamountsofcashfromsavingsornewrevenue.
Ifchangingbenefitsfornewemployeesisntenoughtoshrinksystemcosts,whataboutreducing
benefitsforexistingemployees?Unionsarequicktopointoutthatbenefitscantbechanged
retroactivelyforexistingemployees.Paradoxically,theywereequallyquicktoacceptretroactive
benefitincreasesin2001.Iftheyhadnt,PERCestimatesthattherewouldntbeapensionproblem
today.

1
AnabbreviatedversionofthisarticlewaspublishedintheCentreDailyTimesonJuly26,2014.
2
TheviewsexpressedherearemyownanddonotnecessarilyreflectthoseoftheBoardofSchoolDirectorsorthe
StateCollegeAreaSchoolDistrict.
Meanwhile,schooldistrictsandHarrisburgcryfoulandtouttaperingthecollarsanotherformof
deferralaspensionrelief.Sorry.Inthelongrun,theirsirencallswillcauseourchildrenand
grandchildrenmoreharmthangood.
LegislatorsseriousaboutpensionreformwouldbewisetoadoptThomasJeffersonspointofview:No
generationcancontractdebtsgreaterthanmaybepaidduringthecourseofitsownexistence.Instead
ofcommittinggenerationaltheftbyexpectingourchildrentofootabillthatwehaveneglectedtopay,
howaboutoneoftheseproposals?EachwouldpayoffPSERSdebtsin10years:
Raiseboththestatesalestaxto6.75%andthepersonalincometaxto3.60%.Thatswhatthe
PERCcalculatedinareportissuedearlierthisyear.
Implementa10%naturalgasseverancetax.Itwouldbethehighestinthenation;doublewhat
thePennsylvaniaBudgetandPolicyCenterrecommends.
Doublecurrenttaxesgeneratedbygamingrevenue,eliminateexistingpropertytaxrelief,and
allocatetheentireamounttopensions.
ReducestateK12educationfundingby15%andeliminateenougheducationalprograms
statewidetofurlough15,000personnelequivalenttoalltheteachersinthePhiladelphiasand
Pittsburghsschooldistrictscombined.Thatfreesupenoughstateandlocalrevenuetopaythe
pensionbill.
Reducefuturepensionbenefitsforcurrentemployees,andbepreparedtolitigatetheinevitable
suitinfederalcourt.
Regardlessofhowyoumightmixandmatchtheseoptions,onesoberingconclusionremains:Wehave
dugourselvesaverybighole.Thatsthehardtruthofpensionreform.
Iflegislatorsdonthavethestomachforrealsolutions,thenheresmyrecommendation:Change
nothinguntil2018orlater.Itallowsenoughtimeforthegrowthinemployerpensioncontributions
stuntedbylegislativedecisionsin2010toreachaminimallevelofactuarialsanity.Theresaslim
chanceitwillbeenoughtopayoffourdebtsoverthenext30years,butdontbetonit.Inthe
meantime,focusonpayingyourshareoftheemployercontribution,justlikeschooldistricts.Itsnot
goingtobeeasy.
Ourelectedofficialsdemonstrateahistoryofunderfundingandoverpromisingpublicpensions.Absent
meaningfulreform,thehardtruthisthatemployerpensioncontributionswellnorthof30%ofpayroll
arethegoingpriceforfiscalaccountability.
ChangestoPennsylvaniaspublicpensionsystemsaredesperatelyneeded.ButifHarrisburgdefersthe
inevitablerequirementtorefundthesystems,astheydidin2003and2010,theyllcompoundexisting
problemsandsaddlethenextgenerationofPennsylvanianswiththeconsequencesoftheirfailed
leadership.
Pleasehelpyourlegislatorfindthecouragetoaddressthisproblemresponsibly.Ourfuturedependson
it.
MoreinformationonPSERScanbefoundathttp://www.psers.state.pa.us.PERCanalysisofpensionproposalsare
availableathttp://www.perc.state.pa.us.

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