The State Level Pension Crisis: Pennsylvania
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Editor’s Note: This piece will be the beginning of an investigative series in partnership with Watchdog.org‘s state-level journalists. Pension budget woes beset nearly every state in the union and cities and municipalities are also being hit with unprecedented pension debt. Baby boomers are retiring. Some state and local budgets allocate more funds for pensions for retirees than they use for actual services and current worker pay. Once again, the younger generation is saddled with debt from a previous profligate era.

 

Pennsylvania’s public pension liability is one of the worst in the nation, and it’s going to stay that way at least until next year because lawmakers bent to the will of the state’s public-sector unions and killed a measure that would have overhauled the system.

A bill to create 401(k)-style hybrid defined contribution and benefit plans for future hires in the Public School Employees’ Retirement System and State Employees’ Retirement System failed to gain enough votes in the state House last week.

Despite the measure not affecting current employees, it was a bridge too far for government employee unions and the lawmakers who support them.

Union officials did not return multiple requests for comment. But Jerry Oleksiak, president of the Pennsylvania State Education Association, wrote in a PennLive oped that the pension reform bill would drive away young teachers in a state already facing a teacher shortage. “The promise of a stable and secure middle class retirement is a good incentive to enter a high pressure profession that doesn’t pay nearly as much as other jobs that ultimately require advanced degrees,” Oleksiak wrote.

But he offered no suggestions on how to address the $63 billion in unfunded liabilities the pension system has accumulated.

[Jerry Oleksiak, president of the Pennsylvania State Education Association] offered no suggestions on how to address the $63 billion in unfunded liabilities the pension system has accumulated.

“The crisis has been caused here because of benefits increases that weren’t paid for, from not deferring costs and not making payments, and then from estimating that we’re going to get seven and a half, 8 percent return on the stock market every single year,” Nathan Benefield, vice president of the Commonwealth Foundation, told Watchdog.org.

The unfunded pension liability has skyrocketed from $7.6 billion to more than $63 billion since 2006.  Pension costs have been partly to blame for driving numerous school districts to consider property tax hikes and layoffs during budgets discussions for the upcoming school year.

Benefield said the union’s unwillingness to compromise on pensions will hurt its own membership because the result will be layoffs.

He said that a 401(k)-style defined contribution plan would take much of the politics out of pensions.

“Moving to a defined contribution plan means that the state makes a matching payment every year, so it’s always fully-funded. There’s no underfunded liability, no debt in there, and taxpayers don’t bear the risk from stock market loss.”

Nationwide, the differences between private sector and government employee benefits are striking. According to March 2016 data from the Bureau of Labor Statistics, 48 percent of private-sector workers have a defined contribution plan like a 401(k), while only 6 percent of state and local government workers do. On the other hand, 57 percent of government workers have a traditional defined-benefit plan, compared with only 4 percent in the private sector.

A surprise bill for taxpayers

Sheila Weinberg, founder and CEO of Truth in Accounting, told Watchdog.org that unions have more influence in these decisions than taxpayers, who often pay little attention to the arcane world of public pension finance.

Part of the reason for that is that the depth of the problem began to become transparent only with the imposition of new reporting standards last year.

Pennsylvania did not report pension debts before 2015, when it adopted the Governmental Accounting Standards Board’s new standard, which requires a fuller disclosure of what is owed.

After reporting no pension debt in 2014, Pennsylvania reported $14 billion under the new regulation.

But Truth in Accounting, a non-partisan organization that advocates transparent government financial reporting, estimates that Pennsylvania has an additional $21.7 billion in unreported pension debt. Weinberg said the state does not report its 50 percent liability to teacher pensions, but it should because the contribution is required by law.

“The taxpayers haven’t had skin in the game where they’ve had to pay for it,” said Weinberg. “Once they’re going to have to pay for this … then they’re going to start demanding change.”

California and Illinois, notorious for unsustainable budgeting, had 2015 pension debts of $78.8 billion and $116.8 billion respectively. Nationwide, states have accumulated $684 billion in unfunded pension debt.

In addition to the $35.7 billion in unfunded pension benefits, the state owes $22.6 billion in unfunded retiree health benefits. In total, Pennsylvania is carrying $106.5 billion in debt, including state bonds, capital asset-related debts and other liabilities, as of 2015. Of that, $65.8 billion is unfunded.

“Current taxpayers should pay for their bills, but they have pushed those comps onto future taxpayers,” said Weinberg. “Somebody in the future’s going to have to pay taxes for people’s retiree health care and pensions. Those people are retired and those taxpayers aren’t receiving services from that person.”

Weinberg is confident that as the problem gets more attention, support for action will increase.

A number of Pennsylvanians have already decided that something needs to be done.

An October poll of 764 Keystone State voters found 54 percent support a 401(k)-style plan for state employees. This option garnered support across party lines, with 67 percent of Republicans, 51 percent of independents and 41 percent of Democrats favoring it.

The Federal Employees Retirement System and 10 states have implemented hybrid plans of the kind Pennsylvania just rejected.

“It’s kind of inevitable that we’re going to have pension reform in the near future,” said Benefield. “The math makes it inevitable that we’re going to, it’s just a matter of when.”

The latest effort at pension reform was not the legislature’s first pass at the issue.

Democratic Gov. Tom Wolf vetoed a more far-reaching bill the legislature passed in June 2015. That bill would have moved new employees away from guaranteed pensions and toward a 401(k)-style plan. Wolf and the unions said the savings would be short-term, ignoring the unfunded liability the state has accumulated. The June House bill received substantial bipartisan support, which was not the case in the latest vote, but not enough to override the veto. Another attempt in December mustering some Senate Democrats’ support failed in the House.

Pennsylvania is hardly alone in failing to confront a mountain of pension debt.

California and Illinois, notorious for unsustainable budgeting, had 2015 pension debts of $78.8 billion and $116.8 billion respectively. Nationwide, states have accumulated $684 billion in unfunded pension debt.

“If the states would have truly balanced their budgets, there wouldn’t have been any liability, and the taxpayers would have understood the costs of these pension plans,” said Weinberg.

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