Three major factors led to our public-pension predicament: Steep stock market losses, much higher benefits, and chronic underfunding. There are many villains and many fingers pointing in different directions. The bottom line is that the Pennsylvania Public School Employees' Retirement System (PSERS) and the Pennsylvania State Employees' Retirement System (SERS) are in need of cash infusions to meet their pension obligations – obligations that every Pennsylvania taxpayer is bound by law to meet. We will focus Friday night's discussion on the financial crisis facing PSERS. Our guests include Richard Dreyfuss, senior fellow at The Commonwealth Foundation, who is an actuary and spent 21 years as a human-resources executive at Hershey Foods. Dreyfuss, an expert on compensation and benefits packages, has written and lectured extensively about Pennsylvania's public pensions and the need for reform. He stipulates that any pension plan that requires an employer contribution above 5-7% of payroll is "unsustainable." Also, Dr. Mark Price, a labor economist with the Keystone Research Center, joins us and argues that the state must maintain a robust, defined-benefit public-pension plan. Rounding out the panel are Mark Crossey, vice president of the Pennsylvania State Education Association, the state's largest teachers' union that largely opposes fundamental changes to the pension system, and Tim Allwein, vice president of the Pennsylvania School Boards Association. The PSBA supports legislation to modify Pennsylvania's school-pension system.
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Pennsylvania has two public-pension plans: The Pennsylvania School Employees' Retirement System (PSERS) that covers teachers and other school employees, and the Pennsylvania State Employees' Retirement System (SERS) that covers state workers and elected officials. Pennsylvania’s pension system is a defined-benefit plan. It’s 100% employer-sponsored and factors retirement pay based on years of service times 2.5% of the average salary in an employee's three highest earning years. The vast majority of private-sector employers have moved to what’s known as a defined-contribution plan. That’s a program in which retirement contributions by employers and workers are deposited into an individual account and invested for each member or employee. It’s akin to a 401(k) plan and the risk is borne by the employee-investor, not the employer.
The cold, hard numbers of Pennsylvania's crisis are sobering. The employer-contribution rate to PSERS (employers being the Commonwealth of Pennsylvania and local school districts) will jump from 4.8% to 29% over the next three years. For SERS, it jumps from 4% this year to $28.3% by July 1, 2012. That's an average annual tax increase of $1,200 per taxpayer and that is just to pay for state workers' and school employees' pensions. And, if future projections hold true, the rate will remain at 30% a year for seven more years, and that is IF, IF, the pension fund manages an 8% annual increase. Imagine the implications for property owners of having to pay 30% or more of their school district’s payroll into the fund for the better part of the next decade.
Forbes.com gives Pennsylvania two stars out of four (one star being the worst) for its debt rating. Forbes places PA's per-person debt at $950 and $9,800 in public-pension liabilities. But be glad you don’t live in New York, New Jersey, or Ohio. Their states earned just one star.
As the economy tumbled and the stock market plummeted, PSERS' net assets in the last fiscal year plunged from $62.7 billion to $43.2 billion. To make up that 35% gap, school districts must increase their contributions to the pension fund. The rate will jump this fiscal year from 4.78% to 8.22%. But that’s a pittance compared to the estimate that by 2016, the employer- contribution rate will jump to 35%.
It all began in 2001. Republican Tom Ridge was governor. Lawmakers voted to boost their pensions by 50%. Gov. Ridge backed the plan also to boost state workers’ and school employees’ pensions by 25% and allow public employees to vest after 5 years of service rather than 10. Teachers and state workers had to increase their contributions. But here’s the kicker: Due to the recession, lawmakers and Governor Ed Rendell in 2003 put off paying for it all by reducing districts’ pension contributions from 5.64% to 1.15% and spread the payments out over ten years creating the bubble that will burst in 2012.
I spoke to Marty Horn who was the secretary of the Office of Administration under Gov. Ridge and played what he calls a "limited" role in the decision to boost the pensions. As he recalled those 2001 deliberations, he said, "Three things that stand out; how over-funded the fund was, how strong the rivalry was between the judges, who had a higher multiplier, and the legislators who were very jealous of that, and the third thing was that nobody believed that the bubble would burst."
Horn, who is now a distinguished lecturer at the John Jay College of Criminal Justice in New York City, defends the Ridge team. (Full disclosure: I was Deputy Director of Communications under Gov. Ridge.) "I don’t think the administration was driving this at all. I think the administration was reacting ... This was being done between the union leaders, the legislative leadership and the pension board chairs. And I certainly was never in a room with legislators on this issue ... One of the provisions of the bill that was mind-boggling to me allowed legislators, really everyone, to collect more than 100% of their salary. Previously, all you could collect was capped. So, you had legislators who had more than 40 years of service who didn’t want to lose credit when they increased the multiplier (from 2 - 2.5 percent of your 3 highest earning years). If you had 40, 41, 42 years with a multiplier of 2.5 percent you could make more than you’re making in salary! That was mind-boggling to me.” One can imagine!
Many feel it’s time to relieve the employer (read that: taxpayers) of the burden of risky and volatile market conditions and make employees responsible for how their pensions are invested. The state’s major teachers’ union, the Pennsylvania State Education Association (PSEA), opposes efforts to transition to a defined-contribution plan. They argue it would make it more difficult to attract good teachers and if lawmakers change any of the parameters, like the age-in requirement, they effectively would create a second-class of employee.
279,000 active school employees pay between 6-7.5% of their salaries into the pension fund. 177,000-plus retirees collect benefits. You won’t want to hear this because it sounds a lot like the electric rate cap rhetoric, but taxpayers have been underfunding the system for 10 years. When the stock market boomed, school districts and the Commonwealth were allowed to lower their contribution rates. The state pays one-half of the pension costs for teachers and school employees. State courts have ruled that retirement benefits cannot be reduced for current teachers, school employees, public officials or state employees.
Should districts plan ahead and raise the employer-contribution rate now to mitigate the taxpers’ costs in three years? Some are following that path. We'll talk with state Rep. Glenn Grell, R-Cumberland County. He's co-sponsoring a bill, with the support of the Pennsylvania School Boards Association, that would reduce pension benefits and create individual retirement accounts for school employees hired after July 1, 2010. It does not have the support of the PSEA. And, clearly, this bill will not affect the steep increases necessary now to meet our obligations. But it does address what can be done about new hires.
One option for immediate relief to local school districts would be for lawmakers to re-amortize the pension debt. If they don't, property owners could face average school-tax increases of about $560 in 2012-13. Marty Horn suggested that Pennsylvania could take immediate steps, like New York has done, to ameliorate its long-term unfunded liabilities. That would include creating a second-tier for new hires. It might mean reducing the multiplier, increasing their personal contributions, adding new age requirements to receive full benefits. But Horn cautioned against moving away from a defined-benefit plan as "unfair unless you make it up in salary ... If we want good teachers, we damn well better pay them. We don’t pay our public officials very much … As a person who spent his entire life in the public sector and lived on a public servant’s salary, the only thing I have is my pension. And public employees, I think rightfully say, 'We sacrifice salary in exchange for the pension.' The pension really is a form of deferred compensation for public employees. And I think it’s important not to forget that.”
Yes, but property owners and Commonwealth taxpayers facing their own financial struggles in this new decade might not be very sympathetic to those public servants whose pensions they are obligated to support. It's a complicated subject but one that we will try to make clear because it's too important, and frankly, too costly for any of us to ignore. I hope you'll join us Friday night at 8:30. Let me know what you think lawmakers and the governor should do to mitigate the crisis. And, one more thing; Be sure to ask candidates running for state office this year about their plan to solve the problem. You can email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
