State House Sound Bites

Capitol reporter Mary Wilson covers Pennsylvania politics and issues at the Pennsylvania state capitol.

State pension beat: of debt and design changes

Written by Mary Wilson, Capitol Bureau Chief | May 29, 2014 7:10 PM
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Democratic and Republican state lawmakers differ as to whether it matters that a plan to change pension benefits doesn't take a big bite out of the massive debt the state has already accrued.

The Republican plan to change pension benefits for future state and school employees would bring savings -- just not the kind that would help the state pay off pension debt much faster than existing law requires.

"You won't see big number changes until you're 25 or 30 changes in the future," said Jim McAneny, executive director of the Pennsylvania Employee Retirement Commission (PERC). "Actually, you don't totally see the changes until everybody has joined the choir invisible -- passed on."

Does it matter that a plan to change pension benefits wouldn't do much to pay off existing pension debt?

Republicans say no. They call the proposed change to pension benefits a way to control future costs, and say that grappling with existing pension debt is a separate problem all its own.

"That, I think everyone now acknowledges now, is a separate discussion, in the short term, than pension design," said GOP Senate Majority Leader Dominic Pileggi.

But Democrats say it does matter.

"Republicans have seemed, in my opinion, to have talked about reform as being the solution to the debt problem, and to the budget problem," said Miriam Fox, the Democrats' executive director of the House Appropriations committee. "But when you look at what they've proposed, it has nothing to do with the budget problem, and it doesn't pay off the debt."

PERC's consulting actuary found that a plan enrolling future state and public school employees into a hybrid pension program part 401(k)-style, and part traditional defined-benefit pension, would save more than $11 billion over 30 years, by shifting more costs to the employee.

There's no easy way to size up that $11 billion (over 30 years) next to the state's roughly $47 billion-and-growing pension debt.

"It's not $11 billion versus $50 billion," said McAneny. "It's $11 billion versus what we're going to have to pour in to pay off the debt."

The debt is what the state owes, in pension payouts, to all its current employees and retirees right now. Scheduled payments on that debt are written into state law and are set to become gradually steeper over the next several years, putting pressure on the rest of the state budget.

Republicans have argued that the state's pension benefits themselves are unaffordable, pointing to the 401(k)-style plans favored by the private sector, and the fact that people are living longer than actuaries expected when pension benefits were set in legal stone. Democrats disagree, arguing that traditional defined-benefit plans are more efficient to manage than 401(k)-style plans, and that state government should show an interest in ensuring the retirement security of its employees.

The dark cloud over the debate is Pennsylvania's large pension debt, which grew due to a combination of factors. Pension benefits were sweetened temporarily for state and school employees from 2001 to 2010, applying retroactively to those workers' past years of service as well as future years. In good economic times, the state skipped payments due on its pension plans which, at the time, were well-funded. But a couple of economic downturns resulted in losses to the investment returns flowing into the pension funds, leading lawmakers to artificially lower what it paid into the pensions. The debt increased.

This post has been edited to include details about the 2001 increase in pension benefits for state and school employees. 

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