The commonwealth faces a number of significant challenges, but none are as serious as the public employee pension crisis. Pension liabilities have reached a staggering $80 billion and continue to grow with each passing day.
The effects of this crisis have been felt for nearly a decade. Lawmakers have faced massive budget deficits nearly every year since 2008. These fiscal difficulties have prevented us from investing in tax cuts for hardworking families or contributing more money to areas of state government that could benefit from additional funding, including education.
Money that otherwise could have been used in the classroom has been consistently diverted to meet rising pension obligations. The proposed 2017-18 state budget includes $100 million in new money toward education; the increase in the pension payment for school districts is $144 million. The state’s contributions to school district pensions increased from $290 million to a whopping $2.1 billion in the past decade — a 618 percent increase.
The road to addressing this problem has been long and difficult. However, the General Assembly finally took historic action last week to restructure the state’s two public employee pension systems. The resulting legislation is the most comprehensive transfer of risk away from taxpayers in the country.
With the Governor signing Act 5 of 2017 into law, we have transformed state employee and teacher pensions to reflect today’s workforce with a 401(k)-style plan that provides employees with options and portability.
According to an analysis by the Pew Charitable Trust, Act 5 helps “ensure the Commonwealth’s retirement system is sustainable and secure for both taxpayers and public workers for decades to come” and called the enactment of this legislation “the most comprehensive and impactful reform any state has implemented.”
Under the new plan, new employees and lawmakers will choose between three retirement options, including a full 401(k)-style plan or one of two side-by-side hybrid plans that include both a traditional pension and a 401(k)-style option. Current employees will have the opportunity to opt into one of these plans as well, if they so choose. Lawmakers are treated just like every other employee — new lawmakers will be placed into the new plan; current lawmakers will have to choose to opt in. Current retirees will see no changes to their benefit.
The plan also includes the vital component of portability, ensuring that employees can take their benefits with them if they choose a different career path. More than 75 percent of teachers and more than half of state employees leave their job before they reach 20 years of service. These employees would fare better under the new system.
This legislative action is significant not only for how it restructures the retirement system for state employees and teachers, but for how it approaches the problem. Instead of simply dealing with the challenges of the day, this approach instead looks toward the future.
Outside analysis suggests that the plan could shield taxpayers from billions in future costs if investment returns by the pensions systems continue to fail to meet projections. An analysis of both systems shows that if those projections are missed by 1 percent, taxpayers will realize a savings of $27 billion when the new plan is fully in place. At the same time, employees share in the benefit if the returns exceed expectations.
Independent analysis estimates that the restructured pension system will shave more than $5 billion off of the pension debt with an additional savings of up to $3 billion is projected in terms of reduced costs and fees for investment management.
Groups from across the political spectrum such as the Pennsylvania Chamber of Business and Industry, the Commonwealth Foundation and the Pennsylvania Institute of Certified Public Accounts have all acknowledged the importance of this law. The Pennsylvania School Boards Association said the plan provides the “stability our school districts have been calling for and need.”
For many years, there appeared to be no end in sight to the problems plaguing Pennsylvania’s pension systems. With this much-needed modernization of Pennsylvania’s pension systems, we have finally arrived at a solution that strikes the proper balance between the interests of taxpayers and the need to provide competitive retirement benefits for employees.
Sen. Jake Corman is the Majority Leader of the Pennsylvania Senate (@JakeCorman or email@example.com). Sen. Pat Browne is Chairman of the Pennsylvania Senate Appropriations Committee (@SenatorBrowne or firstname.lastname@example.org).