With combined debts approaching $50 billion, the Public School Employees Retirement System and State Employees Retirement System are in trouble. The blame game is in full swing: It’s the legislature’s fault. It’s the governor’s fault (insert any governor of this century). It’s school boards’ fault. It’s unions’ fault.
Take your pick. To some degree, each assertion is correct.
Gov. Tom Corbett is sounding the alarm for “meaningful pension reform.” Reform, however, has two different meanings in legislative doublespeak: Reduce costs by changing benefits, or provide budgetary “relief” to employers by deferring payments.
Harrisburg is buzzing with proposals. The hot topic is the Tobash plan, a hybrid model for new employees that would cap defined benefits at $50,000 per year for qualifying retirees and would create a variable annuity for benefits in excess of the cap.
Lost in the bloviating is this fact: Assuming all assumptions hold true (a tenuous assumption itself) actuarial studies commissioned by the Public Employee Retirement Commission show that any pension “reform” proposal under consideration will, at best, reduce costs by 2 to 3 percent over the next 30 years. Capping maximum pensions for only new employees has no appreciable impact on pension bills for at least 20 years, if at all. And, as earnings assumptions are scaled back to more realistic expectations, it’s likely that these proposals will grow the pension deficit, just as they did in 2010.
That’s not much cause for celebration. Moody’s, the investment service that just reduced Pennsylvania’s bond rating to the third lowest in the nation, seems to agree.
Moody’s concern is that current proposals don’t reduce the sea of red ink that the pension systems face. Despite quadrupling employer pension contributions over the past four years, the systems still require massive amounts of cash from savings or new revenue.
If changing benefits for new employees isn’t enough to shrink system costs, what about reducing benefits for existing employees? Unions are quick to point out that benefits can’t be changed retroactively for existing employees, yet they were equally quick to accept retroactive benefit increases in 2001. If they hadn’t, PERC estimates that there wouldn’t be a pension problem today.
Meanwhile, school districts and Harrisburg cry foul and tout “tapering the collars” — another form of deferral — as pension relief. Sorry. In the long run, their siren calls will cause our children and grandchildren more harm than good.
Legislators serious about pension reform would be wise to adopt Thomas Jefferson’s point of view: “No generation can contract debts greater than may be paid during the course of its own existence.” Instead of expecting our children to foot a bill that we have neglected to pay, how about one of these proposals? Each would pay off PSERS’ debts in 10 years:• Raise both the state sales tax to 6.75 percent and the personal income tax to 3.60 percent. That’s what the PERC calculated in a report issued earlier this year.
Implement a 10 percent natural gas severance tax. It would be the highest in the nation; double what the Pennsylvania Budget and Policy Center recommends.
Double current taxes generated by gambling revenue, eliminate existing property tax relief, and allocate the entire amount to pensions.
Reduce state K-12 education funding by 15 percent and eliminate enough educational programs statewide to furlough 15,000 personnel — equivalent to all the teachers in Philadelphia’s and Pittsburgh’s school districts combined. That frees up enough state and local revenue to pay the pension bill.
Reduce future pension benefits for current employees, and be prepared to litigate the inevitable suit in federal court.
Regardless of how you might mix and match these options, one sobering conclusion remains: We have dug ourselves a very big hole. That’s the hard truth of pension reform.
If legislators don’t have the stomach for real solutions, then here’s my recommendation: Change nothing until 2018 or later. It allows enough time for the growth in employer pension contributions — stunted by legislative decisions in 2010 — to reach a minimal level of actuarial sanity. There’s a slim chance it will be enough to pay off our debts over the next 30 years. In the meantime, focus on paying your share of the employer contribution, just like school districts. It won’t be easy.
Our elected officials demonstrate a history of underfunding and overpromising public pensions. Absent meaningful reform, the inconvenient truth is that employer pension contributions well north of 30 percent of payroll are the going price for fiscal accountability.
Changes to Pennsylvania’s public pension systems are desperately needed. But if officials in Harrisburg defer the inevitable requirement to refund the systems, as they did in 2003 and 2010, they’ll compound existing problems and saddle the next generation of Pennsylvanians with the consequences of their failed leadership.
Please help your legislator find the courage to address this problem responsibly. Our future depends on it.