Expect 2015 to restart the useless blame game over the Public School Employees’ Retirement System pension debacle. The stage is set for another “if only” year.
“If only employers had contributed more to the system.”
“If only employees hadn’t lobbied for overly generous, retroactive pension increases.”
“If only the 2008 financial collapse hadn’t occurred.”
Each statement has a shred of 20/20 hindsight. But it’s past time for blaming and high time to answer this: Now that we’ve dug ourselves into this hole, how do we climb out?
Unfortunately, crafting a remedy has taken a back seat to the various pension “reform” proposals percolating in Harrisburg. Most focus on changing the retirement system for new members, which has marginal near-term impact on PSERS stated $40 billion unfunded liability. The General Assembly is failing miserably to define an adequate finance plan for more than 495,000 current and former public school servants.
Pundits rejoiced with the recent news that in 2014 PSERS investments exceeded the 7.5 percent forecasted rate of return. But is there really cause for celebration when the pension contribution was legislatively suppressed by 42 percent of the annual pension requirement, or more than $1.4 billion?
It gets worse. A report published in November by the Pioneer Institute used the long-term market value of PSERS investments to estimate a 6 percent market rate of return. By this more representative methodology, PSERS is about 40 percent funded. The true unfunded liability for PSERS probably exceeds $60 billion; more than $12,000 per Pennsylvania household.
2015 will require the largest single year increase in pension contributions in the commonwealth’s history. The state’s Independent Fiscal Office estimates that an additional $592 million will be needed to make up for last year’s use of non-recurring revenue and to pay next year’s PSERS contribution. Even so, that staggering sum won’t match the requirement, forcing the PSERS funded ratio to its lowest level in 30 years.
How high is your confidence level that Harrisburg can get the job done? As legislators bloviate, listen for the four horsemen of the pension apocalypse:
1. Deferral. Reamortizing the pension bill has been tried before. It always increases costs, threatening future economic competitiveness as financial markets lose confidence in the commonwealth.
2. Borrowing. Pension obligation bonds are speculative and risky. A detailed analysis published by the Center for Retirement Research at Boston College found that they are rarely, if ever, profitable to the issuer. Act 120 of 2010 made them illegal. Let’s keep them that way.
3. Deception. Pretending that investments will earn 7.5 percent hides debt off the books and exposes the system to great risk. The Netherlands, which operates one of the most stable pension systems in the world, expects a realistic 4 percent return on pension investments. Shortfalls are addressed within three years with lower pension payments or higher contributions. Meanwhile, PSERS members expect taxpayers to guarantee their benefits, but those paying the bill lack similar protection for their own, less generous, retirement accounts. Is that fair?
4. Misguidance. One-time revenue might balance a single budget, but it won’t fix the underlying problem.
In 2015, most school districts should uphold their pension responsibilities. The State College Area School District will surpass a new milestone: pension contributions will exceed $1,000 per student. The district will use more than $1 million of pre-planned reserves to help offset an annual pension contribution that will exceed $7.5 million. Careful preparation can’t erase the bill, but it will help manage the expenditure.
Harrisburg’s New Year’s resolution should commit to both short-term pension funding and long-term pension reform. Here are a minimal set of expectations:
• Maintain or accelerate the pension contribution schedule defined by Act 120 of 2010. We’re only halfway up the hill.
• Demand that state legislators make difficult decisions to balance pension expenses and revenue, including reducing future benefits for current employees and creating new, recurring income such as a shale gas severance tax.
• Hold school boards to high standards of fiscal responsibility, developing the skills to prioritize educational programs and the pragmatism to moderate property tax increases by reallocating school district budgets to meet pension obligations.
In simple language, stop the blame game and the shell game. This crisis won’t end until elected officials fund pensions based on accrual of revenue rather than risk. Harrisburg and school boards are obligated to pay the unfunded pension liability. Failing to act decisively will break the back of Pennsylvania’s most venerated resource, a thorough and efficient public education system.