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Post by mikekerstetter on Dec 1, 2012 5:10:01 GMT -5
www.pennlive.com/midstate/index.ssf/2012/11/pennsylvania_pension_cuts_woul.html#incart_riverPennsylvania pension cuts would apply to all, Gov. Tom Corbett says By The Associated Press on November 30, 2012 at 12:00 AM, updated November 30, 2012 at 10:41 AM Print Brought to you by HARRISBURG — Gov. Tom Corbett acknowledged Thursday that his administration is considering reducing future pension benefits for current Pennsylvania state employees and teachers, and said any such cuts should be distributed evenly to include lawmakers and judges. Governor Tom Corbett, gives his 2012 budget address in front of the combined state House and Senate at the Capitol in February. CHRIS KNIGHT, The Patriot-News "When you don't have the money, you can't have the pension plans continue to take so much out of the taxpayers' pocket," he told reporters, comparing the state's situation to pension trends in the private sector. Corbett conceded that the state constitution might shield judges from any reduction in pension benefits and said any major reduction in public pension benefits passed by the Legislature would likely end up being decided in a lengthy court battle. An administration report released Monday warned that the growing financial obligations of the state's two major public-sector pension funds threaten to drive taxes up, drain funding for other state programs and hurt business growth. The report ruled out higher taxes but said prospective cuts for current employees should be considered. The State Employees' Retirement System and the Public School Employees' Retirement System already face an unfunded liability of $41 billion. Last year, state government paid about $1.1 billion into the funds. The amount of taxpayer money going into the funds is expected to double to $2.2 billion in the year that starts July 1 and to exceed $5 billion by 2019. Despite case law interpreting the state constitution that bars reductions in benefits for tens of thousands of current employees, Corbett said he believes it is legally possible to do just that by limiting the reduction to future benefits employees have yet to accrue. For example, he said the "multiplier" — a percentage applied to an employee's years of service and final average salary to produce his or her retirement benefit — could be reset at a lower rate for the latter part of the employee's career. "You can cut the multiplier for folks going forward even if they (are) vested ... because they still have the benefit of that period that they had the multiplier," Corbett said. "Legally, can you do that? I believe you can." David Fillman, head of Council 13 of the American Federation of State, County and Municipal Employees, which represents 45,000 state employees, said any attempt to reduce employees' right to earn future pension credit would violate the constitution. "No one has called to say, 'what do you think of this?' ... We haven't had a meeting of the minds," he said. Corbett said it will be up to officials who oversee Pennsylvania's 3,200 local government pension plans — including police officers, firefighters and non-uniformed employees — to decide whether or not to follow the state's lead on pension changes. "I think they're going to have to look at what we do and, if they like what we do, follow it," he said.
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Post by mikekerstetter on Dec 1, 2012 5:12:00 GMT -5
www.pennlive.com/midstate/index.ssf/2012/11/pennsylvania_pensions.htmlOfficials looking to other states to fix Pennsylvania's pension problem By JAN MURPHY, The Patriot-News on November 27, 2012 at 5:00 AM, updated November 27, 2012 at 5:03 AM Print Brought to you by Think of “Pac-Man” gobbling up the little yellow dots as it moves through the maze. That’s not too far from Gov. Tom Corbett’s description of the pension crisis that the state faces. The soaring pensions costs are consuming billions in state revenue. The state’s obligations to its two public employee pension funds are eating up money that otherwise could go to fund schools, public safety, transportation, human services and other core governmental programs. The Keystone Pension Report offers a framework on how the penion plans could be reformed to make them more affordable. Christine Baker, The Patriot-News/file To help Pennsylvanians understand the magnitude of the problem, Corbett’s budget office on Monday issued the Keystone Pension Report. It also explains how the problem was created: benefit enhancements in 2001, a decade of underfunding by the state and school districts and less-than-expected investment returns. Combined, this left both pension programs less than 68 percent funded. A healthy pension program is about 80 percent funded. The report offers a framework for how the pension plans could be reformed to make them more affordable while sustainable by pointing out approaches other states have considered or adopted. These include increasing the employee contribution; raising the retirement age by two to three years; and changing the pension formula calculations, including capping benefits and altering the method used to determine pension benefits. This fiscal year, the report notes the commonwealth is contributing just over $1.5 billion to the State Employees’ Retirement System and the Public School Employees’ Retirement System. Absent reforms, those costs will rise by $511.3 million. The state is expecting revenue growth of $818.7 million in the 2012-13 fiscal year, but 62 percent of it will be swallowed up by the rising pension costs. “The state’s general fund budget is on a very predictable path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government,” Budget Secretary Charles Zogby said. “With a clear understanding of the crisis and the challenges we confront, it is imperative that Pennsylvania find a workable solution.” Corbett and legislative leaders have identified pension reform as one of the highest priorities for the 2013-14 legislative session. To date, though, none have offered a specific plan to deal with the cost of pension benefits as well as the $41 billion in unfunded liability for future retirement benefits to be paid. State Rep. Glen Grell, R-Hampden Township, calls the budget office’s report an important first step to show the budget office and governor’s office have a grip on the problem. But Grell, whom the House Republicans have dubbed as their go-to guy on pension reform, said, “it clearly isn’t a solution or a road map to a solution.” The state and school employees’ pension systems offer defined benefit plans. These plans require employee contributions and provide guaranteed specific dollar-value benefits upon retirement. The investment risk rests predominantly with the employer. Many private companies have switched to defined contribution plans, such as 401(k)-type plans. In these plans, employers contribute a predetermined amount to supplement the employee contribution. The investment risk rests with the employees. To help fix the problem, Senate Republican leaders plan to reintroduce legislation to move new state and school employees to a defined contribution plan after the new legislative session starts in January. The plan didn’t gain traction this year. Richard Dreyfuss, a senior fellow to the conservative-leaning Commonwealth Foundation in Harrisburg, is urging policymakers to also look at altering the unearned benefits provided through the defined benefit plan for current employees. He said it’s critical to find the money to deal with the pension systems’ unfunded liability so the burden is not passed on to future generations. “I think a lot of this is driven by the budget challenges of next year,” Dreyfuss said. “We’re already underfunding these plans significantly.” David Fillman, executive director of the American Federation of State, County and Municipal Employees Council 13, said the report brushes over the fact that employees have been contributing to the pension system all along. And he said there have been years when the state and school districts contributed little or nothing. The report also ignores the lack of providing cost-of-living adjustments to retirees for the past decade, Fillman said. He said he hopes that policy-makers will “bring everybody to the table to talk about where we go instead of trying to jam something down everybody’s throat.” Zogby said he hopes all parties begin working together to institute meaningful reform while keeping the taxpayer in mind. “We must keep the taxpayer top of mind and not harm current and past employees,” Zogby said. “We will not touch accrued benefits, nor will we allow the pension problem to continue for future generations. We need to fix this problem for the future stability of both the pension systems and the commonwealth’s budget.” Sponsored Links
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Post by mikekerstetter on Dec 1, 2012 5:38:06 GMT -5
THE KEYSTONE PENSION REPORT
A DISCUSSION OF STRUCTURAL REFORM AND RELIEF TO PENNSYLVANIA’S
RETIREMENT SYSTEM FOR LONG TERM SUSTAINABILITY
OFFICE OF THE BUDGET CHARLES B. ZOGBY, SECRETARY
INTRODUCTION
Like the stone that locks an arch into place, Pennsylvania seeks a keystone—that integral lock that can both secure the delivery of essential programs and services to our more than 12 million residents and make good on the state’s pension obligations to public employees. This keystone, in the shape of pension reform and relief, is essential to addressing the public funding crisis we now confront, which is being driven by rapidly rising pension costs. Reform must pave the way to a future that enables us to provide sustainable support for the core functions of state government and fulfill our consitutional mandates, while meeting our pension obligations to Pennsylvania’s state government and public school employees.
Pension reform has become a key topic of discussion, news reports, and debate in nearly every corner of the commonwealth. It is a question on the minds of many, from members of the
General Assembly, public and school employees, school district directors and administrators, to retirees, business leaders, and even state and municipal finance rating agencies. As well,
it is a question increasingly on the minds of Pennsylvania taxpayers who ultimately bear the cost of the system through their tax dollars. All of these stakeholders, while representing
diverse interests, recognize the crisis facing our state: that the commonwealth’s growing pension obligations are crowding out funding for their children’s basic and higher education,
public safety, health, human services, the maintenance and repair of roads and bridges, environmental protection, and other core governmental programs.
Governor Tom Corbett has vividly described this dynamic as a “tapeworm” or “Pac-Man” eating away at the state’s budget, an acknowledgment that growing pension costs are severely
undercutting the commonwealth’s ability to fund essential programs and services. Though no cure-all to Pennsylvania’s budget challenges, the fiscal reality is that absent meaningful
structural pension reform, the state’s General Fund budget is on a very predictable path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government on which our citizens rely.
The primary objective of this Keystone Pension Report is to provide Pennsylvanians a fact-based discussion of the funding crisis we now confront, describe the challenge the state faces
in meeting its obligations to both our taxpayers and pension systems, and highlight the likely outcome for state programs and services absent meaningful pension reform. The Report is
intended to provide financial facts, highlight key issues, and advance the dialogue on meaningful pension reform and relief, with a goal of creating a common framework around which solutions can be structured.
This report is organized around the answers to the following questions:
• What are Pennsylvania’s statewide pension systems?
• What created Pennsylvania’s pension problem?
• What is the pension challenge in Pennsylvania?
• What happens if we do nothing?
• How can we create a framework for solutions?
Currently, the commonwealth faces a $41 billion unfunded pension liability. This depletes money from education, public safety, health and human services and critical infrastructure.
WHAT ARE PENNSYLVANIA’S STATEWIDE PENSION SYSTEMS?
The commonwealth administers two separate pension systems. The State Employees’ Retirement System (SERS) manages the
retirement system for most public employees in the executive, legislative and judicial branches, authorities like the Pennsylvania
Turnpike Commission, the Pennsylvania Game Commission, and the Pennsylvania Housing Finance Authority, as well as some
of the employees in Pennsylvania’s higher education systems, including the State System of Higher Education and state-related
universities. The Public School Employees’ Retirement System (PSERS) manages the retirement system for all public school
teachers, administrators, and other public school
employees.
Together, these two systems comprise more than 815,000 total members and pay out nearly $8 billion annually in retirement benefits to more than 300,000 retirees and beneficiaries (Exhibit
1). The pension systems are funded through a combination of: 1) employer contributions, 2) employee contributions and 3) investment earnings. Of these three components, SERS and PSERS rely overwhelmingly on investment returns as their primary source of funding, with nearly 71 cents of every dollar derived from investment earnings.
For SERS, the commonwealth and independent entities pay all of the employer contributions for public employees. Department and agency budgets must include sufficient funds to cover all salary and employee benefit costs, including the employer contribution to SERS calculated based on a percentage of payroll. For PSERS, the commonwealth and local school districts together share the employer contribution costs. As a general rule, the commonwealth pays a minimum of 50 percent of the employer contribution cost and that amount increases based on the relative wealth of the district, such that in the state’s poorest school districts the state pays more than 75 percent of the cost. In the current fiscal year, 2012-13, the commonwealth’s employer contribution costs for both systems are projected to total more than 1.5 billion, $677.4 million for SERS and $856.1 million for PSERS.
The amount of employer contributions are determined each year through a process that establishes an employer contribution
rate that is, ideally, based on the amount required to fund the cost of the pension benefits earned that year by the active
members in the plans plus any unfunded liability. Actuaries refer to this rate as the “normal cost.” Reflected in the normal cost
calculation is an assumed discount rate or investment rate of return. At present, the normal cost reflects an assumption of
investment returns at 7.5 percent per year.
Employees also contribute to the respective systems. Employee contributions are a percentage of pay as fixed by statute,
based on an employee’s hire date and the multiplier selection. As such, employee contributions under both plans vary. SERS
contribution rates range from 5 to 10 percent of pay, with most employees contributing 6.25 percent. PSERS contribution rates
range from 5.25 to 10.3 percent, with most employees contributing 7.5 percent. Last year, employees contributed nearly $1.4 billion.
Both SERS and PSERS provide employees with what are known as defined benefit, or DB, plans. In a DB plan, the final retirement benefit paid to an employee is a fixed amount determined
by a formula that includes years of service, final average salary and a multiplier (Exhibit 3). An important characteristic of DB plans is that the commonwealth, and ultimately the taxpayer,
bears the entire investment risk of the plan, which is reflected in the annual employer contribution rate that the commonwealth must contribute. Active members of both pension plans accrue retirement benefits each year. In a DB structure, when investment returns go up, the commonwealth’s employer contribution rate is reduced. When investment returns fall short of expected results, the commonwealth’s employer contribution rate increases to cover
the entire shortfall.
Decisions that were overly optimistic and short sighted, based upon the hope that the plans could earn their way out of deficit, led to annual decreased employer contributions and underfunding of the systems.
Pennsylvania’s Basic Pension Formula:
FINAL AVERAGE SALARY x MULTIPLIER (2 or 2.5%) x YEARS OF SERVICE = RETIREMENT BENEFIT
WHAT CREATED PENNSYLVANIA’S PENSION CRISIS?
Helpful to addressing Pennsylvania’s pension crisis is to understand its more recent history and what brought us to this crisis stage in the first place. Like other states, Pennsylvania’s crisis was not caused by any single driver, but rather is the product of actions by previous administrations coupled with economic forces outside the commonwealth’s control. In Pennsylvania’s case, the primary drivers of the current pension crisis were generous improvements to member and retiree benefits that did not require a proportional employee match, nearly a decade of underfunding by state government and local school districts,2 and investment returns that failed to meet expectations.
Historic Economic Expansion
Our starting point is in late 2000 into 2001, a time when the nation and states were coming off one of the greatest economic expansions in U.S. history. The stock market had expanded
nearly four-fold. More than 20 million jobs were added. The Gross Domestic Product (GDP) had grown by about 3.4 percent annually. The commonwealth, along with the rest of the country, was experiencing wealth. Flush with investment returns, the funded ratios of SERS and PSERS were in well in excess of 100 percent (at their height, SERS was 132 percent funded and PSERS was 124 percent funded). That is to say, on paper at least, the actuarial values of the assets of the pension systems were significantly greater than the actuarial values of their accrued liabilities.
Generous Benefit Enhancements
It was in this financial environment, that Act 9 of 2001 was passed. Act 9 substantially increased pension benefits for public employees and public school employees. The pension benefit accrual factor (multiplier) was increased from 2 to 2.5 percent (an increase of 25 percent) without an adequate corresponding increase in employee contributions. The higher benefit formula applied to both new and current pension plan members and for current members was made retroactive back to the start of their commonwealth or school service, sometimes as much as thirty or forty years. Act 9 also lowered the vesting threshold from 10 years to 5 years, expanding the base of eligible beneficiaries.
Economic Downturn and Uncertainty
Act 9 became law on May 17, 2001. Not long after came September 11, 2001, rocking the U.S. economy to the core. As a result of 9/11, the stock market, already down about 10 percent from its peak in 2000, lost more than 14 percent in the five days after it reopened on September 17th. It would take months for the market to recover these losses.
The investment returns of Pennsylvania’s pension plans were not immune from the 2001 downturn. SERS experienced a more
than 10 percent decrease, while PSERS saw growth of less than 3 percent in the value of its investments. A decline in investment
returns meant an increase in employer contribution rates, which were set to go from near zero percent in Fiscal Year 2001-02 to
greater than 5 percent in Fiscal Year 2002-03.
Early Legislative Approaches to Reform
Seeking to avoid this steep increase, Act 38 of 2002 was enacted artifically capping employer contributions at 1.15 percent, in
effect, arbitrarily underfunding the pension systems for one year and limiting the growth in the future employer contributions
below actuarially recommended rates. For example, the PSERS employer contribution rate was set to increase to over 9 percent
in Fiscal Year 2003-04, but these changes resulted in the rate being reduced to 3.77 percent.
Act 38 also established a cost of living adjustment (COLA) without identifying a funding source for it. The actuarial cost of this ad
hoc COLA was $1.75 billion for both systems. Underlying Act 38 seems to have been a hope that the economic downturn would
be short lived and the commonwealth could then backfill any gap through increased market performance.
When economic performance fell short of expectations, Act 40 of 2003 was adopted to ease the impending fiscal shock of rising
employer contribution rates. The main thrust of Act 40 was to artificially suppress employer contribution rates to both SERS
and PSERS to the current fiscal year, through an actuarial manipulation that required the pension plans to recognize gains more quickly and losses more slowly. Act 40 resulted in the state’s underfunding of both SERS and PSERS by more than $5.9 billion
when comparing what should have been contributed--the annual required contribution (ARC) -- with actual state appropriations.
The impact of Act 40, however, did not stop there. In the context of the state budget, Act 40’s underfunding of the pension
systems had the effect of freeing up General Fund dollars that then became available to spend elsewhere. And spent they were.
A beneficiary of this “robbing Peter to pay Paul” budget maneuvering was basic education, which over the succeeding years saw exceptionally high funding increases. The bulk of these new dollars found their way into school district budgets not only to support new programs, but also to pay higher employee salaries, which only further exacerbated future pension obligations given the role of salary in benefit calculations.
This same dynamic often repeated itself at a school district level, further contributing to the problem. Lower state contributions meant lower district contributions and, like the state, had the effect of freeing up dollars in local district budgets that could be and were spent elsewhere. Though some districts acted responsibly in putting funds into reserve accounts knowing a pension tsunami would eventually hit, many more regarded the lower contributions as new found money that made its way into new programs, more personnel, and higher salaries. No matter the final destination, the result was the same: an underfunding of pension systems while at the same time exacerbating future obligations.
Assumptions about Investment Returns
Underlying each of the preceding legislative enactments were economic assumptions about the pension systems’ financial health, as well as expectations as to future economic prospects. It seems particularly the case that past decisions to expand benefits or arbitrarily reduce contributions were predicated on the belief that the pension systems could earn their way out of any deficit,
thereby satisfying any shortfalls. With this in mind, we take a brief pause to consider the role investment return assumptions play
in the pension systems.
As noted above, the amount of employer contributions is
determined each year through a process that establishes an
employer contribution rate based on the amount required to
fund the cost of the pension benefits earned that year by the
active members in the plans, a rate known as the normal cost.
Reflected in the employer normal cost calculation is an assumed
discount rate or investment rate of return. SERS and PSERS both
currently use an assumed rate of return of 7.5 percent. This rate
though was only recently lowered, having previously been set
as high as 8.5 percent.3
The higher the assumed rate of return, the lower the normal
cost and conversely, the lower the rate of return, the higher
the normal cost. This can be seen in Exhibit 6, which shows
the current (2012) normal cost of 5.1 percent for SERS and
2.2 percent for PSERS, and how that cost increases as the
rate of return declines.
For a time, SERS and PSERS outperformed their respective
assumed rates of return. For much of the past decade,
however, the actual investment performance of the pension funds’ assets has not kept pace with the assumed rate of return,
further contributing to the systems’ unfunded liabilities and the difficulty of meeting current and future pension obligations.
The 2000s are generally known in the investment and finance worlds as the “Lost Decade.” During that time, the stock market
went through one of the most volatile periods in recorded history. The S&P 500, which many consider as best reflecting the
overall performance of the stock market, started the decade higher than it ended it, meaning no gains were achieved over the
10-year period, hence the lost decade. Over that time, the S&P registered two major plunges of over 50 percent and several
declines of at least 10 percent. Pension plans, as a whole, lost much of the gains they realized during the 1990s and, in fact,
went from surpluses to double-digit declines in asset value.
The Great Recession of 2008 was the knockout punch delivered to national pension plan earnings. The ripple effects of the
lending market crisis and the subsequent credit crunch drove investors from the market and sent stock prices plummeting.
Returns on investment holdings suffered some of the largest losses since the 1930s, and have yet to fully recover. The
investments of our retirement systems were similarly affected.
Turning A Corner
Breaking from previous legislative enactments, Act 120 of 2010 was the first successful effort at curbing rising pension costs,
containing savings offsets that previous legislation did not contain. A key milestone in reform, Act 120 began to “stop the
bleeding” caused by previous Acts and instituted a number of important changes to reduce the costs of Pennsylvania’s public
pension systems. The critical reforms implemented by Act 120 included:
• Creating short-term funding relief through a series of annual rate collars that artificially limited the amount the
employer contribution rate could increase over the prior year’s rate to not more than 3 percent for FY 2011-12,
not more than 3.5 percent for FY 2012-13, and not more than 4.5 percent for FY 2013-14. Especially noteworthy
is that the short-term budget relief provided by Act 120 was “paid for” by long-term reforms that produced an
overall savings to the pension systems;
• Reducing pension benefits for new employees by lowering the multiplier used to calculate retirement benefits
from 2.5 percent to 2 percent, returning it to pre-2001 levels
• Increasing the retirement age to 65 for new employees, extended the period for employees to vest from 5 to 10
years, and eliminated the lump sum withdrawal of their contributions at retirement; and
• Implementing an innovative “shared risk” provision for new employees that allowed for increased employee contributions if the actual investment returns fell below assumed returns.
WHAT IS PENNSYLVANIA’S PENSION CHALLENGE?
Pennsylvania’s pension challenge is multi-faceted. Past legislative actions expanded member and retiree benefits, oftentimes
without funding support to sustain them. In addition, nearly a decade of underfunding by state government and local school
districts, combined with investment returns that failed to exceed expectations, have left the state with massive unfunded
liabilities and created growing employer contributions needed to fund past obligations. These costs are taking a greater and
greater share of available revenues, threatening to crowd out funding for core governmental programs and services. We now
look at each aspect of Pennsylvania’s pension challenge.
Unfunded Pension Liability
Pennsylvania’s two public pensions systems have a combined unfunded liability of over $41 billion.4 In other words, the total
liabilities (future retirement benefits to be paid) exceed the total assets of the combined plans by $41 billion in 2012. It is
important to note that this unfunded liability is essentially a state debt owed to state workers and public school employees.
The latest actuarial valuations show that SERS is 65.3 percent funded, while PSERS is 69.1 percent funded. When the valuations
of the two systems are combined, as Exhibit 9 shows, they are just under 68 percent funded.4 A healthy funding ratio is
considered 80 percent. The funded ratios of the two systems are expected to continue to decline in the next several years,
hitting a low of 55.2 percent for SERS and 59.4 percent for PSERS before they begin to slightly rebound (Exhibit 10).
Growing Total Commonwealth Employer Contributions
To fund the current cost of pension benefits as well as the unfunded liability, Pennsylvania’s total required employer contribution rates and total employer contributions will rise quickly. The employer contribution rate for SERS rate, which was just 5 percent in FY 2009-10, is now 11.5 percent, and will grow every year until it tops out at 32.5 percent in FY 2016-17. Likewise, the PSERS rate, which stood at 5.64 percent of payroll in FY 2010-11 is at 12.36 percent for the current fiscal year and expected to increase every year until it peaks at 28.04 percent in FY 2019-20. Both rates will plateau at these high levels for several years before retreating.
As the employer contribution rates for both systems grow, so do the total dollar amounts of required employer contributions, more than doubling every two years. Like a runaway freight train, contributions will rise over 625 percent in total funding in the coming decade.
These numbers are staggering but the pain they impose on the state budget comes in the year-over-year cost growth as pension
contributions claim a growing share of the General Fund and of available new revenues (detailed in the next section).
Costs have more than doubled in just the past two years, with net growth of $825 million. Looking ahead to FY 2013-14, total contributions are expected to increase by $697 million, just the start of the significant increases over the next five years. It is not until FY 2018-19, that the cost growth begins to taper down and level off, though at very high levels of overall commonwealth funding.
Commonwealth Employer Contributions as a Share of Available Revenue
If the sheer size and growth in the state’s total pension contributions over the next several years were not enough of a
challenge, the effort to meet these obligations is made more difficult by the fact that pension costs are claiming a significantly
larger share of all available new revenues in every budget cycle going forward for the foreseeable future. Like an oncoming
tidal wave, pension costs threaten to overwhelm the General Fund budget and the vital programs and services that it funds.
Consider, for example, the impact of rising pension costs on the coming (FY 2013-14) General Fund Budget absent any reform.
We know that total contributions will rise to $2.2 billion from $1.5 billion, aproximately a $700 million increase. Of this
increase, $403.1 million is for PSERS and $293.9 million is for SERS. Of the SERS increase, about 37 percent is paid for out of
the General Fund, which translates into a net impact to the General Fund of $511.3 million.
Next, consider the pension cost increase in the broader budget context. General Fund revenues, assuming a 3 percent growth
rate, are expected to increase by $818.7 million this year. At $511.3 million, pension cost growth alone will claim 62 percent of
all new revenues. If pensions alone were the only area of state government growing, the challenge posed here might be less
acute. But, of course, pensions are not the only area of state government seeing substantial cost growth (Exhibit 12).
Along with pensions, the state is expected to see substantial cost increases in medical assistance programs, debt service,
and prisons, which together total over $1.31 billion and outstrip projected revenue growth by nearly $500 million (Exhibit
13). Closing this gap to balance the budget, a constitutional requirement, requires cuts in spending elsewhere in the General
Fund. Having already reduced over 260 distinct budget line-item appropriations in the past two years totaling over $1.25
billion, additional spending reductions, particularly of the magnitude necessary to close the gap, will almost certainly require cutting into core programs and services, absent a tax increase or revenue uptick. It is one thing to have accomplished line item reductions in 2003, when program spending levels were more robust, it is quite another, given today’s leaner budget.
This dynamic of pension and other mandated cost growth exceeding new revenues that force reductions elsewhere in the
budget in order to achieve balance is not a new phenomenon, nor is it one that will end with the coming fiscal year. The spending cuts of the past two fiscal years were due, in part, to this same dynamic. Going forward, as pension costs grow significantly year- over- year for the next several years, the future is likely to include similar reductions as more and more pressure is put on the General Fund.
Crowding Out of Funds for Core Programs and Services
As the previous discussion shows, growing pension contributions are taking a greater share of available revenues. Pension costs added together with cost increases in other mandated
expenditure areas are significantly outpacing all available new revenues. Closing the gap between these cost increases and available new revenues produces what is best described as
a crowding-out effect on the rest of the General Fund Budget. That is to say, with mandated spending growing faster than available revenues, balancing the budget for the foreseeable future requires deep spending cuts in other areas of the General Fund, thus crowding out funding for core programs and services.
The areas at greatest risk of being cut are not “nice to have” government services and programs, but rather the core constitutional responsibilities of state government the commonwealth provides for through the annual budget process. These constitutional responsibilities include public safety and police services, health and human services, public education, and roads and bridges. These programs and services are all in jeopardy.
The impact of increasing pension costs along with other mandated cost areas in the General Fund directly correlates to not only less funding being available for other programs and services, but real cuts in these areas as they all compete for limited tax dollars. The commonwealth must first pay capital debt service obligations. Second comes pension obligations. Third, the commonwealth must pay any federally mandated match for entitlement programs. Only after these obligations have been met, can the commonwealth begin to pay for other programs and services.
As it stands, once debt service, pensions, and federal entitlement obligations are paid, there are too few dollars left to fully fund the remaining General Fund programs and services in this or succeeding fiscal years, therefore budget cuts must occur. As noted above, for 2013-14, this means having to cut as much as $500 million to balance the budget.
WHAT HAPPENS IF WE DO NOTHING?
Although some have given voice to the view that Pennsylvania does not have a pension crisis in light of the fact that our unfunded liabilities will be paid off and eliminated in 40 years, this
rather narrow view fails to consider the commonwealth as a whole, beyond pensions, and the almost certain financial pain to core programs and services that will result from ever increasing
employer contributions.
Absent structural redesign and reform of the pension systems, the commonwealth and the General Fund budget are on a very predictable path. With $41 billion in unfunded pension
liability already incurred, we know that annual pension costs are growing significantly; that they are claiming a greater share of available new revenues; and that together with the cost growth
in mandated expenditure areas, our liabilities will outstrip revenues each year. We know too that accommodating this mandated spending growth will force spending cuts in the rest of the General Fund budget - cuts that will impact directly core programs and services.
Just as it impacts at a state level, this same dynamic will play out in nearly every school district across the commonwealth. Increasing pension contributions obligations will claim a greater and greater share of school district budgets, crowding out funding for education, whether it is direct classroom instruction, sports, facilities and maintenance, and ultimately put pressure on districts
to increase property taxes.
Increasing Cost to Taxpayers
Unfunded liability results if established employer contribution rates fall short of covering the assumed annual cost of the retirement systems. Currently, the combined unfunded liability
for both systems is $41 billion. The legislatively created caps, which artificially restrain annual growth in the employer contribution rate, will still increase employer contributions from
the current 12.36 percent for PSERS to 28.04 percent in fiscal year 2019-20. Respectively, the SERS rate will increase from the
current 11.50 percent to 32.50 percent in 2017-18. These rates will remain in place until the plans reach sufficiently funded
status, which is not expected to occur for several years, assuming, of course that investment returns meet expected rates of return.
Over the next 30 years, the employer contributions required to fund this liability will reach $4.3 billion and $2.7 billion at their
peak. If nothing is done, each Pennsylvania household’s share of this unfunded liability would be $8,000.
Negative Impact on the Commonwealth’s New Business Growth
A growing number of leaders in the business community are concerned about the potential negative impact on employers
and taxpayers, such as higher taxes and/or reduced services, should the pension crisis not be sufficiently addressed and
the commonwealth is not able to meet all of its competing funding obligations. Among the major factors that go into a decision-making process for choosing a business location are regulation, geography, climate, employment laws, property values, business tax incentives, level of workforce skills, crime rates, and costs and standards of living. When evaluating a state’s regulatory climate, as well as its tax system, businesses look for consistency and predictability. Job creators need to have confidence that the marketplace will remain consistent and stable and the commonwealth will be able to continue to provide core services to businesses and their employees.
Negative Impact on the Commonwealth’s Credit Rating
The impending financial decisions demanded by the sizeable unfunded pension liability hinder confidence in Pennsylvania’s
financial strength, flexibility and structural balance. Underfunded pension systems have a negative impact on a state’s credit
rating, costing the taxpayer more in increased interest rates for bond issuance because the state’s bonds are perceived as
riskier investments. In Pennsylvania, the impact of increasing pension contributions has been reflected by a recent downgrade
to the Commonwealth’s bond rating:
• On April 10, 2012, Fitch Ratings provided, “The negative outlook reflects the commonwealth’s limited financial flexibility in the context of revenues underperformance through the third quarter of fiscal 2012 and the challenges presented by significant expected growth in annual pension funding obligations in the next few
years.”
• On April 13, 2012, Moody’s Investors Service noted, “The pension fund ratio has fallen to 75% and will continue
to decline until 2017 when the commonwealth will begin to make its full actuarial recommended contribution under current legislation. Annual debt service costs, pension contributions and other post-employment benefit costs will increase substantially through 2012, absorbing an increasing percentage of the budget and challenging the Commonwealth’s ability to return to structural balance.”
HOW CAN WE PROVIDE A FRAMEWORK FOR SOLUTIONS?
Having a clear understanding of the crisis and the challenges we confront, it is imperative that Pennsylvania find a workable
solution.
The rules governing pensions, benefit levels, and contributions are set by law. Structural reform and relief then can only occur
through legislative action. Governor Corbett has indicated that he intends to include a pension reform proposal as part of his FY2013-14 budget. As we begin the process of working together towards a solution, there are several considerations that
should help guide any framework to achieve a legislative solution.
1) Put Taxpayers First: Pennsylvania taxpayers did not create the pension crisis, yet bear the significant portion of cost of our pension systems through their tax dollars. Today, that cost is growing as never before, largely as a result of past decisions by their elected leaders and less-than-expected investment returns.
They are contributing large sums to make good on the state’s pension obligations to public employees, even as they see an erosion of support for services benefitting the larger public. Governor Corbett took a pledge upon being elected to not raise taxes. Tax increases, particularly in a difficult economy that is
already straining many Pennsylvania families and business, should be off the table.
2) Do No Harm to Retirees: Former public and school district employees worked throughout their careers to feel secure in the fact that the pension payments they now receive in retirement will not be affected by any reform that the commonwealth undertakes.
3) Respect Current Employees: The commonwealth recognizes that any accrued retirement benefits of current employees cannot and will not be touched as a result of pension reform. Like our taxpayers, our employees did not create the pension problem. That being said, components of current employee’s prospective benefit can be changed to conform with prior court determinations regarding deferred compensation. Given the current state of both pension systems, it may be necessary to explore changes
to prospective benefits for all current public and school district employees.
4) Achieve Intergenerational Fairness: Pennsylvania has incurred $41 billion in unfunded liability. This is a debt owed, an obligation on which the state must make good. Any reform should not exacerbate this problem by pushing more of this onus to our children and grandchildren. Similar to the Act 120 reforms,
any short-term prospective budget relief should be paid for by long-term reforms that are at a minimum cost neutral or, ideally, generate overall savings to the pension systems. By instituting meaningful cost offsets, the reforms of today will not leave the burden to tomorrow.
5) Learn from Other States: Pennsylvania is not alone in its pension challenge. Nearly every state is struggling in their ability to fund both pension obligations and meet the growing needs of core public programs and services. A 2010 report compiled by the Pew Center on the States notes that states collectively confront
a $900 billion to $1.38 trillion pension funding gap6. The study found that while a majority of states have taken steps to address their pension issues, there was no singular solution or approach taken by states. Despite different approaches, the report is clear to point out that pension plans still face challenges in the long run due to the growing gap between assets and liabilities. The following examples reflect actions taken by other states, which Pennsylvania might consider in implementing long term structural reform to its pension systems:
Increased Employee Contributions- As part of their pension reform efforts, several states have instituted increased member contributions. Depending upon the state, increases have
been instituted for either current or new employees, and in some cases, both.
Retirement Age- Increasing the retirement age even two to three additional years can yield significant savings. Pension benefits would still remain competitive, while allowing public and school employees to retire with security.
Accrual Rates- Changes in how the basic pension formula is calculated, particularly the factor by which years of service and salary are multiplied could result in significant long-term stability to the systems.
Early-Outs- Providing an incentive to long-term public and school district employees to retire without penalty upon reaching certain milestones would provide the commonwealth with a long-term foundation of pension stability.
Risk Mitigation- There are a number of options that could provide greater risk balance in the systems. Those options could include transitioning from a defined benefit plan to a defined contribution plan, adopting a hybrid defined benefit-defined contribution plan,
cash balance plan or modifying the current defined benefit plan to balance evenly the risk between employees and the employer through various investment return and contribution triggers. Increasing the flexibility of the plans to accommodate future economic downturns and stock market declines could also be important factors in structuring the systems for long-term sustainability.
Other Options- Changes in the term over which average salary is calculated, the elimination of overtime pay in salary calculations, or capping the retirement benefit could also yield significant savings and provide for long-term sustainability.
SUMMARY
Pennsylvania is at a crossroads with respect to its public pension systems. A number of factors have contributed to the financial
distress and pension crisis that we now face. Some of these were within the control of past legislative leaders and government
officials. Some were outside their control, including a global economic downturn and the resulting financial market decline,
which continues to challenge us in the form of a substantial unfunded liability in our systems. The goal of pension reform in
Pennsylvania is not to place blame, but rather to place the responsibility of building a balanced, solid and sustainable solution on all stakeholders.
Over the next few months, the Corbett Administration will work with General Assembly, stakeholder groups and the pension
systems themselves to shape a realistic, strategic approach to building the long term sustainability and affordability of our
pensions. This process will allow for the candid discussion of the issues, full and comprehensive examination of the options
and the development of a long term solution for overall stability of the systems, as well as address the detrimental effects of
spiraling pension costs on the commonwealth’s ability to govern and to balance its future budgets.
Pension reform will not be easy, but it is achievable. With a measured and transparent process, the commonwealth can
realize tangible, attainable results that will allow for the continuation of vital programs and services for our residents, provide equitable retirement benefits to our public and school district employees, and relieve the burden on taxpayers of paying for our pension systems.
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Post by mikekerstetter on Dec 8, 2012 7:32:09 GMT -5
With Pennsylvania having a crisis from spiraling public pension costs, Republican Gov. Tom Corbett on Tuesday outlined potential fixes he will offer to legislative leaders in January before presenting his 2013 state budget. Corbett told the Tribune-Review that options include increasing the state retirement age, which varies by agency, and changing how pension benefits are calculated by not including overtime and adding lower-salaried years into the formula. Any changes would start with new employees but, if he can get lawmakers to agree, could include workers who haven’t put in the 10 years required to become vested in the system. Making changes won’t fix the problem in the short term, but the state cannot afford to postpone action any longer, Corbett said. As pension costs rise — state payments are due to increase by $511 million next year — other items in the budget will get squeezed. “Everything is being somewhat driven by what the effect of the pension is,” Corbett said. “People need to know why this is an issue.” The Office of the Budget projects a $41 billion unfunded liability for the pension systems that include teachers and state workers. Trying to cut pension costs would pit Corbett against public-sector unions, which are among the state’s most influential interest groups. Corbett, however, said the first hurdle is the Republican-controlled General Assembly. Asked whether he plans to confront labor groups more directly in the next two years, Corbett said: “We are going to work and see what we can get through the Legislature. That’s my answer.” The spokesman for House Republicans said Corbett should have met with lawmakers before making public his concern about pension costs. “I wish he would talk to the leaders before he goes to the press with it,” said House GOP spokesman Steve Miskin. The governor’s office issued a recent report citing “staggering” pension costs that more than doubled in the past two years. Pensions for state and school employees cost taxpayers $1.5 billion this year and will rise to $2.2 billion in 2013 and $5.16 billion in 2019-20, Budget Secretary Charles Zogby said. “We’ve already made significant changes to the pension system in 2010,” said Sen. Jay Costa, D-Forest Hills. Those include increased payments and retirement ages. Corbett should allow those changes to have an effect, said Richard Bloomingdale, president of the Pennsylvania AFL-CIO, who called the debate a “phony crisis.” State leaders caused a pension funding shortfall during the past 12 years, when a series of laws increased benefits while decreasing funding, Costa said. Pennsylvania State Education Association spokesman Wythe Keever compared that to someone who “owned a credit card and didn’t make payments on it for 12 years.” Cutting up the card won’t eliminate the debt, Keever said. Keever said Corbett could satisfy the pension liability by increasing taxes on corporations. Corbett said tax hikes are out of the question. If costs don’t come down, money would have to come from education and welfare spending, he said — two of the largest line items in the general fund. The Fraternal Order of Police, which endorsed Corbett’s 2010 campaign, would oppose proposals to cut benefits, said state FOP president Les Neri. Police retire earlier than most public employees and don’t have as much time to build a nest egg, said Neri, whose 40,000-member organization has 6,000 people in the state pension system. Raising the retirement age would be a mistake, he said. “A violent criminal in his 20s or early 30s being pursued by a 58-year-old, gray-haired police officer — I don’t think that’s what we have in mind when we’re talking about public safety,” Neri said. Corbett did not reject the idea of floating bonds to cushion the financial impact, though he did not embrace the idea. Rather than asking legislative leaders to help with a plan, Corbett should devise one and present it to the General Assembly, said Sam DeMarco, a conservative activist and president of the Moon group Veterans & Patriots United. “He’s going to sit down and try to gauge their opinion on what they believe they can get done from a political perspective, yet nowhere here is a solution presented,” DeMarco said. Senate Majority Leader Dominic Pillegi, R-Delaware County, sponsored Sen. Pat Browne’s bill to transfer new employees to a direct contribution plan. “We plan to introduce that bill again in the new session and will work with Gov. Corbett, House leaders and (Democrats) to implement a plan that addresses all of the pension issues,” said Pileggi’s spokesman, Erik Arneson. Read more: triblive.com/news/allegheny/3069498-74/corbett-pension-state-costs-leaders-public-budget-gov-pennsylvania-billion?printerfriendly=true#ixzz2ESm08qqO Follow us: @triblive on Twitter | triblive on Facebook |
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Post by mikekerstetter on Dec 10, 2012 15:38:01 GMT -5
Could Pennsylvania pension liability hit current state workers?
By Gary Weckselblatt Staff Writer | Posted: Monday, December 10, 2012 10:00 am
Following a new report by Gov. Tom Corbett’s administration and his subsequent comments to the media, it appears the governor will push the General Assembly to enact pension reform that impacts workers who are currently enrolled in the system.
While case law interpreting the state constitution bars reductions in benefits for current employees, Corbett said in a recent press conference that he believes it is legally possible to limit the reduction to future benefits that employees have yet to accrue.
For example, he said the “multiplier” — a percentage applied to an employee’s years of service and final average salary to produce his or her retirement benefit — could be reset at a lower rate for the latter part of the employee’s career.
“You can cut the multiplier for folks going forward even if they (are) vested ... because they still have the benefit of that period that they had the multiplier,” Corbett said. “Legally, can you do that? I believe you can.”
The Keystone Pension Report, released last week, warned that the growing financial obligations of the state’s two major public-sector pension funds threaten to drive taxes up, drain funding for other state programs and hurt business growth. The report ruled out higher taxes, but said cuts for current employees should be considered.
The State Employees’ Retirement System and the Public School Employees’ Retirement System face an unfunded liability of $41 billion, the report said.
“Absent meaningful structural pension reform, the state’s General Fund budget is on a very predictable path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government,” budget secretary Charles B. Zogby stated in a press release about the report.
The state paid about $1.1 billion into the funds last year. That amount is expected to double to $2.2 billion in the fiscal year that starts July 1, and to exceed $5 billion by 2019.
State Rep. Todd Stephens, R-151, said he’ll look at any proposal for a potential fix, but would tread slowly with any plan that cuts benefits to current employees.
“It’s very important to remember it’s the politicians of both parties who created this mess, not the employees,” he said.
Using the example of 55-year-old workers who have done his financial planning “based on a promise made to them,” Stephens said it would be “unfair to pull the rug out from them at this stage of the game.”
An attorney, Stephens said he’s read court opinions that “really frown on changing benefits. It would be a big mistake for us to do that and have the courts throw it out three years later. That would put us in a bigger hole.”
State Rep. Madeleine Dean, D-153, said it would be “wrong” and “a mistake” to penalize employees when it was the government that didn’t fully fund the system because of strong stock market returns a decade ago.
“Then you had a devastating recession,” she said. That combination “is where the mess began. ... I would not be in favor of what the governor is proposing.”
Two years ago, with a growing property-tax bubble in mind, the General Assembly reformed state pensions for new hires. Through Act 120, future employees and new lawmakers started to pay more money into their pension plans, while benefits were rolled back 25 percent to pre-2001 levels and the vesting period for both school and state employees increased from five years to 10 years.
The deal leveled out the near-term property-tax bubble, but cost homeowners more money down the road. Officials have described it as going from a 15-year to a 30-year mortgage. Your monthly payments are less, but you’re paying for a longer period of time.
Since then, the House and Senate have had bills to establish a defined contribution plan for both the PSERS and SERS.
State Rep. Scott Petri, R-178, wrote the House legislation, HB 551 and 552. Reps. Tom Murt, R-152, Marguerite Quinn, R-143, and Steve Santarsiero, D-31, were co-sponsors.
In the Senate, SB 1540 is co-sponsored by Stewart Greenleaf, R-12, Chuck McIlhinney, R-10, Bob Mensch, R-24, and Tommy Tomlinson, R-6.
In the new term, Petri said he’s exploring legislation similar to that approved last year by Rhode Island, where lawmakers passed sweeping changes to the pension system. The new law suspends annual pension increases for retirees, raises retirement ages and creates a new hybrid system that combines a 401(k)-style plan with a traditional pension.
“The legal question is ‘Can you do this? Can you end the plan mid-term?’ “ he asked. “I know legal counsel in Harrisburg is definitely looking at this.”
The unions in Rhode Island have taken the state to court for reneging on benefits. State leaders insist that without the changes, ever-escalating pension costs would swamp state finances.
Rhode Island’s present could become Pennsylvania’s future.
Pennsylvania State Education Association President Mike Crossey criticized the Keystone Pension Report for making a “scapegoat of working people who have contributed to their pensions. It was employers that paid nearly nothing into the pension systems for a decade.”
Crossey blamed Corbett for “a conscious policy decision to provide over $800 million in corporate tax breaks, including the capital stock and franchise tax and bonus depreciation credit, which cost the state $760 million – more than the projected pension debt owed” in fiscal year 2013-14.
State Rep. Marguerite Quinn, R-143, said a recent email to constituents unrelated to the pension situation quickly came back with four inquiries about potential changes to the system.
“Two of them said ‘Don’t change a thing,’ “ Quinn said. The other two said, “You darn well better get moving on this.’ “
Quinn, who described the current system as “unsustainable,” said, “I can’t imagine people in the system not wanting it fixed so it can be sustainable.”
“I’ve said over and over again that there’s no silver bullet. We’ve got to have this discussion.”
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