Public Employee Pensions and Benefits
On Tuesday, a task force spearheaded by Auditor General Eugene DePasquale released its recommendation for municipal pension reform. The report recommends, among other things, more transparency and accountability in municipal pensions and taking pensions out of the collective bargaining process.
This report is the latest in a string of bipartisan efforts to tackle the municipal pension problem.
Last week, the Senate Finance Committee advanced SB 755, legislation that would indeed take pensions out of collective bargaining and put all new public safety employees into a defined contribution plan.
SB 755 has the support of the Commonwealth Foundation along with the Coalition for Sustainable Communities—a coalition of local officials and business leaders. But for the first time, the legislation received Democratic legislative support. Sen. Art Haywood, from Montgomery County and a former township commissioner, joined with Republicans to advance the bill.
Other Democratic Senators also indicated they might be open to supporting the final legislation.
The panel's ranking Democrat, Sen. John Blake, D-22, Archbald, voted against the bill as did other caucus members with one exception. But Mr. Blake said he’s keeping the option of eventually supporting the bill open, depending on what a pending report from Gov. Tom Wolf’s task force on municipal pensions recommends.
Mr. Blake said he’s concerned that switching to a defined-contribution plan could ultimately lead to more pension debt. He noted that Carbondale Mayor Justin Taylor supports the bill.
Sen. John Yudichak, D-14, Plymouth Twp., said he plans to keep an open mind about municipal pension changes if the bill reaches the Senate floor. He said pension changes are one reason why Nanticoke is ready to leave Act 47 distressed municipality status.
Of course, municipal pension reform has been a top priority for Democratic mayors from across the commonwealth for some time. As the Pittsburgh Post-Gazette reports:
[Pittsburgh] Mayor Bill Peduto has pushed hard this year for overhauling municipal pensions, joining nine other Democratic mayors in chastising Democratic legislators for what they called a failure to act, and has met with the governor and legislators on the issue.
"His message has been that pension reform is the number one priority for this city and every other one in the state," said Tim McNulty, Mr. Peduto’s spokesman.
Mr. Peduto and other proponents have said looming election cycles and the heavy political influence of public safety unions may make future efforts to overhaul the system difficult.
"It's going to be a hard reach to do state pension reform this year and municipal pension reform next year," said Lancaster Mayor J. Richard Gray.
While budget discussions continue under the Capitol dome, addressing municipal pensions is no less urgent. And given the bipartisan support behind this effort, the time is ripe.
Yesterday, the General Assembly passed landmark legislation to free homeowners from skyrocketing property taxes, make school budgets go further, and protect public employees from politics.
SB 1 bill reforms the pension system by placing new state employees and school teachers in a defined-contribution retirement plan, similar to a 401(k). The bill passed the House of Representatives 106 to 89 and the Senate concurred with a 29 to 20 vote.
Please take a minute to thank your lawmakers for working to get politics out of pensions.
For years, public servants' retirement benefits have been at the mercy of political whims, with past legislatures making empty promises. Pension underfunding, along with market downswings, have left taxpayers with a $53 billion pension liability and skyrocketing local property taxes (an extra $600 per homeowner since 2008-09).
SB 1 not only stops the bleeding, but also benefits public employees by giving them stability, portability, and protection from political manipulation through a defined-contribution plan. The bill also provides employees with a cash-balance plan, adjusts the calculation of lump sum withdrawals to make them revenue neutral, and reduces "pension spiking" practices. SB 1 also puts lawmakers in the same defined-contribution plan as new employees, once they are re-elected.
The bill would save about $11 billion over the long-term.
Meanwhile, Governor Wolf continues to insist we do not have a pension crisis. A veto would be a huge blow to the commonwealth, paving the way for future credit downgrades, education cuts, and tax hikes.
One of the specious arguments used to thwart pension reform centers on the average benefits of retirees. Opponents of reform claim the "average pension benefit" is around $25,000 annually. But a deeper examination of this figure tells a different story.
The "average" retiree didn’t work in the school system her entire career. And the "average pension" is diminished by employees taking a "lump sum withdrawal" upon retirement. Data from the Public School Employees Retirement System (PSERS) show teachers who worked their entire career in education have a much better retirement plan.
- Q: What is the average pension for a PSERS retiree with 30-34 years of experience?
- A: $38,232
- Q: What is the average pension for a retiree with 35-39 years of experience?
- A: $50,176
- Q: What is the average pension for a retiree with 40 or more of experience?
- A: $53,377
All of these totals are after retirees take their lump sum withdrawal, which is comprised of employee contributions plus interest. If employees opt to withdraw the lump sum, often amounting to several hundred thousand dollars, they then receive a lower annual pension payment. Almost all employees choose this option.
This withdrawal option (called option 4) is not available for employees hired after 2010. SB1, the current reform pension bill making its way through the General Assembly, would change the Option 4 formula, as it costs taxpayers more for employees who take the lump sum over the higher annual pension. The actuarial note for SB 1 released on Monday shows changing this formula would save an estimated $6.1 billion in pension contributions over 30 years.
This half-truth misleads for another reason—it implies shifting to a defined contribution plan hurts workers. That couldn’t be further from the truth.
As Matt pointed out in his testimony on SB 1, most new teachers will never be vested in their pension. In contrast, a defined contribution plan offers teachers and state workers a predictable, portable and sustainable retirement plan—one which is better for most young workers.
Of course, the most important reason to shift to a defined contribution plan is to get politics out of pensions—and end the cycle of overpromising and underfunding pensions.
Pennsylvania's public sector pension crisis is undeniable.
Consider the burden it places on local school districts, whose pension contributions increased from $1.4 billion in 2012-13 to $1.9 billion in 2013-14. In 2008-09, districts spent $562 million on pension contributions; schools have thus seen more than a three-fold increase in only five years.
And these costs will continue rising in coming years.
Take a look at our most recent Policy Memo for more information on education spending trends.
Pension reform commands a great deal of attention in Harrisburg these days, and deservedly so. Pension systems for state and public school employees are in bad shape, and reform is vital.
But the commonwealth's pension problems aren't confined to state government and school districts. Pension costs are strangling many of the Keystone State's local governments. Earlier this year, the Auditor General released a report detailing the magnitude of the local pension problem.
The report focused on 562 "distressed" municipalities. These 562 municipalities have underfunded their pension systems by at least $7.7 billion. Rising pension costs are forcing local governments to raise taxes and fees, lay off workers, and cut back on services—including those devoted to public safety.
To address this problem, lawmakers in the House and Senate introduced legislation to put new public safety employees into secure defined contribution or cash balance plans. Moreover, these bills would take pensions off the table during collective bargaining and binding arbitration—a process by which an arbitrator can set pension benefits regardless of a municipality’s ability to pay.
Here’s a short description of two pieces of legislation aimed at tackling municipal pension problems:
- HB 316, sponsored by Representatives Keith Greiner and Seth Grove, freezes pension benefits at current levels for public safety employees and moves those employees into a cash balance plan to prevent the accumulation of additional pension debt.
- SB 755, sponsored by Senator John Eichelberger, allows municipalities to establish defined-contribution plans for all public safety employees and would prevent local municipalities from using pension assets to fund any other programs aside from pension benefits.
While SB 755 is the better of the two plans—it takes the politics out of pensions—both proposals give local governments tools to fix the their pension problems.
Local government pension reforms are now gaining momentum thanks to bi-partisan support from Democrat and Republican local officials, business leaders, and the Coalition for Sustainable Communities, which the Commonwealth Foundation has proudly joined to help stress the urgency of municipal pension reform.
During his budget address, Gov. Wolf stated, "It's not good enough to just say no and continue with the same old same old.” Why, then, does he continue to sidestep Pennsylvania’s pension crisis?
One explanation is that government unions, some of Gov. Wolf’s biggest financial supporters, benefit from “the same old same old” system and want the governor to continue blocking real reform.
Matt explains that defined benefit plans—like public school pensions—create an unmanageable burden for taxpayers and leave public employees at the mercy of politicians to properly fund their retirement. In contrast, a 401K-style retirement plan is affordable for taxpayers and portable, dependable, and protected from political manipulation for public workers.
Click here or listen to the interview below.
The Dom Giordano Show airs every weekday from 9 am – 12 pm.
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Public pensions have created one of the worst financial crises in Pennsylvania’s history—a monstrous, $50 billion debt that Gov. Wolf can no longer ignore. To prevent the crisis from growing, the state Senate passed Senate Bill 1 to convert a broken retirement system into a stable and fair plan for public employees and taxpayers.
Matt Brouillette, CF’s president & CEO, sat down with Mike Pintek on KDKA to discuss these legislative and structural reforms.
Meanwhile, government union leaders are attempting to fight pension reform by making deceptive (and debunked) claims, which Matt refutes. He points to pension debt projections for local school districts that simply “do not have enough money in [their] communities to pay”.
Click here or listen below to hear more.
Mike Pintek appears on 1020 KDKA weekdays from noon to 3 pm.
Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.
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One of my favorite children’s books is titled "The Monster at the end of this Book." In it, Grover (of Sesame Street fame) pleads with the reader not to turn the page, or else you will unleash the horrible monster. As it turns out (Spoiler ALERT), lovable furry old Grover himself is the monster, and all is well.
Children are entertained by Grover's protestations, but never frightened by all his warnings against turning the page, as they are quite silly.
Similarly, government union leaders are making dramatic but misleading objections against public pension reform. Their scary rhetoric—that lawmakers are "stealing retirees pensions," that pension reform will "cost taxpayers billions," that legislators are "destroying the middle class" and "taking away retirement security"— has been debunked and should not be taken seriously.
In reality, pension reform ensures the integrity of government employees' retirements and saves taxpayer dollars.
Thankfully lawmakers in Pennsylvania have, like children reading "The Monster at the end of this Book," pressed on with pension reform, understanding that the most dangerous course of action is to do nothing.
Today, the State Senate passed Senate Bill 1 (read our news release on that), by at 28-19 vote. SB 1 would create a hybrid system, with a defined contribution plan and a cash balance component, for all new hires. Yesterday, the State House advanced House Bill 727, which would offer a defined contribution plan for all new hires.
Pennsylvania should follow the lead of 18 other states that have moved to a defined contribution or hybrid pension plan—without seeing the horrors claimed by union leaders—delivering affordable and predictable retirement benefits, which can’t be politically manipulated or underfunded.
See Commonwealth Foundation’s pension reform toolkit for more information on pensions.
"It's not good enough to just say no and continue with the same old same old." So said Gov. Tom Wolf during his budget address, making clear his administration is committed to finding solutions, compromising, and working with both Republicans and Democrats to improve Pennsylvania.
Unfortunately, the governor isn't practicing what he's preaching.
Angela Coloumbis of the Inquirer reports that Wolf's spokesman Jeff Sheridan has emphatically repeated Wolf's opposition to Senate pension reform legislation and other Republican ideas to end business as usual in Harrisburg.
As I point out in a recent letter to the editor, Gov. Wolf needs to stop blocking transformative reforms—like liquor store privatization, pension reform, and the Taxpayer Protection Act—critical to achieving prosperity for all Pennsylvanians.
I’m disappointed to see Gov. Wolf’s spokesman Jeff Sheridan accuse Sen. Bartolotta (Governor wants to reinvest in higher education, April 29) of having a “profound misunderstanding” of middle class families, while at the same time misleading readers about how Gov. Wolf’s proposal harms those same middle class families.
Sheridan conveniently fails to mention that Wolf proposed taxing university fees, textbooks, and meal plans—to the tune of $150 million per year.
Middle class students will pay the brunt of that burden—as will middle class families paying more for nursing home care, day care, diapers or utility bills. A recent study by the Independent Fiscal Office notes that every income group will pay more under Wolf’s tax increases.
While Sheridan repeats campaign slogans about changing the status quo and blames the previous administration, Wolf’s budget calls for more of the same. Following decades of spending increases and tax hikes, Pennsylvania’s tax burden rose to the 10th highest in the nation. As a result, Pennsylvania has ranked among the worst states in job, income and population growth for 40 years.
Ironically, it is Gov. Wolf who is saying “no” to needed reforms to get our state on the right track. He has already threatened to veto liquor store privatization and has indicated opposition to pension reform. Wolf has also been silent on Sen. Bartolotta’s own Taxpayer Protection Act—which would limit the growth of state spending and unleash the private sector.
Higher taxes and spending won’t fix Pennsylvania’s economy, and it’s time for Gov. Wolf to stop blocking reforms that will offer prosperity for all Pennsylvanians.
Pennsylvania's $50 billion public pension problem isn't going to solve itself. Reform is a must, which is why Senate Majority Leader Jake Corman has rightly called for structural changes to the public pension systems before considering higher taxes.
A reform being considered now would put new state and school employees into a defined-contribution (DC) plan. Transitioning to a DC plan for new hires—a necessary move to extract politics from pensions—is an important first step on the road to real pension reform.
But not everyone is convinced.
A common assertion put forth by critics of this approach is that such a switch would increase "transition costs," forcing taxpayers to foot the bill. The argument is as follows: Transferring new state and school district employees to a DC plan will increase costs for taxpayers as the pool of employees paying into the current DB plan shrinks, requiring more conservative investments and higher contributions.
Still awake? Good.
This argument against switching to DC plans is flawed. Eileen Norcross, program director and research fellow at the Mercatus Center explained why in her testimony last week:
Closing a defined benefit plan does not add liabilities to the plan. Rather, it changes how the plan’s liabilities are accounted for and changes the investment strategy for the plan’s assets. It reveals the economic value of the plan and makes the funding of the plan’s benefits more sound. Closing a defined benefit plan doesn’t add new costs; it makes the costs transparent, and it makes it easier to ensure that the benefits for retirees are fully funded.
But what about the specific contention that closing a DB plan requires moving to more conservative investments, leading to an increase in costs? Norcross refutes this myth:
The investment-based transition costs argument is a casualty of the flawed accounting standards that have created large, unfunded pension liabilities that states must now address. The use of GASB 27 over the years created an accounting and funding illusion that allowed public plans to ignore investment risk and undercontribute annual plan payments. It is why plans experienced such large and unanticipated losses during the 2008 market crash and why plans suffer from large unfunded liabilities today.
To summarize, unrealistic assumptions about future investment returns can increase costs—not a transition to a DC plan. In fact, unrealistic assumptions create dramatic risks for taxpayers that may be alleviated by moving new hires to a DC plan:
…the probability of Pennsylvania meeting its pension obligations by the year 2030 without additional contributions is not even 50 percent, but significantly lower: 31 percent for the Public School Employees Retirement System (PSERS) plan and 16 percent for the State Employees’ Retirement System (SERS). The need to make up this shortfall is the reason for saying that closing a defined benefit plan generates investment-based transition costs. But these costs lessen the risk of pension underfunding and may even eliminate the risk.
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