Public Employee Pensions and Benefits
Pennsylvania may soon be unable to meet its pension obligations. Without additional contributions, Pennsylvania’s Public School Employees’ Retirement System (PSERS) will have only a 31% chance of sufficient funding by 2030 and the State Employees’ Retirement System (SERS) will have only a 16% chance.
Meanwhile, the Independent Fiscal Office estimates that pension payments in 2019-20 will represent 9.4% of the state General Fund budget or $3.3 billion. That’s more than double the share of pension payments in the 2011-12 budget—crowding out funding for other services.
In truth, SERS' unfunded liability grew by about $1 billion this year due to artificially low employer payments. A more accurate calculation comes from the SERS actuary, The Hay Group. They estimate an unfunded liability of $19.45 billion as of December 2015.
Artificially low employer payments aren't the only reason the unfunded liability has grown. SERS assumes a 7.5 percent rate of return for investments, but the actual rate of return has been far less, only 0.4 percent in 2016.
Keep in mind that SERS liabilities represent less than half of the overall pension liability taxpayers will pay. The larger Public School Employees' Retirement System is carrying a $37 billion liability for a total of $56 billion.
Clearly, letting Act 120 work means more debt for taxpayers. Giving state workers greater control over their retirement is the only way to boost worker security and stop the flood of red ink.
Pennsylvania’s nine-month budget saga has concluded, but not everyone is pleased with the ending. The Philadelphia Inquirer published a caustic editorial criticizing state lawmakers for failing to surrender to the governor’s unreasonable budget demands.
Rather than providing clarity, the partisan editorial adds to the mountain of misinformation casting a shadow over the budget debate. For example, the editorial board writes,
Gov. Wolf has succumbed to Republican obstruction and agreed to a plan that keeps the state in the fast lane toward fiscal instability and educational decline.
Far from being obstructionists, Republicans advanced numerous balanced budgets, liquor privatization, and pension reform. The governor is the one clinging to the status quo. His insistence on higher taxes and spending will chase more people out of the state, leaving fewer taxpayers to cover the growing costs of government. Does this sound like fiscal stability?
But tax increases are necessary, some say, to stave off educational decline. The truth is more complicated. No correlation exists between higher education spending and educational outcomes. Lack of funding is not the problem. Misplaced control is the problem. Pennsylvania’s educational system will improve when parents, not government officials, are in control of education.
The editorial continues:
Of the many disappointments of this budget, the greatest is its failure to address the state's structural deficit, the stark difference between the state's spending and receipts. This deepening hole, expected to approach $2 billion next year, is sapping the state's ability to function.
Leaving aside the hyperbolic ending, the board’s preferred plan does not eliminate the deficit despite including a $2.3 billion tax increase over two years. Furthermore, if the state is facing a deficit, adding billions in new spending makes little sense. Why add new bills if the state cannot pay its old ones?
In keeping with its partisan tone, the board writes,
That seems to be of no concern to the legislature's least reasonable Republicans, who can return to a never-ending campaign trail to gleefully proclaim that this budget raises no taxes. But the problem is that it does raise taxes. Local property taxes throughout the state are bound to rise because the state is failing to properly fund schools, leaving districts to make up the difference.
Leading readers to believe lawmakers have no alternatives to tax hikes is disingenous. Reforms like voter referendums, school choice, and mandate relief can ensure education funding, which is at record levels, is spent more efficiently.
Finally, the board attempts to paint the governor as a reasonable negotiator who can’t get anywhere with obstinate Republicans:
This budget doesn't address the looming pension crisis or reform the state's absurd grip on wine and spirits sales, supposed Republican priorities that, despite belated and begrudging concessions by the Democratic governor, remain as untouched as Wolf's agenda.
These “concessions” were token at best. Republican legislators preferred a pension plan that moved all new public employees into a 401k plan. The governor said no. On liquor, they requested complete privatization of the system. The governor said no.
After having their top two priorities rejected, the legislature still increased spending by more than $880 million, with $230 million added for education—the governor's top priority. Republican lawmakers passed these increases even though many preferred reductions in government spending.
Nevertheless, the 2015-16 budget impasse is history. Focus will now turn to the 2016-17 budget and lawmakers will have another opportunity to redesign government so that working people aren't harmed by the consquences of overspending.
State employee compensation costs have soared to nearly $93,000 per worker per year, with health care and pensions the largest contributors.
Meanwhile, costly EPA mandates on carbon and mercury emissions will cause strife for Pennsylvania's coal industry. Other mandates could cost farmers millions.
Nathan Benefield recently joined George Toth on WNPV's Regarding Your Money to discuss how the rising costs of state workers and EPA mandates will burden Pennsylvanians.
Click here or listen below to the interview:
The state pension boards testified before the General Assembly this week and reported a combined unfunded liability of more than $56 billion. Contrary to claims that “we should let Act 120 work,” the outlook for Pennsylvania’s state pension systems continue to worsen.
Here’s a glimpse at how the unfunded liability has increased since 2010:
The Pennsylvania School Employee Retirement System (PSERS) Budget Report explains that its unfunded liability is due to a combination of funding deferrals, subpar investment performance, and benefit enhancements:
Each year, PSERS payments consume a growing percentage of the Pennsylvania's ever-increasing education spending. In 2010, pensions accounted for roughly 3 percent of state education spending. In the current fiscal year, they account for 16 percent of the total education share:
The State Employees Retirement System (SERS) announced decreased investment fees, from 96 to 59 basis points. Although this results in modest cost savings, the 59 basis points are still significantly higher than many passively managed mutual funds.
Also of note, from The PLS Reporter:
Both systems said they are keeping their current 7.5 percent assumed rate of return despite not meeting that amount in a short-term look back.
Certainly, the public pension crisis is the most urgent policy challenge facing the commonwealth. It is driving property tax increases and credit downgrades across the state. The sooner Pennsylvania moves to a defined contribution retirement plan for new hires, the better.
Some positive news emerged last week, Gov. Wolf agreed—as part of a lawsuit filed by Rep. Steve Bloom and Rep. Seth Grove—to a temporary deal to keep the Public Employee Retirement Commission (PERC) operating as an independent agency.
Under the deal, PERC employees will be paid through the Office of the Budget, but will continue to be independent—reporting to the PERC board, not to the governor’s office. Moreover, PERC will be able to continue analyzing pension bills.
Current law prevents the legislature from voting any pension reform bill without an analysis from PERC. Gov. Wolf’s veto of PERC funding and plan to move PERC employees not only threatened the independence of PERC, but undermined the prospects of pension reform.
Of course, Wolf spokesman Jeff Sheridan denied that this was the intent:
The administration did not propose the elimination of PERC with its line item veto or its 2016-2017 budget proposal. PERC and the Office of the Budget reached an agreement in February that ensures that PERC can continue to carry out all functions related to its municipal pension obligations.
Commonwealth Foundation, however, caught Sheridan's doublespeak. In fact, the Governor’s Executive Budget explicitly says, “This budget includes…the elimination of the Public Employee Retirement Commission.” Later it mentions the plan to “Abolish the Public Employee Retirement Commission to eliminate redundancy.”
Sheridan later retracted his statement to Capitolwire (paywall)
[EDITOR'S NOTE: The original story was altered to remove a portion of Sheridan's statement indicating Wolf's 2016-2017 budget proposal did not include the elimination of PERC. In an email sent a day after the quote was provided, Sheridan acknowledged the governor's FY2016-17 budget proposal includes the elimination of PERC].
But the Governor’s 2016-17 budget just builds on Gov. Wolf’s actions to unilaterally shut down PERC. In a letter, Gov. Wolf’s chief of staff Mary Isenhour tells PERC to “discontinue operations:”
As you are aware, the General Appropriation Act of2015, the Act of December 29, 2015(P.L. _, No. 10A) (Act 10A), did not contain an appropriation for the Public Employee Retirement Commission (PERC) for Fiscal Year 2015-2016.There are no appropriated funds from which to cover operational expenses, salaries and benefits, or expense reimbursements. As we discussed yesterday, it is necessary for PERC to take all appropriate steps to immediately discontinue operations.
The letter tries to make it sound like the legislature or someone else forgot to fund PERC. But it was Gov. Wolf who vetoed funding for PERC, with little explanation—though it’s pretty clear to all observers the veto was punitive.
PERC was fully funded in the Governor’s 2015-16 budget proposal, and in the “framework budget” the governor was pushing in December. Only after PERC refused to change their analysis at the governor’s request did he decide to eliminate PERC.
Thankfully, this lawsuit and agreement protects taxpayers and allows PERC to continue to provide independent pension analysis regardless of threats from Gov. Wolf.
Yesterday we issued a press release on public employee compensation, which is now causing quite a stir on social media. One commenter accused us of engaging in “shenanigans.” Another wanted us to “quit crying about what people make,” and a few politely questioned the validity of our figures.
To summarize the critics’ arguments: they do not believe the average cost of public employees’ compensation is nearly $93,000 per worker. As they point out, many state workers make less than $93,000 a year. This is true. However, the Office of Administration does not calculate the cost of compensation (page 18) on an individual basis. The $93,000 figure is an average and is not applicable to the every one of the 80,000 employees working for the state.
An employee’s compensation can vary based on the department he or she works in. For example, the average salary for an employee in the State Police is $74,725. In contrast, the average salary for a human services employee is $47,606. Union membership is another factor determining compensation. Employees who belong to AFSCME can expect $76,780 in compensation whereas SEIU members can expect to earn about $10,000 more in compensation over the same year.
Indeed, none of this challenges our central point: the cost of employee compensation—determined by contracts negotiated in secret—is rising dramatically. If ignored the costs will continue to climb, further burdening private sector workers who will be required to pay for exceedingly generous compensation packages.
One final point is in response to a criticism not mentioned above. Detractors claimed our post was a misplaced attack on state employees and evidence that we are not concerned about people making a living wage—a completely unfair representation of our position. Our goal is to make Pennsylvania a more prosperous place to live for everyone.
Yet, this goal is impossible to meet if we continue to sanction the unsustainable growth of government. Increasing taxes on working people in the private sector to pay for government spending will only hinder the state’s economic progress and prevent Pennsylvania from becoming a place where people want to live and work.
The soaring costs of public employee compensation, if left unchecked, could aggravate Pennsylvania’s financial troubles.
The growth in employee benefits, which have skyrocketed since 2006, is driving this upward trend in employee compensation.
|Commonwealth Agency Employment (inflation-adjusted 2015 dollars)|
|No. of employees||Average salary per employee||Average benefits per employee||Total average compensation per employee||Benefits as % of salary|
|Source: Pennsylvania Office of Administration, "2016 State Government Workforce Statistics," http://www.oabis.state.pa.us/SGWS/2016/2016_SGWS_Dashboard_Charts.pdf#pagemode=bookmarks. The report details statistics for agencies under the PA governor's jurisdiction.|
While public employee pay has risen by 5.6% since 2006, average benefits per employee have increased by an astonishing 71.2%, bringing the total average compensation to nearly $93,000 per employee.
With few exceptions, compensation steadily but stably increased until the last three years—when it exploded. Just last year, compensation rose by $7,700 per worker—more than $5,000 of this in benefits alone.
Beyond benefits as a percent of compensation, total compensation for Pennsylvania’s public employees is also much higher than that of private sector employees, according to Andrew Biggs of the American Enterprise Institute.
In his 2014 report, Biggs found Pennsylvania offers one of the most generous compensation packages for public employees. In fact, the state was second in terms of the inequality between public and private sector compensation, even after adjusting for factors like educational attainment. For public employees, total compensation was 35 percent higher when compared to private-sector workers.
Put plainly, this arrangement is unfair to private sector workers who are taxed to pay for the more generous compensation packages enjoyed by their public sector counterparts.
Lawmakers can address this unfairness and rein in the costs of government by making the collective bargaining process more transparent and bringing public employee benefits in line with the private sector.
Contract transparency would give taxpayers a seat at the table during collective bargaining negotiations. Currently, public officials can negotiate union contracts in secret—with their campaign contributors in many cases. This effectively denies taxpayers a voice in contract discussions.
Structuring benefits to mirror those offered in the private sector is also a critical reform. For example, moving all new employees to a 401k pension plan, which is what is offered to most private sector workers, will help the state control future costs while offering employees more control over their retirements.
Promoting parity between private and public sector medical plans is another way to close the compensation gap.
According to the Kaiser Family Foundation, private sector workers pay about 20 percent of their premium for individual coverage and 22 percent for family coverage. The total contribution of public employees for their share of medical benefits is approximately 11.7 percent. If the state increased this contribution to 20 percent, taxpayers could save at least $153 million annually.
These commonsense reforms would serve the dual purpose of reducing compensation inequality and protecting working people from paying even more in taxes.
 The Bureau of Labor Statistics does not provide compensation data on a state-by-state basis. However, it does provide compensation data by geographic area. The comparison above uses compensation data from the Middle Atlantic region, which includes Pennsylvania, New Jersey, and New York.
Gov. Wolf has a history of trying to fire individuals who won’t kowtow to his agenda. He tried to remove Erik Arneson as head of the independent Office of Open Records—a move the state Supreme Court ruled illegal; he replaced David Meckley as the chief recovery officer in York; and he demoted Bill Green as chair of the School Reform Commission in Philadelphia.
Now, Wolf is targeting the Public Employee Retirement Commission (PERC), trying to shut down the entire agency. What’s PERC’s great ‘crime’? Apparently, evaluating pension legislation before lawmakers vote on it. In other words, if Wolf can eliminate PERC, he can effectively roadblock pension reform.
But there’s a problem. The law establishes PERC as an independent agency to evaluate state pension systems and legislation and offer cost and benefit assessments. While PERC members are appointed by legislative leaders and the governor, Wolf has no legal authority to unilaterally disband PERC. But Wolf seems focused on retribution against PERC for refusing to bow to his dictates.
As Capitolwire (paywall) reported last month, when Wolf line-item vetoed PERC’s funding:
According to the aforementioned sources, the Wolf administration wanted PERC to hold a meeting early in December, well before the commission could have an actuarial analysis done on the pension reform proposal…
In the absence of an analysis done by Milliman, PERC’s contracted actuarial firm, the commission was supposed to accept the figures offered by the pension systems and the Wolf administration.
[PERC Executive Director Jim] McAneny refused to do that – allowing Milliman to subsequently find a few errors within the legislation, including one that erased an estimated $630 million in long-term savings – instead pushing for his agency to do one of its many important jobs. However, his decision appears to have put in jeopardy PERC’s ability to do much of anything going forward.
PERC’s function as an independent arbiter serves—and protects—taxpayers. Relying solely on actuaries who are on the payroll of the same system they’re charged with evaluating is hardly a winning strategy for government accountability.
Wolf’s dictatorial actions clearly undermine the prospect for future pension reform, while sending the clear message: If you don’t do the governor’s bidding, he will simply eliminate your job.
Last year, Gov. Tom Wolf promised he would take state government in a "different direction" and grow the middle class. He pledged to do this by making Pennsylvania a magnet for private sector entrepreneurs without giving massive tax breaks to special interests.
Throughout 2015, the governor has strayed from those promises by vetoing a budget that held the line on taxes, privatized liquor and made an effort to protect the state's credit ratings through pension reform.
Of course, a new year provides new opportunities…or should we say a fresh start. So with the new year in mind, here are five resolutions the governor can work toward to deliver on his promises to Pennsylvanians:
Resolution #1: Return to the campaign promise not to raise taxes on working people.
As a candidate, Tom Wolf promised to protect low and middle-income people from a tax increase, but in 2015, he broke that promise. Fortunately, the governor has an opportunity to stand on the side of an overtaxed working class, and prevent policies that will expedite the exodus of Pennsylvanians.
Resolution #2: Level the playing field and cut spending on corporate welfare programs.
Unbelievably, government spending has increased in 44 of the last 45 budget years. Cutting down or eliminating nearly $700 million in corporate welfare is a great way to save tax dollars and level the playing field for all Pennsylvanians.
Resolution #3: Deliver property tax relief by signing real pension reform.
Over the past year, the governor highlighted the onerous property tax system in Pennsylvania and proposed a tax shift to help, but such a shift does not solve the real problem: school budgets squeezed by pension costs.
To provide relief to homeowners, we need comprehensive pension reform that stops adding new debt and provides a method to pay down existing debt. That means converting to a 401k-type system and finding additional revenue (either through spending cuts or non-tax revenue sources) to pay for the more than $53 billion in benefits promised to public employees.
Resolution #4: Make government work smarter by getting out of the booze business.
Selling wine and liquor is not a function of state government. Government booze control leads to higher prices, fewer choices, less convenience, an inefficient bureaucracy. Selling the state stores would be a windfall for both taxpayers and consumers alike.
Resolution #5: Create "government that works" by increasing transparency and ensuring taxpayer resources are not used for politics.
Government should not grant any private organization unfair political privileges. This includes using taxpayer resources for the collection of political money. A true “transparency governor” will end these favors and restore accountability to taxpayers.
To strengthen our state and give Pennsylvania a real fresh start, these are five resolutions worth keeping.
Last week, Gov. Wolf once again resorted to defending his latest budget vetoes citing the fear of credit rating downgrades. Oddly, he seems to miss that pension reform and pension funding are mentioned eight times in the latest memo from S&P.
In fact, in every credit downgrade, rating agencies mention our pension crisis and the need for reform.
- Here is Moody’s in 2012: “Rapidly growing pension contributions will absorb much of the commonwealth's financial flexibility over the next five years.”
- In 2013, Fitch echoed this concern, citing “Sizable increases in [pension] contributions,” and expressing the fear that it is “unclear if any pension reform will be enacted.”
- S&P said much of the same in 2014, citing “inaction on pension reform” and questioning the political appetite for tackling the issue: “It is unclear to us whether the state has the willingness to address its significant pension issues.”
- And again in 2014, Moody’s writes that “Material reduction in long-term liabilities, including unfunded pension liabilities” could make the ratings go back up.
To be clear, these ratings reports also cite a structural imbalance—though one which can be solved by reducing spending or addressing the cost drivers (including pensions) in the budget. Most credit downgrades also provide warnings about Pennsylvania’s slow economic growth—a problem that will only be made worse, not better, by raising taxes.
Nonetheless, every credit warning has cited our pension liability and the need for pension reform.
But what kinds of reform will improve our credit rating? As we’ve noted here many times before, it isn’t pension obligation bonds—a solution favored by Gov. Wolf.
Financial experts warn that pension bonds would only weaken our fiscal condition. Moody’s actually called pension obligation bonds a “red flag.” Earlier this year, Fitch issued a very strong warning against pension bonds:
Pension obligation bonds (POBs) will not correct unsustainable benefit and contribution practices and are not a form of pension reform, Fitch Ratings says. Issuing POBs is neutral for some governments' credit quality and negative for others.
In contrast moving new employees to a defined contribution plan (like a 401k) or even a "hybrid" plan is seen as a positive financial move. Here is S&P on the subject of moving to a new plan design in a 2014 report:
According to NCSL, between 2012 and 2014, 17 states and Puerto Rico passed 43 bills related to defined contributions, cash balance, or hybrid plans. Among these are Kentucky, Louisiana, Tennessee, and Virginia. Earlier this month, Oklahoma became the 18th state to join the ranks after Gov. Mary Fallin signed a bill that moves future employees of the state's non-hazardous plans to a 401(k) defined contribution plan. …
We believe that such reforms, despite potentially adding more near-term budgetary costs, can be important components of a government's overall liability management and contribute to greater plan affordability over time.
If Gov. Wolf truly wants to work on improving our credit rating, he needs to support real pension reform.
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