The Pennsylvania Pension Bailout

Pennsylvania legislators are drawing nearer to implementing a bailout bill for Philadelphia and a state takeover for insolvent municipal pension funds in cities like Pittsburgh. While pension reforms are sorely needed, House Bill 1828 encourages imprudent fiscal management and then tacks on additional pension regulations making a bad bill a little less bad.

Rep. Thomas Caltagirone said it best, “Who do you think will bail them out? The Commonwealth of Pennsylvania. We’re not going to let them fail.” Sen. Jay Costa admitted “Whether consolidation is the best approach for municipal pension plans ‘is a discussion for another day,’ Costa said. Now, he says, ‘we have a responsibility to help those that are not funded properly. We have to work to make sure retirees receive their benefits.’ Costa said.”

So how are politicians planning to rescue local governments who can’t do their jobs?

First, they would allow Philly to raise its sales tax from 7% to 8% for five years – rewarding an inefficient and bloated bureaucracy while simultaneously discouraging economic growth.

An amendment by Senate Finance chair Pat Browne would also bar elected officials from participating in plans that allow employees eligible to retire to pick a retirement date 4 years in the future, and then amass pension payments at a 4.5% interest while continuing to work and collect their salaries via the city’s Deferred Retirement Option Program.

Secondly, the bill establishes pension reforms- again shaped by Browne’s amendment. Any municipality pension plan with less than 50% of funding will be taken over by the Pennsylvania Municipal Retirement Board; Pittsburgh’s city pension is funded at 28%. The amendment also requires distressed funds to:

  • Make reduced payments toward pension costs.
  • Require new hires to contribute to their pension.
  • Permit, but not require, defined contribution plans- similar to 401(k) plans in the private sector.
  • Allow municipal pension employees in Pittsburgh to be given “hiring priority” in the state system.

Essentially, state legislators think a takeover by the state will somehow solve local pension problems when state pensions are themselves facing major troubles. Centralizing the pension problem is a distraction from the real reforms that need to take place, namely, transitioning to defined contribution plans.

HB 1828, even with Browne’s amendment, is far from the reform Pennsylvania needs. Government should to follow the lead of private businesses that ended expensive defined-benefit pensions long ago and transition to a defined contribution system. This should be the first reform required of any municipality, without it we will simply be passing on pension costs to the next generation.