Pensions and Pa’s Poor Fiscal Health

Pennsylvania recently underwent a “fiscal physical’ and didn’t exactly come out with a clean bill of health. Truth in Accounting, an economic think tank, recently released its report on the 2019-20 financial health of the 50 states. Its rankings are based on each state’s ability to fully fund its pension system and other post-employment benefits. How did Pennsylvania score on this report? A miserable “D” grade, coming in 39th nationally.

What factors led Pennsylvania to receive such a low ranking? For one, we’ve got a bad case of underfunding our pensions. The commonwealth has a $75 billion debt shortfall, $65 billion of which comes from unfunded retirement benefits and future healthcare benefits for retirees. If Pennsylvania would seek to pay off its debt and balance the budget today, every taxpayer would need to fork over a whopping $17,100.

Balancing the budget will inevitably require a healthy dose of pension reform. The state has already taken steps toward this goal, creating a defined contribution plan and two hybrid defined contribution and defined benefit plans for the State Employees Retirement System (SERS).

Graph: Unfunded Retirement Benefits (Actual)

Much more needs to be done. The last round of pension reforms mitigate the accumulation of future debt, but they don’t fully solve the issue. Doctors’ orders? Moving exclusively to defined contribution plans to further slow the creation of state debt. In addition, lawmakers can limit state spending growth, an action possible in the near-future if lawmakers enact the Taxpayer Protection Act.

Other steps that could help to address the already existing state debt include:

  • Increasing pension contributions to pay off the unfunded liability over a 20-year period.
  • Modifying pension plan benefits not yet earned.
  • Using revenue options—such as privatizing Pennsylvania’s liquor control system—to pay down the state’s unfunded liability.

If Pennsylvania doesn’t get serious about improving its financial health, taxpayers will be asked to shoulder this financial burden. Eventually, thousands of retired workers will be expecting their benefits, and the money to pay for them simply won’t exist. Taking the proper steps as quickly as possible will give Pennsylvania a clean bill of fiscal health for decades to come.