Mutually Exclusive: Pension COLAS and Lower Taxes

In Government 101, we learn how a bill becomes law and the circuitous route that, at any stage of the political process, may derail a proposal. In fact, only 6.3% of the 5,759 bills introduced in the 2005-06 legislative session in Pennsylvania were signed into law.

In other words, no fewer than 5,395 were left along the political roadside waiting to be reintroduced in the next legislative session.

One variation of a bill that is perpetually introduced, House Bill 2084, represents the convergence of two very emotional issues, retiree pensions and property taxes. More specifically, this bill proposes a cost-of-living-adjustment (a COLA, which is now euphemistically called a “supplemental annuity”) to retired state and public school employees’ defined-benefit pensions.

In 2001, Governor Ridge crafted a political deal to increase pensions for the legislature by 50% and for other public employees by 25%. The resulting political backlash from retired members led to a retiree pension COLA the following year. It appeared “affordable” at the time, but the market drop following 9/11 forced an upward revision of taxpayer pension contributions that will peak in 2012. The only significant variable affecting the projected increases are the pension plans’ investment returns, which have been excellent lately.

But not all retired public employees benefited from the recent pension increases. Those who left their public jobs before the 2001 pension bump feel shortchanged. They are now seeking a legislative remedy to improve their existing benefits, despite the projections of higher taxpayer costs in the near future.

What appears would be a moot issue in an election year is not. Public retirees are a vocal, organized, and politically active group that is pushing legislators to pass House Bill 2084, which has about 80 co-sponsors, representing both Democrats and Republicans.

It is important to note, however, that many of these co-sponsors are also advocates of tax reductions, particular property tax reduction. Many have pledged to do everything and anything to achieve this goal.

But it turns out that House Bill 2084 would significantly increase school property taxes. Preliminary estimates suggest that the bill would increase the Public School Employees Retirement System (PSERS) tax-funded liabilities by $4.2 billion. About half of this amount would be shouldered by local school district property taxes. Add in another $2.8 billion in additional liabilities for the State Employee Retirement System (SERS), and the taxpayers of Pennsylvania have just been given a new $7 billion tax bill.

Of course, no lawmaker would support such a tax increase in an election year, so the legislation proposes these costs be spread out over 10 years at 8.5% interest. This is intended to make the proposal more “affordable” to taxpayers. Under this approach, the total cost jumps to $10.2 billion. Stated differently, taxpayers will pay an additional $1 billion every year for the next ten years for a COLA benefit to former state and public school employees. Approximately $295 million of that increase will be new school property taxes.

A variation of this strategy is to extend the funding period to 20 years to further lower the annual costs. However, such a strategy is of little solace to taxpayers, since the cost is further transferred to the next generation of taxpayers who have their own future to finance. Proponents figure by extending the funding period together with other forms of financial engineering, they can hold the current funding rate constant rather than passing the lower costs onto taxpayers. This is another way of “funding” a COLA.

How do the co-sponsors of House Bill 2084 explain the clear contradiction of being for both increasing pension liabilities by over $10 billion and for reducing taxes? The answer is either they didn’t bother to consider the bill’s costs to the taxpayers, or they assume the bill will never go anywhere, which allows them to pander to this vocal and politically organized group of retirees.

For the record, there are many other pension COLA bills—some even more generous than House Bill 2084—each with plenty of co-sponsors. But only time (and politicking) will tell if pension COLAs are once again thrown on the heap of bills to be reintroduced next legislative session. One thing is for certain, however, legislators can’t be for both increasing pensions and lowering citizens’ taxes.

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Richard C. Dreyfuss, an actuary and pension expert, is a senior fellow with the Commonwealth Foundation ( in Harrisburg.