Punishing the Next Generation: The Rendell Pension Legacy

As the Rendell administration moves inexorably toward its finish line in January 2011, it is reasonable to begin considering the issues awaiting the next governor. Of significant note is Rendell’s inability to enact comprehensive and sustainable reforms of public pensions and retiree medical plans. Obviously, the General Assembly is inextricably linked to any reform efforts-or lack thereof.

The next governor will inherit these significant liabilities that have been politically manipulated and are proving increasingly unaffordable.

The only real question is the magnitude. These looming financial burdens will require extraordinarily difficult decisions for the state’s next chief executive.

Consider the combined unfunded pension liabilities of the state’s two largest pension systems, for public school and state employees, which by some measures in 2012 could be in the $20 billion to $40 billion range. A good portion of these costs will be reflected in higher statewide and local property taxes.

Separately, the state’s unfunded retiree medical liability stands at about $10 billion, against which the state is contributing only about $746 million. Since the annual assumed interest rate is 8.5 percent, the state is not even covering the annual interest cost of $850 million on this growing debt.

All this is in addition to significant unfunded pension and health-care liabilities that also exist at the local levels of government.

The deficits referenced above are the amounts needed just to make these plans current with the benefits earned to date. The costs of benefits yet to be earned will entail additional liabilities.

In fairness, the 2001 pension improvements for public school and state employees occurred before Rendell took office, and the steep taxpayer contribution increases will begin after he is gone. But Rendell was no mere observer of the coming crisis.

The governor signed Act 40 of 2003, which delayed state pension increases until 2012, because pension costs were considered unaffordable at that time. We saw this same rationale at work in the recent debate to allow municipalities to defer pension contributions or spread them over a period, up to 30 years. Long-term liabilities are managed for short-term political gain rather than long-term economic planning.

The most recent example of this truism is found in the Philadelphia pension bailout bill. This legislation was enacted amid threatened city employee layoffs. The unspoken part of this legislation is that the proposed “solutions” – deferred pension payments – simply assign more unaffordable costs to the next generation of taxpayers. The “who” and “how” relating to repayment of these deferred contributions are huge unanswered questions.

At the state level, with respect to “funding” the state’s retiree medical liability, the stealth manipulation here is in the approach of establishing a new 30-year funding period beginning each year. This is equivalent to a Pennsylvania homeowner taking out a new 30-year mortgage annually, effectively establishing a perpetual “mortgage” that never gets paid off but only accrues greater debt.

Add to this the $1.7 billion unfunded liability of the state’s medical malpractice insurance fund, otherwise known as MCARE, plus other forms of debt at the state and local level. A cumulative picture of unaffordable and unsustainable deferred costs clearly emerges.

Though these issues are not well-understood by the citizenry, they are reasonably understood by policymakers who know significant changes must be made but cannot enact the necessary reforms.

The result of Harrisburg’s indecision will likely be a powerful disincentive for the next generation of taxpayers to live, work, and invest in Pennsylvania. Many young and mobile citizens will say “No, thanks” to an intergenerational transfer of costs – the result of overpromised benefits that too often remain unfunded well after the public employee retires.

Inaction by the legislature and Rendell should be viewed not only as a lost opportunity to address these problems, but as a perpetuation of the failing status quo.

# # #

Richard C. Dreyfuss, an actuary and pension expert formerly with the Hershey Foods Corporation, is a Senior Fellow with the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy education and research institute located in Harrisburg.