$27 Billion Pension “Reform”: Still Doubling Down on Generational Theft

On June 16, the PA House passed pension “non-reform” by further deferring the scheduled taxpayers’ contributions to the state’s largest government pension plans – the Public School Employees Retirement System (PSERS) and State Employees Retirement System (SERS).  They also created a new reduced defined benefit plan for new hires. The net cost of this reform with interest is still a breathtaking $27 billion.  Since the prior version of the bill was an incremental $52 billion – by some scorecards this bill should be considered only half as bad.

The problem remains when you begin with a pension system which is unaffordable and unsustainable and then adopt “reforms” resulting in another $27 billion to the equation, the result can’t possibly be defined as affordable and sustainable.  That is, unless your goal is another short-term fix to mollify voters in an election year.   

The goal should remain to pursue comprehensive and sustainable long-term pension reform which works for all taxpayers – including those too young to vote.

Act 40 of 2003 was a prelude to the 2012 pension plateau.  HB 2497 is a variation of the same mindset which occurred in 2003.  Inevitably, these short-term fixes create more significant long-term problems.

In December 2009, the PSERS board certified an employer (taxpayer) rate of 8.22% of payroll for the fiscal year beginning July 1, 2010.  This rate is close to that needed to avoid adding to the unfunded liability.  For FY 2010-11 many would propose an actuarially deficient and arbitrary rate of 5.76% which is being marketed as an increase from the current 4.78%. 

Why is reducing contributions to already underfunded plans considered by some to be reform? 

In the interim, by further underfunding these pension systems, this politically convenient diversion from spending taxpayer money enables willing policymakers to further grow government budgets under the ruse of “saving” money and “investing” elsewhere.

Can you imagine not paying your mortgage in order to grow your family’s budget expenditures elsewhere? Moreover, this financial manipulation is anchored on an 8% annual return on investments for the foreseeable future. These concerns are echoed by the Pennsylvania Employee Retirement Commission (PERC), which wrote in their May 27, 2010 actuarial note:

…[I]t must be noted that the temporary collared contribution rates proposed in the bill do not follow generally accepted actuarial standards of practice. The short-term effect of the bill would be to defer the payment of actuarially required contributions to both PSERS and SERS, resulting in the underfunding of both retirement systems. This underfunding will permit the continued growth of the Systems’ unfunded liabilities resulting in a steady decline in the funded ratios of both PSERS and SERS.

In other words, the proposed reforms would transfer today’s unaffordable costs to future generations of taxpayers – our children and our children’s children.

In addition, PSERS’s investment asset performance would be averaged over 10 years instead of five, in an effort to “hide” poor returns on investments.  SERS would remain at five years given that their actuarial firm would not support a 10 year averaging approach.

Instead of trying to redefine reform, Pennsylvania should immediately establish a statewide defined-contribution (DC) plan for all new government employees.  Rather than further burdening our public pension systems, any new teacher, legislator, judge or state, county or municipal worker should be placed in a system similar to those for some state and local workers in Alaska, the District of Columbia, and Michigan.

Then we must put spending and debt controls on the current defined-benefit plans that are prone to financial and political manipulation.  Public pensions are too frequently used as political capital.  When a pension surplus accrues, it is used to improve benefits for unionized employees.  When a pension fund runs deficits, taxpayers are blamed for underfunding them.  Politicians get a high political rate of return from government employees for maintaining or improving benefits, but they receive little return for actually funding them.

Therefore, in order to remove politics from retirement benefits, we must:

• Prohibit such public pension features as Deferred Retirement Option Plans (DROPs), which allow workers to double-dip by collecting a pension while still working for full compensation.
• Prohibit any benefit increases if the result would cause the funded ratio to fall below 90%.
• Prohibit pension obligation bonds, as they put even more taxpayer money at risk without changing the fundamental problems.
• Require a consistent set of valuation and funding standards consistent with sound actuarial and accounting principles.  Such reforms are now required of private sector defined benefit plans in The Pension Protection Act of 2006.  Significant pension accounting reforms impacting public sector defined benefit plans are also being considered by the Government Accounting Standards Board (GASB).  HB 2947 would not be compliant with the proposed GASB accounting requirements.
• Prohibit amortization periods that extend beyond the average retirement age of members in the plan.

Defined benefit plans and defined contribution plans both have advantages and disadvantages.  A significant advantage of a DC plan is no unfunded liabilities, this means benefit plans cannot be over-promised and underfunded as is the case with the vast majority of public pension plans and some private sector plans.

Moreover, true pension reform must address PA municipal pensions as well.

Unfortunately, House Bill 2497 fails to implement any of these necessary reforms.  And it is why organized labor groups like the PSEA – while simultaneously blaming the taxpayers for “underfunding” PSERS and SERS – are supportive of the underfunding of pensions in House Bill 2497.  They know that diverting money from pensions for spending elsewhere in the budget today (i.e., public education) will eventually have to be paid tomorrow. 

Our children will already be forced to pay for our underfunded public pension plans.  But this $27 billion pension “reform” represents a doubling-down on this generational theft.

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Richard C. Dreyfuss, an actuary and pension expert, is a Senior Fellow at the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy research and educational institute in Harrisburg, PA