A Tale of Three Cities: Pennsylvania's Retiree and Medical Liability Challenges

Pennsylvania maintains over 3,000 public pension plans at the state, city and municipal levels, the most of any state and approximately 25% of all such plans in America. Over 2,200 of these plans are of the often financially and politically problematic “defined-benefit” genre. According to the Pennsylvania Public Employee Retirement Commission (PERC), over 67 percent of these plans have fewer than 10 members.

Needless to say, there is vast opportunity for pension reform. However, reform must extend beyond merely achieving a common administrator. Any savings created through administrative changes have the potential to be eclipsed by costs generated from benefit enhancements and the lack of a standardized plan design. This is not to suggest that administrative savings are insignificant given employees often change jobs within the public sector, resulting in participation in various Pennsylvania public pension plans—all of which must be aggregated or bridged at retirement, which can be administratively cumbersome and therefore costly.

The real savings in pension reform will be achieved by designing a system in which taxpayer costs are current, predictable and affordable. Any discussion of pension reform is meaningless without these three parameters being defined.

Courts have ruled that our state and federal constitutions prohibit modifying the benefits of current public pension plan participants—even benefits yet to be earned. Thus, the focus must be on revamping the system for new hires.

To relegate Pennsylvania’s need for pension reform to merely a need for more taxpayer funding is to ignore the underlying drivers of the problem and thus preclude a permanent solution. Many of the problems facing these pension plans can be traced to the institutionalized and political nature of the public pension system. Lawmakers are also reluctant to raise taxes, so their preferred approach to making pension costs affordable is to transfer burdens to future employees and taxpayers.

Compounding matters are improper benchmarking and poor risk management, which will likely leave current and future taxpayers exposed to significant financial liabilities—most likely after the policymakers leave office. Finally, ignorance among policymakers is pervasive in pension and retiree medical matters.

Policy Recommendations: Pension Changes

Consider any funding reforms only after plan design reforms.

Adopt a unified defined-contribution plan such as that proposed in SB 566.
Manage annual taxpayer pension costs in the range of 5 to 7 percent of pay.

Allow but do not require SERS and PSERS to invest defined-contribution assets.

Adopt life-cycle funds as the default employee investment option.

Outlaw pension obligation bonds or other funding mechanisms that create liabilities outside the domain of the plan.

Require funding of any unfunded liabilities to be over a period not to exceed the average remaining working careers of the recipients. This is generally less than a 15-year period. Any funding for the complete present value of any new benefit enhancements for non-active members must be fully funded in one year.

Remove state subsidies in the newly proposed defined-contribution plan. All costs are to be borne by the entity which compensates the member.

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The Commonwealth Foundation (www.CommonwealthFoundation.org) is an independent, non-profit public policy research and educational institute based in Harrisburg, PA.