HARRISBURG - Governor Tom Corbett will meet with the General Assembly over the next several weeks to hammer out potential solutions to the looming pension crisis that Pennsylvania, like other states, faces.
But, "There is no silver bullet to address it," Corbett said.
The governor and his staff, in a sit-down meeting with members of the press at the Governor's Mansion Monday, outlined the causes of the pension crisis, potential consequences and some of the options that he will take a sharp look at to meet the dilemma head-on.
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Sentinel photo by LANA MUTHLER
Gov. Tom Corbett talks to members of the press about the pension crisis and potential solutions Monday at the Governor’s Mansion in Harrisburg. To his right sits Kevin Harley, director of communications/press secretary.
The Commonwealth currently faces a $41 billion unfunded liability that it has incurred through a series of what could be characterized as fiscally unwise legislative choices through various acts and the unfortunate downturn of the stock market over the past decade, since the pension systems are significantly funded (71 percent) by investment earnings.
What that brews down to, if nothing is done to fix the pension problem, is each Pennsylvania household's share of this unfunded liability will be $8,000.
Even though the market was one of the driving factors in derailing pension funding, the market cannot be the sole mode of recovery, even if it was in a healthy upswing for the next 20 years, said Pete Tartline, deputy secretary, governor's office budget.
It must be fixed legislatively.
Corbett said Monday he has remained true to the issues he ran on and will continue to do so.
"I ran on a simple thing: more jobs, less taxes," Corbett said.
He cited the 175,000 new jobs in the private sector created during his administration, and said that even in the face of the pension crisis, he does not want to raise taxes.
Tartline said that along with examining how the other 45 states are reforming their pension systems, they will look at creating possible structural changes to the systems; benefit changes to employees; accrual, retirement age and other factors; and risk-sharing opportunities.
As part of their pension reform efforts, several states have increased member contributions. Some have increased retirement age; even a few years can give significant savings. As for accrual rates, changes in the basic pension formula (including years of service and salary) calculations can lend stability.
Giving employees "early outs," or the ability to retire without penalty would also be useful. Creating a system that would evenly balance the risk between employees and employers would lend stability even in economic downturns. Finally, changes in the term over which average salary is calculated, the elimination of overtime pay or capping the retirement benefit could yield long-term sustainability, according to The 2012 Keystone Pension Report produced by Charles Zogby, secretary, Office of the Budget.
Pension reform and relief is key to addressing the public funding crisis - which is driven by rapidly rising pension costs, according to the report.
Ultimately, it is the taxpayers who shoulder the cost of the system through their tax dollars.
Core programs are also in jeopardy due to the pension crisis.
"The Commonwealth's growing pension obligations are crowding out funding for their children's basic and higher education, public safety, health, human services, the maintenance and repair of roads and bridges, environmental protection and other core governmental programs," according to the report.
So without doing harm to retirees, respecting current employees and without raising taxes, the Corbett administration seeks to work with the Legislature to stem the tide of oncoming fiscal and budgetary consequences - which will come if nothing is done.
What it comes down to, said Jay Pagni, director of communications, Governor's Budget Office, is what are they going to fund? Priorities must be set, he said.
"The administration and Legislature must come together and address this," Pagni said. Changes must be addressed legislatively because the pension system is a statute, he added.
The projected revenue increase for the fiscal year 2013-14 budget is $818,700 in the General Fund, but the expenses column outweighs the revenue at $1.315 billion - and 62 percent of the revenue goes toward pension growth. The items that make up the expenses include medical assistance, debt service, corrections, and largest of all, pension systems.
And the pension systems are essentially the only item they can really influence; the rest are rather static, Tartline explained. Pensions are also the main factors that cause the budget to increase, he said.
If nothing is done to reform the pension systems, nearly two-thirds of the General Fund revenue growth will "go out the door to pensions" in fiscal year 2015-16, Pagni said. And of course, this puts a sort of strangle hold on other programs since those dollars are largely going to pensions.
Corbett described this dynamic as a "'tapeworm' or 'Pac-Man' eating away at the state's budget, an acknowledgment that growing pension costs are severely undercutting the Commonwealth's ability to fund essential programs and services."
Despite the essential role pension funding plays in the budget, Corbett does not rank his priorities.
"Pensions, education, privitization ... I don't rank them," Corbett said, due to revolving factors in the Legislature and timing.
As the various programs compete for limited tax dollars, the Commonwealth must first pay capital debt service obligations; next, pension obligations; and third, any federally-mandated match for entitlement programs, according to the report. Only after all these obligations are met can funding go to other programs and services.
Once those programs are paid, there aren't enough dollars left to fully fund the remaining General Fund programs - which means having to cut as much as $500 million to balance the budget for 2013-14.
The path that the legislative acts and economic downturn have created is clear in the too-near horizon: a choice between "either fully funding pension obligations or making cuts to the core functions of government on which our citizens rely," according to the report.
Corbett said that while there is no agreement at this point on what the structural changes will be, it is conceivable to change the benefits structure for new and current employees, effecting short- and long-term budgetary relief.
Background
There are two separate pension systems administered by the Commonwealth. The State Employees' Retirement System manages the retirement system for most public employees in the executive, legislative and judicial branches. The Public School Employees' Retirement System manages the retirement system for all public school employees, according to the report.
There are more than 815,000 members in the two systems and pay out almost $8 billion annually in retirement benefits to more than 300,000 retirees and beneficiaries. In the SERS system, the state and independent entities pay all of the employer contributions for public employees; for PSERS, the state and local school districts together share the employer contribution costs. For this, the state generally pays 50 percent of the employer contribution cost, based on the wealth in the school districts, according to the report.
Employees also pay into their system, and the SERS most employees contribute 6.25 percent; with PSERS, most contribute 7.5 percent. Combined last year, employees paid nearly $1.4 billion.
However, in both of these plans, the state, and ultimately the taxpayers, shoulder the entire investment risk of the plan. When investment returns fall short of expected results, the state's employer contribution rate increases to cover the entire shortfall, according to the report.
Legislative Blunders
In Pennsylvania, the crisis was generated by generous improvements to member and retiree benefits that did not require a proportional employee match, combined with almost a decade of underfunding by state government and local school districts, and lacking investment returns, according to the report.
The legislative acts that contributed to the pension crisis were:
Act 9 of 2001
Act 38 of 2002
Act 40 of 2003
Act 9 substantially raised pension benefits for public employees and public school employees, along with expanding the base of eligible beneficiaries. But shortly thereafter, 9/11 left the market reeling.
Act 38 artificially capped employer contributions, effectively underfunding pension systems for one year; it also established a cost of living adjustment without identifying a funding source for it.
Act 40 was adopted to ease the impending fiscal shock of rising employer contribution rates, but essentially still resulted in an underfunding of pension systems while exacerbating future obligations.
Finally, the Great Recession of 2008 was the "knockout punch delivered to national pension plan earnings," according to the report.
Profitable Prospects
A corner was turned, however, with Act 120 of 2010, which was the first successful effort at curbing rising pension costs through a series of formulaic fiscal plans that provided short-term funding relief; reduced pension benefits for new employees; increased retirement age to 65 for new employees; and implemented an innovative "shared risk" provision for new employees that increased employee contributions if the actual investment returns fall below assumed returns, according to the report.
Currently, both SERS and PSERS combined are slightly less than 68 percent funded. A healthy funding ratio is 80 percent. The $41 billion total unfunded liability is "essentially a state debt owed to state workers and public school employees," according to the report.
"The goal is to maintain contributions so it is 80 percent or above and so it does not artificially inflate what the investment rate may be," Tartline explained.
One of the problems driving the pension crisis train is there wasn't enough shared risk between the state and employees, Tartline said. There is a need to create a system in which there is shared risk so the Commonwealth is "off the hook," he said.
Rhode Island recently took a more aggressive approach to fixing its pension problem and created a sort of hybrid, looking at all employees, effectively taking on "the whole nut," Tartline said.
Corbett said he will analyze Rhode Island, along with other states, which have embarked on pension reform. It may take more than one solution; 36 states are using more than one strategy to change its systems.
Essentially, the governor said, pension reform will not be easy, but it is achievable.
