Pennsylvania pension report gets cool reception
A Corbett administration report on Pennsylvania’s $41 billion unfunded public pension bill warns of higher taxes, program cuts, lower business growth and steeper borrowing costs but falls short of offering specific solutions, experts said.
The report from Budget Secretary Charles Zogby hints of solutions Gov. Tom Corbett might recommend on the issue he calls a priority for 2013, including reducing prospective benefits for employees.
“Increasing pension contribution obligations will claim a greater and greater share of school district budgets, crowding out funding for education, whether it is direct classroom instruction, sports, facilities and maintenance, and ultimately put pressure on districts to increase property taxes,” the Budget Office said.
Budget Office spokesman Jay Pagni said the administration is working with a panel of experts to finalize a proposal that might take pieces of changes other states made as they wrestled with public pension issues.
Other states increased employee contributions, raised the retirement age, changed pension calculations and adopted defined contribution programs. Those actions wouldn’t necessarily address Pennsylvania’s liability problem, said Rick Dreyfuss, a retired actuary and senior fellow with the Manhattan Institute and the Commonwealth Foundation.
“All of these prospective changes affect ongoing costs of the plan, but our problem is the accrued costs,” Dreyfuss said.
State and school employees’ pensions are funded through a combination of investment earnings from the pension funds, employee contributions and taxpayer contributions.
Corbett has likened the growing taxpayer tab for pensions — $1.5 billion this year, $2.2 billion in 2013-14 and $5.16 billion in 2019-20 — to a Pac-Man devouring the state’s ability to provide basic services.
Dreyfuss said the only way to reduce the unfunded liability is to dramatically increase those payments.
Bradley Belt, senior managing director of the Milken Institute and former executive director of the federal Pension Benefit Guaranty Corp., questioned whether any plan could address unfunded liability without adding taxes or severely cutting services to cover pension contributions.
“I think it is fine that the budget secretary said there will be no harm to taxpayers, current retirees or benefits already earned. … Maybe he believes in the Tooth Fairy, but at the end of the day there is a hole that needs to be filled, and the question is, how do you fill that hole?” Belt said.
“Do taxpayers end up picking up the tab, or do you cut back on services? Then you don’t have textbooks in schools, you close libraries, you lay off teachers and firefighters, and you don’t fix the holes in the road,” Belt said.
Zogby emphasized that taxpayers and retirees wouldn’t be hurt.
“The taxpayers did not create this problem, nor did commonwealth or school district employees,” he said. “We will not touch accrued benefits, nor will we allow the pension problem to continue for future generations.”
Senate Majority Whip Pat Browne, R-Allentown, said the Budget Office report documents the causes of the problem and establishes a framework.
“What you do is establish a reform package that ensures it does not replicate the problems of the past,” Browne said.
Browne said shortfalls in anticipated investment returns account for 50 percent of the unfunded liability. Although courts typically have held that benefits cannot be adjusted for active employees, Browne noted that several states changed the basis for future benefits while protecting those earned.
“Whether we can adjust prospective benefits will be part of our discussion,” he predicted.
In the Republican-controlled House, some lawmakers want to see specifics from the governor’s office, rather than a framework for debate.
“We are looking forward to the governor’s concrete proposals on needed changes and we will take a thorough look at that proposal when it is put on the table,” said House Majority Leader Mike Turzai, R-Bradford Woods.
The Associated Press contributed to this report. Debra Erdley is a staff writer for Trib Total Media. She can be reached at 412-320-7996 or [email protected].