Pennsylvania public pension dilemma rooted in 1990s
HARRISBURG — Thousands of state workers and retirees’ benefits could be at risk if the Wolf administration and lawmakers cannot agree on a solution to Pennsylvania’s $47 billion unfunded pension liability.
Legislators and past governors contributed to the problem significantly, records show. About 70 percent of the liability arose from policy decisions in 2001 and 2004, according to data from the House Democratic Appropriations Committee.
Experts say the crisis began even before that, in the 1990s. And since then, lawmakers and governors have spent hundreds of millions of dollars on programs and budget deficits, instead of contributing to retirement funds for state and school employees.
Combined, the Pennsylvania Public School Employees’ Retirement System and the State Employees’ Retirement System have more than 330,000 retirees.
Taxpayers could be asked to absorb $1 billion. The state’s pension obligation is set to increase in the next budget from $2.8 billion to $3.8 billion.
Fixing the pension system is a priority of Senate Republicans, but Gov. Tom Wolf opposes Senate Bill 1, the proposal pending in the House.
As the June 30 deadline draws near for a budget agreement, pensions will become a major part of negotiations between Wolf, a Democrat, and GOP legislative leaders trying to eradicate a projected budget deficit of $1 billion to $2 billion.
“From the perspective of what are the sexiest issues in politics, funding pensions is not one of them,” said J. Wesley Leckrone, associate professor of political science at Widener University in Chester. “If you’re faced with cutting education or programs other people are interested in or, say, kicking the can down the line for a couple years until we make it up, it’s easier to underfund pensions.”
When it comes to issues such as pension reform or the possibility of raising taxes, politicians typically make unrealistic promises, said Robert Strauss, a professor of economics and public policy at Carnegie Mellon University.
“Our elected officials are terrified of offending the voting public,” he said. “ … While it was fun to give away the future earlier, the future is now — and it’s a reality we all have to live with.”
Before 9/11 sent financial markets tumbling, the pension funds for public employees were overfunded. In May that year, lawmakers and former Gov. Tom Ridge passed Act 9 of 2001 to raise benefits for employees by about 25 percent, in the future and retroactively.
The law required employees to contribute more to help cover costs. It gave lawmakers a 50 percent pension boost.
“The stock market had been going up and everybody was pretty giddy about that, and they lost track of reality for a while,” said Leckrone. “… They basically increased the amounts of pension payouts and lowered the amount they were requiring districts and governments to put into the pension fund.”
Chronic underfunding began between 1995 and 1999 when a booming economy, with good returns on investments, caused officials to lower contributions, according to a study by the National Association of State Retirement Administrators. The required contribution rate dropped as low as zero for some plans.
Then the terror attacks cut investment returns dramatically, and the state struggled to find money for retirement plans.
In the ensuing years, to fill budget gaps, Gov. Ed Rendell’s administration made the fateful choice to artificially reduce employer contributions, compounding the problem. In 2004, the rate slipped beneath 100 percent-funded for the first time since the 1980s.
The 2008 recession exacerbated the mounting pension problem. That year alone, the PSERS net investment loss was $19.5 billion.
“I don’t think it’s so much a ‘crisis’ if you really think about the genesis of the problem,” said Wendell W. Young IV, president of United Food and Commercial Workers Local 1776. “I guess if the state, as the employer, doesn’t pay the bill because they didn’t want to pay it, then that’s a fabricated crisis.”
At its lowest point, Pennsylvania’s contribution rate to public pension funds dropped to 27 percent in 2010.
Now the pension funds are about 58 percent funded, according to data from PSERS.
By comparison, the rest of country has maintained an average of 80 percent or higher during the past 15 years.
Low rate of return
In 2010, Rendell’s final year in office, lawmakers passed Act 120 as a long-term payment plan. The law reduced pension benefits for state and school employees hired after Jan. 1, 2011, and for new lawmakers after Dec. 1, 2010, to help pay down pension debt.
The state’s contribution rate began to improve. But whether the plan is sustainable is open to debate.
If Senate Bill 1 moves through the House, it would do so on a party-line vote, said G. Terry Madonna, a political scientist at Franklin & Marshall College in Lancaster.
“The Republicans for four years, when (Republican Tom) Corbett was governor, didn’t pass a pension bill and had a governor who would have signed it,” said Madonna. “Now the election of Wolf has galvanized the Republicans.”
Democrats who might vote to reform the pension system risk alienating unionized workers who could endure higher taxes to pay down the debt.
“Funding a pension plan has a low political rate of return,” said Richard Dreyfuss, an actuary who testified at a recent House State Government Committee hearing on Senate Bill 1. “There’s not ribbon cutting, no building you can point to.”
Leckrone said: “Politics is about the immediate. I think the reason why you see Republicans willing to take the cause on now is because it’s not their constituency, and Democrats are unwilling because it is their core consistency.”
Madison Russ is an intern with the Pennsylvania Legislative Correspondents’ Association. Reach her at [email protected].