Cash or credit? PA facing $600 million in pension costs

By Eric Boehm | PA Independent

Gov. Tom Corbett will lay out his plans for next year’s state budget Tuesday morning in Harrisburg, with a $2 billion elephant in the room.

That’s how much — about $1 out of every $15 the state plans to spend — Pennsylvania has to pay the State Employees Retirement System, or SERS, and the Public School Employees Retirement System, or PSERS, in the 2014-15 budget. It’s a $600 million increase from the current year, with larger increases due in the next few budgets.

Pensions are the largest area of the growth in the state budget, threatening to swamp the state’s books with red ink.

Aides declined to speak on the record about the governor’s address, but Corbett plans to talk about the pension crisis Tuesday.

But after laying out a specific plan last year that involved cuts in benefits for current and future state workers — a plan that went nowhere in the Legislature — Corbett will likely leave the specifics to the General Assembly.

There is a growing sense in the General Assembly that something must be done.

“The largest cost and growth in next year’s budget will be pension costs,” Senate President Joe Scarnati, R-Jefferson, said last month. “To pay the bill will mean that we are forced to flat-fund or reduce-fund many areas of the budget that have already been cut close to the bone.”

Scarnati urged his colleagues to “attack” the pension issue, but he seemed to suggest he aims for a solution that will give more budget flexibility this year, something that can be achieved most easily by deferring at least part of that $2 billion due next year.

That’s where much of the coming pension debate will center on two competing views about how to proceed: Face the reality of the pension costs and make the full payments or continue to use the collars to make artificially low payments each year.

Underfunding the state pension systems is something of a tradition in Pennsylvania. The state has been doing it since 2003.

That was the year the state Legislature voted to take a decade long “pension holiday” with the assumption robust market returns would make up for 10 years of directing pension dollars toward other programs.

Two years earlier, in 2001, the General Assembly boosted its own retirement benefits and those of all current state workers and public school teachers. In 2002, it gave retirees a retroactive increase in retirement benefits.

The increased benefits, plus the deliberate underfunding, sowed the seeds of the current crisis. The stock market crash of 2008 and the ensuing recession brought those decisions home to roost.

But the underfunding continued, thanks to changes approved in 2010 that set arbitrary “collars” on the pension payments, allowing the Legislature to artificially determine how much they would have to spend on pensions each year, regardless of what the actuaries said.

The pension systems have only been “fully funded” the past three years in the sense that the Legislature has met those artificially low benchmarks for pension expenditures. In reality, the underfunding has continued and the unfunded liability has continued to grow.

In fact, the $2 billion payment due next year is the result of setting artificially low targets for pension funding. With true accounting, the bill would be more than $4.5 billion.

“We in state government have had a shameful history since 2001 producing legislation that short-changes the funding of our public employee pensions,” said state Rep. John McGinnis, R-Blair. “The mistake has always been to not pay the bill.”

LOTS OF MONEY: Pennsylvania owes more than $2 billion this year, but the cost of the state’s pension system will keep climbing. (Source: Governor’s Budget Office, Feb. 2013)

Part of Corbett’s plan last year included an extension of the collars – with the “savings” in the form of underfunding the plans theoretically offset by reduced benefits to be paid out 25 or 30 years down the line.

That was roundly criticized by a variety of analysts.

“Collars don’t save any money. They defer payments and that costs you more,” said Jim McAneny, executive director of the state Public Employee Retirement Commission, a state agency that serves in an advisory role to lawmakers on pension issues. “Pay me now or pay me later, but you’re going to end up paying me more if you pay me later.”

And Fitch, a credit rating agency, pointed to Pennsylvania’s history of underfunding the pension system when it downgraded the state’s rating last fall.

State Rep. Glen Grell, R-Cumberland, who led the state House’s working group on pension issues last year, believes the state needs to make the full level of payments — even if that means borrowing heavily in the bond market to do it.

But the Corbett administration is unwilling to take on more debt to pay off other debts.

Instead, the administration seems interested in a proposal from state Rep. Mike Tobash, R-Schuylkill, that would create a hybrid pension system and potentially shave as much as $7 billion off the state’s total pension bill, according to a Capitolwire report last week.

But there is no consensus on any of those issues, even within the House GOP caucus.

Meanwhile, Democrats in both chambers have promised to oppose any changes in pension benefits for public workers. They believe the state could raise enough revenue to meet the pension obligations without sacrificing other programs, provided the governor and Republicans in the Legislature are willing to raise taxes.

Miriam Fox, executive director of the House Democrats’ Appropriations Committee, said she’s “very worried” about how it appears Republicans will deal with pension obligations.

“They want to make the minimum payment on the credit card,” she said of Republicans. “It’s like borrowing to put gas or groceries on your credit card and not paying it off for 25 or 30 years. And when you default, there’s no asset to back up the debt. There’s no house to sell to recoup some of your losses.”

Corbett’s speech on Tuesday will give some direction to lawmakers, but they will have to make the difficult decisions.

In an election year when the governor and lawmakers will want to spend tax dollars on a host of more attention-grabbing items, funding the state pension system is the boring but prudent choice.

PA Independent Bureau Chief Andrew Staub contributed to this article.

Boehm can be reached at Eric@PAIndependent.com and follow @PAIndependent and @EricBoehm87 on Twitter for more.

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