PA Senate prez: Do away with ‘obsolete, unsustainable’ pensions or face difficult budget cuts

By Eric Boehm | PA Independent

After two years of talk and little action, pension reform might finally rise to the top of the General Assembly’s to-do list in 2014.

If so, it will be for good reason. Escalating pension costs will consume an estimated $2 billion in next year’s budget, which must be approved by the end of June, up from $1.4 billion this year. School districts, which pay for roughly half of retirement costs for teachers and other school employees, are facing similar increases that threaten to swamp their budgets with red ink next year and for years to come.

The situation requires the General Assembly attack the state pension crisis, Senate President Joseph Scarnati, R-Jefferson, said Tuesday, just moments after being re-elected by his peers to head the chamber for an eighth consecutive year.

“The largest cost and growth in next year’s budget will be pension costs,” Scarnati said. “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.”

Addressing the pension debt will allow the state to spend more for basic education, higher education and social services, Scarnati said.

It might also help Pennsylvania deal with an estimated $800 million budget deficit next year.

That budget hole pales in comparison to the estimated $45 billion unfunded liability in the state’s two public pension plans – one for state workers funded entirely at the state level and the other for public school employees, which is funded with a 50/50 split between the state and it’s 500 school districts.

Scarnati gave few details for how he wants to tackle the pension problem, aside from calling for Pennsylvania to move “the pension system in line with the private sector and restoring taxpayers’ trust in our ability to deal with this financial nightmare.”

Last year, Scarnati and fellow Senate GOP leaders sponsored a package of bills to move all future hires into a new retirement plan that would mirror the 401(k)-style plans now common in the private sector. Those so-called “defined contribution” plans put the investment risk on the individual, rather than the taxpayers, who have to make up any shortfalls in the current “defined benefit” pension plans used in Pennsylvania and most other states.

Scarnati said the current defined benefit plans were “obsolete and unsustainable.”

But it will be a heavy legislative lift. Scarnati’s fellow Republicans won’t get much help, perhaps none, from Democrats in the General Assembly.

“We think we need to pay our bills and move forward,” said Senate Minority Leader Jay Costa, D-Allegheny, on Wednesday.

He said Democrats would be skeptical of making any changes to retirement plans for future hires, and any proposed changes for current workers and retirees “would be a deal-breaker.”

And Costa does not buy the argument that pension costs will force reductions in other parts of the budget. Senate Democrats have already outlined a variety of ways to increase revenue by closing tax loopholes, adding taxes to gas drilling companies and accepting more federal dollars through an expansion of Medicaid, he said.

The powerful public-sector unions in the state are also opposed to any changes and have threatened to sue if retirement benefits are altered. It is unclear how the state courts would view such a challenge.

In the state House, state Rep. Glenn Grell, R-Cumberland, has been shopping around a proposal to give current employees the option of moving from the defined benefit plans to a new defined contribution plan. That avoids many of the messy legal issues that arise from the switchover, he said.

Grell agrees with Scarnati that addressing the pension issue should be “priority No. 1” for the General Assembly, but says any changes will have to deal not only with the benefit structure but also with that $45 billion unfunded liability.

Since the unfunded liability is the measure of benefits owed to current retirees and current workers as of today, changing benefits for future workers does virtually nothing to change it.

It’s only going to get bigger.

Gov. Tom Corbett’s budget office, using data provided by the pension funds, estimates the unfunded liability will grow to more than $65 billion within a few years and won’t be paid off until well into the 2040s.

CORBETT: Will Gov. Tom Corbett have a new plan for dealing with Pennsylvania’s $45 billion unfunded pension liability? We’ll find out in early February.

Grell wants the state to borrow on the bond market — as much as $9 billion — to cover some of the cost of the unfunded liability.

But Corbett has been unwilling to consider such heavy borrowing as a solution, though the governor’s strategy will likely be clearer after his upcoming budget address in early February.

Last year, Corbett endorsed a plan to extend the so-called “collars” on the state’s annual pension payments. Collars are artificially determined limits on pension contributions that essentially mean the state is continuing to underfund already underfunded plans.

Continuing the collars is good politically because it frees up money in the budget for other items, but bad for the health of the pension funds — both Grell and Costa used the “kicking the can down the road” analogy.

But Grell said he’s be willing to support an extension of the collars if other changes were made to address the long-term costs of the pension systems, including the borrowing and a switch to a 401(k) plan for new workers with an incentive for current workers to jump ship, too.

“It would provide relief to the General Fund and to the school districts,” he said. “That’s fine, as long as you make the changes to pay for it in the long run.”

In the long run, the state owes billions to current and future retirees. In the short run, it doesn’t have the money to pay for it.

This might be the year that reality becomes a problem for the budget and the lawmakers charged with crafting it.

Boehm is a reporter for PA Independent and Watchdog.org. He can be reached at Eric@PAIndependent.com and follow @PAIndependent on Twitter for more.

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