PA’s major pension funds facing growing unfunded liabilities
By Frank Keegan | Watchdog.org
WASHINGTON, D.C. — A lawyer and an economist disagreed about the immediacy of the financial crisis state governments face, but did give about 30 people gathered at a National Conference of State Legislatures session here one common message:
Start fixing pensions and retiree health benefits programs now. “Or else.”
“You always need an ‘or else’,” lawyer James Spiotto told those gathered for “Bankruptcy, Defaults, Debt, Pensions. Do States Need a Federal Rescue? “
He said the “or else” for states is not bankruptcy, but the power to “discharge contractual obligations if they prevent you from carrying out essential government services.”
According to the economist, Andrew Biggs of the American Enterprise Institute, unfunded retirement promises and risky investment efforts to gamble out of the crisis could be catastrophic enough to prevent governments from carrying out essential services.
He said for pensions alone funding is only at about 45 percent of what is needed to pay future obligations. Officials claim the pensions are 78 percent funded.
In Pennsylvania, the state Public School Employees Retirement System known as PSERS, has a funded ratio — the calculation of assets divided by liabilities — of 79.2 percent. The State Employees Retirement System, known as SERS, is funded at 84 percent, according to the most recent information.
PSERS has an unfunded liability of about $19 billion, which is expected to grow to more than $45 billion by 2020 before beginning to decline, according to the system’s own estimations. SERS has an unfunded liability of about $10 billion this year.
Biggs compared the growth in unfunded liabilities to the housing bubble that triggered the recession.
“You have excessive risk and bad accounting that hides that risk,” he said.
Biggs said pension funds are getting into riskier investments in a desperate effort to have enough to pay promised benefits without having to invest more now.
“The problem is, taxpayers have to make up the difference,” when things go wrong, Biggs said.
“The problem is when you add together explicit and implicit debt (of states and municipalities) you can exceed 100 percent of state GDP,” he said. “States have a lot of stress coming from a lot of different directions. These financial crises can happen very fast. Things could go wrong very quickly.”
When they do, states really can’t go bankrupt, according to Spiotto, “because a sovereign is a sovereign.”
Spiotto is head of the special litigation, bankruptcy and workout group for the Chicago-based law firm Chapman and Cutler LLP.
“States are co-sovereign, not sub-sovereign” to the federal government, he said. “As sovereigns, they can decide who they pay and when they pay” if necessity forces tough decisions about essential government services.
“The whole issue of pensions? Will it kill us today? No. Will it tip over any state today? Probably not. But if we don’t address it today, it will get to be a lot larger problem,” Spiotto said.
“We have to recognize the reality that there have to be some changes. We have to look at what is affordable and sustainable” for public pensions, he said.
Last year, the Pennsylvania General Assembly passed a pension reform package aimed at reducing dramatic single-year increases in contribution levels that would have kicked in beginning this year.
The law set “collars” on the state taxpayers’ contribution increases to PSERS and SERS. Contributions cannot increase by more than 3 percent for fiscal year 2011, 3.5 percent for fiscal years 2012 and 2013 and 4.5 percent in fiscal years 2014 and 2015.
The law supersedes the fund’s actuarial assessment when it comes to contributions to the pension plans.
The reform law also increased the retirement age for state employees from 62 years to 65 years. The retirement age for school employees was increased from 55 years to 65 years.
State Rep. Glen Grell, R-Cumberland, said the Legislature may look to revisit the pension bill after the state budget is completed this year.
However, state Sen. John Wozniak, D-Cambria, said the law passed last year relieved the immediate pressure on the state pension plans. He said the Senate has had no discussions about revisiting the public pension issue this year.
If lawmakers were to look for some way to reduce the unfunded liabilities, their options may be limited.
While laws and constitutional amendments generally forbid states “impairing” earned pension benefits, Spiotto said “discharging” them in a fiscal crisis is possible if doing so preserves essential government services.
Even the most optimistic official estimates of public pension funds aggregate capacity to pay promised benefits require substantial tax increases.
If those tax increases are politically impossible, states would have to make more cuts to spending to pay pensions.
In response to a question about governments more honestly accounting obligations, Spiotto said, “If you can get transparency and solid information, it would solve a lot of the problems.”
Eric Boehm of PA Independent contributed to this report.
