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December 30, 2011 | By | Posted in General News

Pensions need more than big payday to get back on track

Editor’s Note: This story appears today as part of the PA Independent’s Year in Review series. This week, we will re-post several of our top stories from 2011. The article below was originally published on October 10, 2011.

More than $29B in the hole and climbing
 
By Eric Boehm | Pa Independent
 
HARRISBURG — Pennsylvania’s public-employee pension system could hit the PowerBall jackpot tomorrow, and it barely would make a dent in what the state owes and taxpayers will have to pay.

 
The jackpot would pay $44 million in cash — or $71 million in an annuity — but those figures pale in comparison to the $29 billion in unfunded liabilities owed by the state’s two largest public pension plans, the Public School Employees Retirement System, or PSERS, and the State Employees Retirement System, or SERS. 
 
A large, one-time contribution will not fix the system and explosive growth of the funds’ investments — a long shot in this economy — will not either, pension experts agree.
 
 
Either way, the best solution is a long-term plan to establish a dedicated funding stream for the two systems, requiring significant payments of state taxpayer money, said Jeff Clay, executive director of PSERS.
 
“The credit card of the pension system has been maxed,” Clay told the state Senate Finance Committee last week.
 
While investment returns are still good, the system is in a state of negative cash flow, he said, meaning the system is paying out more in benefits than it is taking in through contributions and investment earnings. 
 
This year marks the beginning of a steady increase in state payments to the plans.
The state this year is contributing $693 million to SERS and $761 million to PSERS. Using current projections, the state will be paying $2.1 billion annually into SERS and $8 billion annually into PSERS by 2035, to make up for a decade of underfunding the plan while also increasing benefits.
 
According to a new report from the National Bureau of Economic Research, a New York-based research nonprofit, the pension obligation will top $1,500 per household per year in Pennsylvania for the next 30 years.
 
The heads of Pennsylvania’s two largest public pension funds told the state Senate Finance Committee last week that pension reforms passed in 2010 helped give the funds proportionately higher funding levels in the short term, but the systems need dedicated long-term funding sources to pay down a combined liability of more than $29 billion.
 
“The increases in employer contributions, which will be stepping up significantly over the next several years, represent a significant challenge to Pennsylvania,” said Mark Ryan, executive director for state Sen. Mike Brubaker, R-Lancaster, chairman of the Senate Finance Committee.
 
Employer contributions are the payments made by the state, using taxpayer money, into the pension plans.
 
Without the rate caps instituted by the pension law passed last year, current payments would be significantly higher. As a result, the amount of debt in the system is continuing to rise each year that the rate caps are in place.
 
When the caps expire in 2015, the PSERS system will have an unfunded liability of about $40 billion, according to the funds’ own estimates. The debt will continue growing, until it exceeds $47 billion in 2020, according to current projections.
 
At that point, the state will be pouring more than $5 billion annually into PSERS, a figure that will continue climbing until it passes $8 billion annually in 2035.
 
Ryan said Brubaker would like to make further public pension reform a priority for the early part of next year.
 
But other lawmakers said the issue can be put off a little longer.
 
“Taxpayers are protected for the next few years, so it doesn’t have to be done right now,” said state Rep. Glen Grell, R-Cumberland, one of the prime architects of the pension reforms passed last year.
 
Grell said those reforms “stopped the bleeding” in terms of members coming into the system.
 
The changes included in Act 120 of 2010 eliminated the lump-sum withdrawal option and increased the retirement age to lower costs in the long term. But the law also placed caps on the taxpayer contribution — the part of pension payments made by the state using taxpayer dollars — to avoid a predicted spike in payments over the next few years.
 
Those changes are just adding to the long-term debt of the system, said Richard Dreyfuss, a retired actuary and pension expert with the Commonwealth Foundation, a Harrisburg-based policy center.
 
“Since both funds have negative cash flow, they are paying out more benefits then they are taking in,” Dreyfuss said. “So even when they have good (investment) years, the asset totals barely move up, because they are paying out so much in benefits.”
 
Courts have determined that it is illegal for states to reduce or revoke pension benefits earned by employees in the system, so any savings have to be accomplished by reducing benefits or costs for future employees. Even if the pension system were to be entirely overhauled, the changes would only apply for the future and not reduce the existing unfunded liability, which consists only of earned benefits.
 
Democrats did not attend the hearing last week and did not return calls for comment.
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