Increases begin this year, but the big numbers are a few years away
By Eric Boehm | PA Independent
HARRISBURG — Gov. Tom Corbett’s second proposed budget contains an ominous warning about the state’s two major pension funds and the taxpayer contributions they will require in the coming years.
The state’s contribution to the two pension plans is increasing by more than $500 million in the newly proposed budget, up from about $1.1 billion last year to more than $1.6 billion in the fiscal year that will begin July 1.
Like debt service payments, the pension obligations are mandatory expenses of state government. In other words, tax dollars are required by law to pay for those costs.
And when mandatory payments increase at a rate that far exceeds expected revenue growth, it forces either taxes to increase for more revenue or spending on discretionary items to decrease.
Since Corbett has pledged not to increase taxes, discretionary spending will be targeted for cut backs, said state Budget Secretary Charles Zogby last week.
“That means that something has to get squeezed out,” Zogby said. “Just as families are making choices to maybe not buy a new car or not take a vacation … state government is having to make those same choices as well.”
But the increase this year is just the tip of the iceberg.
By the fiscal year that begins July 1, 2016, Pennsylvania will be paying more than $4.2 billion combined to the two pension systems. That’s an increase of 600 percent in just six years.
The higher contributions — due to increasing benefits and deferred payments to the system over the last decade — are detailed on the final page of a 22-page presentation given by Zogby to members of the media in the hours before Corbett’s budget address last week.
Though the pension data was buried on the back page, James McAneny, executive director of the state Public Employee Retirement Commission, which provides actuarial analysis on the state’s pension systems, said the pension problem will be front and center in future budgets.
“We have this current crisis, and we have to find a way to deal with it,” McAneny said. “But then the other side is: how do we address the circumstances that led to this crisis in the first place? There are no easy solutions to these problems.”
Presently, the State Employees Retirement System, or SERS, is funded at 75 percent and faces an unfunded liability of $10 billion.
The larger system, the Public School Employees Retirement System, or PSERS, is funded at 69 percent and has an unfunded liability of $26.5 billion, according to the latest official figures.
And the unfunded liability may be much worse than the official numbers suggest, as some studies estimate Pennsylvania’s combined pension liability to exceed $100 billion, thanks to accounting tricks.
But even if the official numbers are to be believed, the increase in the next six years is only the beginning. State contributions to the two funds are projected to top $5 billion
Ten years ago, the PSERS plan was funded at better than 114 percent, and there was a surplus instead of an unfunded liability.
Then, lawmakers approved two major changes to the pension plans.
A 2001 law increased the guaranteed benefits by 50 percent for lawmakers and 25 percent for most other state employees. The following year, another change granted a 25 percent increase to retirees in the system as well. Neither change was accompanied by a comparable increase in contributions because the pension funds, at the time, were running a surplus.
A 2003 law postponed making higher contributions that were necessary after the recession of 2001 in the hopes that the fund would grow enough over the next decade to make such contributions unnecessary.
“It’s one thing to say going forward you’re going to get a new rates, but it’s another thing to give more benefits retroactively without throwing in more money to cover it,” McAney said. “Then, you had this creation of an expectation that it was going to grow its way out. Unfortunately, the bottom fell out and here we are.”
The bottom fell out with the Great Recession that began in 2008, during which the two pension systems lost nearly 30 percent of their value.
“We’ve weathered them before, but this was in a short period of time and you had two historic downturns,” said Evelyn Tatkovski, spokeswoman for PSERS.
Compounding the problem was 15 years of underfunding the plans — when state contributions were smaller than the amount of benefits earned, she said.
Taxpayers will be hit with a double whammy on the PSERS obligations, because school districts and the state split the contributions to that fund 50-50.
At Spring-Ford School District in Chester and Montgomery counties, business manager Timothy Anspach said the district is facing a $1.2 million contribution this year, which would be the equivalent of a 1.46 percent tax increase for all residents.
“This is a hardship, because no one wants to make cuts to force bigger class sizes, and you don’t want to cut support services either,” Anspach said. “But then the question becomes, how much can you tax?”
Looking forward, Anspach said Spring-Ford is anticipating a doubling of pension obligations in the coming years.
Because courts have ruled that benefits earned by workers cannot be taken away or reduced, the mountain of pension obligations coming due over the next two decades will have to be paid off one way or another.
Any changes to the systems only would affect future employees and would have to be done legislatively. Right now, there is little push in the state Capitol to do so.
Richard Welsh, executive director of the Senate Finance Committee, which would handle possible changes to the pension systems, said the required payments will be a larger part of the budget for years to come.
“It does limit our options with spending,” Welsh said. “Anytime you have an increasing level of mandated costs, that shrinks the available dollars and flexibility in the budget.”
CORRECTIONS – This story incorrectly reported the pension cost increase in this year's budget. It is a $500 million increase.