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May 25, 2012 | By | Posted in General News

COMMENTARY: PA pensions infect budget talks this year and years to come

Corbett, Corman say changes needed, but it’s too late for near future
 
By Eric Boehm | PA Independent
 
HARRISBURG — The most obvious lesson of this year’s budget process is one lawmakers should have learned years ago.
 
That lesson is: Pennsylvania’s growing public pension costs must be addressed — or at least taken into serious consideration — in every aspect of state spending.

 
This spring, the burden of the state’s increasing pension contributions is having a ripple effect throughout the entire 2012-13 budget year and years to come.
 
Pennsylvania will spend more than $1.7 billion on its two major public pension systems in fiscal 2012-13, a total that will grow to more than $4 billion by fiscal 2016-17, and school districts will be pouring in another $2 billion by that year.
 
And those totals are only a little more than half of what the pension funds' actuaries say should be contributed this year.
 
 
 
For comparison sake, pensions accounted for only 0.5 percent of the budget in fiscal 2002-03, thanks to artificially depressed state payments.
 
School districts are in the same boat, since half of the pension costs to the Public School Employee Retirement System are borne by districts.
 
Jay Himes, executive director of the Pennsylvania Association of School Budget Officers, which represents school districts' issues, said this week that districts face a 45 percent increase in pension liabilities this year, followed by a 40 percent increase next year — a $2 billion liability in total.
 
But the problem demands an assessment of how we got here.
 
In 2001, PSERS and the State Employee Retirement System were running surpluses — yes, that means there was no unfunded liability. Lawmakers voted to enhance pension benefits for all current state employees by 25 percent and give themselves a 50 percent benefit boost. 
 
Both increases were accompanied by matching increases in employee contributions — but the benefit increases were retrospective while the contribution increases were only going forward.
 
In 2002, facing outcry from retirees, lawmakers approved an increase in benefits for retired state and school workers as well.
 
Yes, that means individuals who were no longer working, earning benefits or making contributions into the system got rewarded with a larger pension for the rest of their lives.
 
Unions applauded the pension increases as “good for everyone involved — school employees, students and taxpayers.”
 
And then the cherry on top. 
 
In 2003, the lawmakers approved and Gov. Mark Schweiker signed Act 40, which allowed the state and school districts to defer their payments into the pension plan for a decade. Workers continued to make their annual contributions, and lawmakers believed investment growth would cover the absent state funding.
 
 
Of course, the wisdom behind that approach failed to account for the 2008 economic collapse, where the pension funds lost a combined $30 billion in value.
 
To put that loss in perspective, the largest general fund budget in Pennsylvania history was slightly more than $28 billion, passed in 2010.
 
A perfect storm of enhanced benefits, lowered contributions and the Great Recession caused the pension funds to fall from a surplus in 2001 to running an unfunded liability of $35 billion in 2012. 
 
Steve Nickol, a former Republican lawmaker who was involved in the pension agreements in the early 2000s, told the Indiana Gazette in 2010 that it would have been proper, in hindsight, to fully fund the pension plans.
 
But that's not what happened, and current estimates show the state will be paying more than $10 billion into the funds annually by 2035, unless long-term changes are made.
 
And that brings us back around to the impact on the state budget. Unless tax revenue begins increasing at a rate far behind what any economic analysis currently predicts, pension costs are going to grow exponentially faster than the revenue being used to pay for them.
 
In other words, the piece of the fiscal pie being used to make those contributions is going to get larger — and the other pieces will get smaller.
 
Gov. Tom Corbett has alluded to as much — calling the pension crisis a “Pac-Man” that is eating away at the state budget. 
 
Corbett’s Budget Secretary Charles Zogby has said that discretionary spending will be on the table for cuts because of required cost increases, of which pensions are a major component (along with the state’s increasing debt payments, but that’s a different story).
 
School officials are facing the same reality. Many acknowledge that this year’s budget difficulties will be compounded in coming years as their share of the pension costs increase.
 
Amid calls from lawmakers for school districts to spend down some of their reserve funds this year, school officials shot back that reserves will be necessary in the future for pension payments.
 
The contention is out there that it’s a rainy day, and we need to use our rainy day fund. I would contend that it’s a rainy decade,” said Eric Eshbach, business manager at Upper Adams School District in Adams County.
 
And so taxpayers get hit on both ends. Local and state pension contributions could mean either tax increases or cuts in services.
 
Corman said he wants to fix the structural problems with the pension system and not merely pursue inadequate reforms, including a change to a defined contribution plan, similar to 401(k) retirement plans in the private sector.
 
 
Any changes likely will affect only future employees, or perhaps future benefits earned by current employees, which Corman said he’d support, but that requires agreement from the state Supreme Court.
 
By paying for pensions at the expense of other parts of the budget, perhaps lawmakers will learn another lesson: What is done today has consequences tomorrow. 
 
Perhaps that will lead to an actual solution to address the long-term costs that can be alleviated with those structural reforms Corman talked about.
 
If only legislators had learned these lessons years ago. It will be much more painful to learn them now.
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