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June 15, 2012 | By | Posted in Legislature

PA ANALYSIS: Proposed pension fixes only part of the solution

Unfunded liability has to be paid off no matter what changes are made for future employees
By Eric Boehm | PA Independent
HARRISBURG — Fixing Pennsylvania’s public pension system will require more than creating a new plan for future employees.

There’s also the 1,000 pound gorilla in the room — a nearly $40 billion unfunded liability run up by the state’s two public pension systems.
Republicans are starting to craft proposals that would move future employees into a more affordable benefit scheme.
But James McAneny, executive director of the state Public Employees Retirement Commission, a state agency that analyzes and reviews state and municipal pension plans, said that approach only will help make future state employee contributions to the systems more affordable.
“It doesn’t do anything for the paying off of the existing unfunded liability. We actually have that debt,” he said of the proposals announced so far in the General Assembly.
The State Employees Retirement System is facing an unfunded liability of about $10 billion and the Public School Employees Retirement System, a $26 billion liability.
Those liabilities represent currently owed benefits only, not benefits that will be earned by current or future state employees.
Once the state budget is settled and lawmakers take their summer vacations, pension reform figures will be one of the front-burner issues this fall. State House and Senate Republicans are outlining plans to close off the existing pension plans to future hires.
State Rep. Warren Kampf, R-Chester, put forth a plan in the state House this week to move future state employees and public school teachers into a defined contribution system — similar to 401(k) plans in the private sector, where employers and employees make contributions into a retirement account that employees can invest as they choose.
A similar proposal is being crafted by Senate GOP leaders, who are circulating memos trying to gather more support for the plan among their peers before officially introducing it.
Kampf made the same argument Tuesday when he introduced his plan.
But fixing future benefits without finding a way to pay off the liability is like maxing out a credit card, then not charging on it but also deciding not to pay off balance, said McAneny.
“That liability is an existing debt,” he said.
State Sen. Pat Browne, R-Lehigh, one of the architects of the Senate proposal, acknowledges the need for funding reform along with restructuring future benefits.
“That would have to be a part of the overall plan,” Browne said. “It’s going to be part of the discussion, and we’ll see what we can do in the fall.”
Browne said the Senate leadership’s final package would include funding reforms to pay off the existing liability, but the group had not determined the best way to do so.
The backers of the Senate plan include Majority Leader Dominic Pileggi, R-Chester; Appropriations Chairman Jake Corman, R-Centre, and Finance Chairman Mike Brubaker, R-Lancaster.
Corman has suggested that the state also could change the rules for current employees and reduce their future benefits, which have not been earned.
But this approach would do nothing about the existing liability.
And a further wrinkle exists.
If the current system is closed down immediately — or at some specific time — the unfunded liability must be paid off before the last current worker retires, likely within a period of 30 years or so, McAneny said.
With a liability larger than the state budget, even a 30-year time frame makes the problem a big one. And the workers that remain in the system will continue earning benefits during that period.
Keeping the current system and allowing workers to continue to enter it means there is no set date for when the last worker will retire and thus the state can continue to push off the payment of the unfunded liability indefinitely, said Rick Dreyfuss, a retired actuary and pension expert for the Commonwealth Foundation, a free market think tank here.
Unions that represent public-sector employees argue that changing to a defined contribution system will cost the state.
David Fillman, executive director of American Federation of State, County and Municipal Employees Council 13, which represents the largest chunk of state government employees here, told PA Independent this week that moving employees into a new plan would do nothing to fix the pension crisis in the short term because future workers are needed to help pay off the unfunded liability.
That logic assumes that the pension plan operates like the federal Social Security system, in which current workers pay taxes to support the benefits of retirees. Critics of that formula have compared it to an illegal Ponzi scheme.
But the state pension systems are different: benefits are earned directly by workers as part of a formula set out in their contracts.
While having more workers in the future helps to keep cash flowing into the system, those contributions are not being used to pay down the liability — only the state’s contributions and investment earnings in the pension system can do that.
“It doesn’t work like Social Security. You don’t need future employees to fund it,” said Browne on Wednesday. “The debt is the obligation of the commonwealth.”
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