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June 18, 2012 | By | Posted in General News

Corrected: Report says pension reforms must focus on sustainability, cost controls

By Eric Boehm | PA Independent

HARRISBURG — As Pennsylvania lawmakers prepare to grapple with the state’s unfunded pension liabilities, a new report shows the ballooning cost of public worker retirement benefits will require reforms focused on controlling future costs.

A new study from the Pew Center on the States, a national public policy think tank, shows Pennsylvania’s total pension liability for retirements and health benefits exceeded $118 billion at the end of fiscal 2010, while contributions to the system are less than one-third of what is necessary to adequately fund the plans and keep the problem from getting worse.

Nationally, the gap between pension fund assets and liabilities was more than $1.38 trillion in fiscal year 2010, up 9 percent from 2009.

As the issue becomes one that states and cities can no longer avoid, policy makers have to approach reform with an eye toward long-term sustainability, said David Draine, a senior researcher for the Pew Center on the States.

“It’s not just about reducing costs in the state’s retirement system, it’s about designing a system that meets the state’s needs while being fiscally responsible and sustainable,” Draine said.  “Without fiscal discipline, nothing is sustainable.”

Some states and cities are beginning to make changes that will better fund the pension plans while reducing the cost of benefits, according to the report.

The city of San Jose, Calif., made headlines this month by approving a new pension plan with reduced benefits for all employees, while states such as Virginia, Kansas and Louisiana have made changes to how their pension plans operate to reduce the risk to taxpayers.

In Pennsylvania, Republicans in the state House and state Senate have begun developing plans to move future employees into a 401(k)-style retirement system known as a “defined contribution” plan, wherein states would set aside a share of money for each year the employee worked, which could then be invested independently and saved for retirement.  In a traditional pension system — a “defined benefit” plan — the state promises a set amount of benefits based on a formula of salary and years worked.

Even those changes and strong investment returns in coming years would not prevent some tough decisions, Draine said.

“There are no quick fixes to this problem,” he said. “States with significantly underfunded state pension systems cannot sit back and expect the stock market to bail them out, particularly as baby boomers retire.”

Most states assume an annual return of between 7 percent and 8 percent on pension investments, but private-sector funds generally use a lower rate of around 4 percent.

Significant debate among pension experts exist about whether public sector plans can realisitically earn that high of a return over the next few decades, Draine said.

In Pennsylvania, both the Public School Employees Retirement System and State Employee Retirement System have voted to decrease their expected rate of return from 8 percent to 7.5 percent within the past year.

Since future earnings can be used to cover expected liabilities, lowering the expected future earnings exposes a higher level of obligations — the state’s two funds saw their unfunded liabilities increase by about $5 billion as a result of those recent changes.

Between 2009 and 2011, 43 states enacted benefit cuts, increased employee contributions, or did both, according to the National Conference of State Legislatures, which tracks legislative activity at the state level.

States aiming at reforms have to pay off the existing liabilities, create sustainable plans in the long term, and maintain benefits adequate in attracting and retaining good workers, Draine said.

Reforms passed in 2010 in Pennsylvania set limits — or “collars”—  on a pending spike in contributions from the state after a decade of deferring payments.

As a result, the state is contributing less this year — and every year until after 2014 — than would be required by the pension funds’ actuaries.

Those collars are part of the reason the Pew report shows Pennsylvania contributing less than one-third of the necessary amount to the funds this year.

As part of its 2011 actuarial report, released last week, SERS acknowledged the impact of the short-term rate collars.

While the actuaries would prefer that SERS funding be based on the actuarially determined funding levels, they recognize that “extraordinary funding challenges” to the state in coming years required the temporary deferral of those payments, read a portion of that report.

The new report showed SERS to have an unfunded liability of $14 billion, while PSERS has a liability of about $26 billion.

Pew’s data indicates a much higher level of debt because it casts a wider net.

The information in the report is from fiscal 2010, the most recent period available for all states, but Pew researchers said the numbers have likely not improved — perhaps even gotten worse — during 2011 and the first part of 2012, due, in part, to “smoothing” the losses during the 2008 economic collapse over a longer time.

Pension funds avoided a catastrophic one-year loss, but will nonetheless have to account for those losses for decades to come, they said.

Lawmakers in Pennsylvania crafting the pension reforms were in budget meetings Monday afternoon and could not be reached for comment.

This story was corrected to clarify that the $118 billion liability is Pennsylvania’s total pension liability.

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Eric Boehm is a reporter for PA Independent. He can be reached at Eric@PAIndependent.com or at (717) 350-0963.

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