PA Taxpayers - The Looming Pension Crisis

Submitted by SadInAmerica on Sat, 05/31/2008 - 10:12am.

Their own golden years were on the minds of legislative negotiators as they sat down with Gov. Tom Ridge's team in the spring of 2001 to work out what became Ridge's final state budget.

Their members wanted something badly that had eluded them for years - an increase in their own pensions.

"We'd say 'education,' we'd say 'economic development,'" said Tim Reeves, the Republican governor's press secretary at the time. "Every time we'd say something, we'd hear in the response the word 'pension.'"

The timing looked right. A booming tech-driven stock market left the state's two major public-employee pension funds with significantly more money on the books than their anticipated need to pay future benefits.

Amid widespread confidence that additional tax dollars would not be needed to pay the multibillion-dollar cost, a deal was struck that guaranteed 50 percent pension increases for most legislators and 25 percent increases for more than 300,000 state workers and teachers.

"There's always a chance that something could go wrong, but we don't see that," then-Majority Leader John M. Perzel, R-Philadelphia, now speaker of the House, said at the time. There was no floor debate - just as the law to raise their own salaries would be handled four years later - and it passed both chambers overwhelmingly.

But what was supposed to have been a painless way to expand benefits for public employees has turned into a looming crisis for taxpayers, with a day of reckoning now barely five years away.

In 2012, the cost of subsidizing pensions for state employees and teachers is expected to jump from less than $1 billion to more than $3 billion a year - and the higher payments are expected to continue for decades. The amount is equal to about $240 for every man, woman and child in Pennsylvania, compared with $80 today.

Policymakers are scrambling to find solutions. But the state constitution bars curtailing pension benefits for current or retired state employees and teachers, and at least in the near future, experts agree the choices are likely to come down to raising taxes or cutting services.

"Sooner or later they're going to have to bite the bullet," said Arthur H. Schwartz, president of the 16,000-member Pennsylvania Association of Retired State Employees. "If they want to they can cut back, reduce government, reduce waste. Maybe we don't need 96,000 state employees. Maybe we don't need a lot of things."

The funds - the State Employees' Retirement System and the Public School Employees' Retirement System - are administered by separate boards. Together they manage $90 billion in assets - primarily from investment returns, but also contributions from taxpayers and employees - for the benefit of about 682,000 workers and retirees.

The average pension in the two systems for those at normal retirement age is approaching $20,000 a year. That is nearly three times the typical private pension benefit and about a third higher than the national average for a government pension, according to the Congressional Research Service.

The biggest retirement payout - $254,000 a year - currently goes to a retired Penn State surgery professor.

Adding to the financial pressures on the state: the soaring cost of medical coverage for tens of thousands of retirees, increasingly rare in the private sector but still a staple retirement benefit for most state employees. The state is now spending more than a half-billion dollars a year on retiree health care.

Coverage was provided at no cost to qualified retirees until 2005, when new retirees began paying a small portion. Much more limited coverage is available to school retirees.

Taxpayers in certain municipalities have even more reason to worry. Pennsylvania has more municipal pension plans than any other state - 3,100-plus at last count - and the number keeps growing. Such small plans face unique challenges, and pension shortfalls have already contributed to serious budget problems in many communities.

In the private sector, businesses have taken a number of often drastic steps to lower their pension liabilities, including capping enrollment, converting from traditional pensions guaranteeing a certain level of benefits for life to 401(k) and other defined-contribution plans, and even going bankrupt.

But in the public sector, Pennsylvania courts have repeatedly ruled that government employees' pensions may not be reduced, a protection that many believe also extends to health insurance.

Any major change in benefits for state employees, as a result, would have to be reserved for future hires. That would likely result in major pushback from public-employee unions, which argue good benefits are key to attracting a strong and stable work force.

For now, all eyes will be on the stock market.

Whenever investment returns for the state pension funds fall short of their 8.5 percent annual target, the difference is added to the "employer share" - paid mainly with state and local tax funds, as well as money from participating entities such as Penn State University.

"What the public needs to understand is we are, all of us, at risk for the performance of the stock market," said Gov. Ed Rendell's budget chief, Michael Masch.

In retrospect, the stock market was already beginning to lose its roar by the time the 2001 benefit increases were pushed through.

Still, legislative tinkering with the pension funds did not stop there. The next year, responding to pressure from retirees left out of the deal, including a protest rally that drew thousands to the Capitol, lawmakers and Gov. Mark Schweiker granted them a cost-of-living increase at an estimated cost of $1.7 billion.

Then, in 2003, as the state government and hundreds of school districts were about to be hit with a big increase in their mandatory pension payments, the Legislature and Rendell struck a deal to postpone paying the lion's share for a decade.

That eased short-term budget pressures but has deprived the pension funds of money they could have invested during the recent market run-up.

Not much has been done since. A bill to require the state and school districts to increase pension payments in advance of 2012 passed the House this year but died in the Senate.

"Where it's going to hit the pockets of taxpayers is at the local school level," said Rep. Steve Nickol, R-York, a member of the state teachers' pension-fund board and sponsor of the unsuccessful House bill. "Anything we do as local tax reform, as significant as it is, could be just totally rendered useless when this hits."

Spokesmen for the funds note that their track records compare favorably to other large pension funds, and are optimistic that a minimum contribution - such as the one Nickol's bill would have required - along with a few more years of healthy stock market returns will reduce the taxpayers' pain in 2012-13.

"The concerns, I'm not trying to minimize them," said spokesman Wythe Keever of the Pennsylvania State Education Association, the state's largest teacher's union. "But it needs to be pointed out that school employees are paying their part (on average, 7.2 percent of pay) and always have, while employers took a holiday in the late '90s and early 2000."

That holiday, it seems, is about to reach an abrupt and painful end. Total employer payments, largely from taxes, are expected to be $3.4 billion over the next five years. For the five years after that - $16.7 billion.

Mark Scolforo - Associated Press Writer - Harrisburg, PA - December 16, 2007 - posted at

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Submitted by SadInAmerica on Sat, 05/31/2008 - 10:12am.