Cutting Unfunded Pension Liabilities Down to Size

No matter what pension plan design reforms the legislature enacts for future employees, the Commonwealth will still have a massive unfunded liability. The unfunded liability is the result of over-promising retirement benefits, poor investment performance, investment performance, but mostly a willful redirection of necessary pension contributions by the Pennsylvania government to other purposes. This gross negligence on the part of elected officials has been bipartisan. It started with the 2001 pension increase signed into law (Act 9) by Governor Ridge and continued through the Rendell years when he signed legislation that purposefully underfunded the pension systems (Act 40 in 2003 and Act 120 in 2010).

Decades of mismanagement have resulted in a combined $63.3 billion in unfunded liabilities, based on the market value of assets. The longer the unfunded liability persists, the worse it becomes. It’s helpful to look at the unfunded liability as a loan. This "loan" has a 7.5 percent annual rate. In Year 1, the principal is $63.3 billion. If no payments are made, the amount due increases to $68 billion next year, then $73.2 the following year and so on. In other words, the unfunded liability grows year after year unless the payment made exceeds interest and the cost of newly earned benefits. And, just like any other loan we need to be making payments on the principal.

The loan example conveys the basics of the problem. Rep. John McGinnis introduced HB 900 last year to address the unfunded liability. In his co-sponsorship memorandum, McGinnis states:

"Right now, just the annual interest on the pension debt is over $4 billion, equivalent to the full yearly salary and benefits for over 50,000 teachers. The situation is so dire that there are likely scenarios where the pension assets will become exhausted in the next 8 to 15 years. When that happens, benefits paid to retirees may well consume 40% to 50% of the general fund. The consequences for our future only get worse as we delay dealing effectively with this problem.

"The right approach is to follow the recommendation of the 2014 Blue Ribbon Panel on Public Pension Funding commissioned by the Society of Actuaries and commit ourselves to paying off the current UALs [unfunded accrued liabilities] of SERS and PSERS over 20 years with level dollar funding. It is not just the responsible thing to do after more than 10 years of serious underfunding–it is absolutely necessary to prevent substantial and irreversible harm to the future of Pennsylvania." [Emphasis added]

We can avert the fiscal catastrophe. However, every day the General Assembly does not act, the unfunded liability grows. HB 900 is currently in the House State Government Committee. Please, contact your representative today and urge them to take action: