Pension Liabilities Cannot be Ignored
The first rule of getting yourself out of a hole is to stop digging. This rule can be equally applied to getting out of the pension "hole" in which Pennsylvania finds itself.
Since my appointment to the Public School Employees’ Retirement System (PSERS) Board of Trustees in 2009, I have immersed myself in the many complexities of a once-robust and well-funded retirement system upon which Pennsylvania’s 177,000 school retirees and 279,000 active educators rely for their retirement security. As recently as 2007, the PSERS fund had assets of $67.5 billion; however, the most recent actuarial valuation of the Fund puts its assets at $45 billion and it is only 79.2 percent funded. The employer contribution rate was increased from 4 percent to over 8 percent of payroll for the coming fiscal year. The problem gets progressively worse, absent some legislative action. Current projections would have employer contribution rates increasing to nearly 30 percent of payroll as soon as 2012-13 and remaining equally high for the foreseeable future.
There are many causes for the deep pension funding hole, and there is plenty of blame to share. When investment returns were robust, pension benefits were increased in 2001 to the point where a 40-year educator can retire with a pension equal to 100 percent of their final salary. During the past ten years, employer contributions were kept artificially low, presumably to keep pressure off school property taxes. Educator salaries were able to increase as school districts were being excused from full-funding of pension obligations. Legislation was enacted in 2002-03 to mask the problem through actuarial and accounting gimmicks. Finally, the substantial investment losses experienced by the system in 2008-09 caused the fund balance and actuarial value of the Fund to plummet.
To address this problem, we must consider both the short-term funding spike and the long-term sustainability of the system. I was encouraged that Gov. Rendell addressed the pension quagmire in his 2010-11 budget address. After all, he will be out of office before the most painful consequences of years of collective neglect will appear in school property tax hikes. Standing alone, however, the governor’s proposals to make a "fresh start" and phase-in the contribution increases over a 10-year period is nothing more than masking the problem and pushing the consequences down the road for another day. His interest in issuing "pension obligation bonds" is nothing more than taking out a risky home equity loan on our debt. Nevertheless, those ideas, if coupled with long-term reforms, may provide a way out of the hole.
Last December, I introduced legislation, House Bill 2135, in an effort to force legislative and executive action to avert a funding crisis. It is important to note that the Pennsylvania Supreme Court has ruled that Article 1, Section 17 of the Pennsylvania Constitution blocks the Legislature from enacting laws to change the pension contracts of existing members of the system. Thus, my plan has absolutely no impact on current members of PSERS and will only apply to new school employees. It is my belief that the current level of guaranteed retirement benefits under PSERS is not sustainable without extraordinarily high taxpayer contributions, through much higher school property taxes.
The "hybrid plan" embodied in House Bill 2135 maintains the security and certainty of a defined benefit plan, albeit at the reduced rate of 1 percent per year of service. In addition, new employees would be enrolled in a defined contribution plan (similar to a 401k plan) with a 3 percent employee contribution and a 2 percent employer matching contribution. Upon retirement, these new employees would receive the guaranteed defined benefit, the accumulated balance of their defined contribution account, plus Social Security.
Any responsible solution to the pension hole should: (1) honor our commitments to current members; (2) stop the bleeding by creating a new level of benefits for future enrollees, which preserves our ability to attract and keep high quality educators; (3) insure that employer funding obligations may not be excused in good times; (4) require any future benefit enhancements or cost-of-living increases to be fully paid for prior to their enactment; and (5) make smart use of financial and actuarial techniques to phase-in the solution.
If we can embrace these tenets, the interests of educators and taxpayers can be reconciled and we can climb out of the pension hole.
Rep. Grell is a member of the PSERS Board of Trustees and the House Appropriations Committee.