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Study of pension reform costing Pennsylvania taxpayers more than $1 million

By   /   March 10, 2014  /   No Comments

By Eric Boehm | PA Independent

As Pennsylvania lawmakers continue to debate pension reform, the meter is running.

Last month, the Corbett administration renewed a contract with Milliman Inc., an actuarial accounting firm based in Seattle, and now plans to spend more as much as $1.1 million for actuarial services. The administration has paid $900,000 to Milliman since 2012 for actuarial analysis of various efforts to change the state’s public pension systems, but the renewed contract says “changing circumstances and changing needs” required more actuarial work.

THE COST OF REFORM: Each new plan for changing the state pension system requires actuarial analysis by the administration, the General Assembly and the pension plans themselves. That doesn’t come cheap.

“They were brought on to do the actuarial analysis of the governor’s pension reform plan and provide analysis for all the proposals that are out there,” said Jay Pagni, Gov. Tom Corbett’s spokesman.

The administration initially contracted with Milliman in August 2012, then renewed the contract in February 2013 and again in April 2013. The latest renewal was signed last month.

Pennsylvania’s two major pension funds — the State Employees Retirement System, or SERS, and the Public School Employees Retirement System, or PSERS — are a combined $49 billion in the red after years of underfunding by the state and investment losses during the recession.

Lawmakers are considering several proposals to deal with the pension debt.

So far, the administration seems to favor a plan from state Rep. Mike Tobash, R-Schuylkill, which would lower the state’s contributions to the pension plan in exchange for long-term funding reforms that would save money by creating a new type of pension plan for future hires.

But each time a new proposal surfaces in the Legislature or gets produced by the governor’s office, the actuaries go to work —and they don’t come cheap.

Under the terms of the contract with Milliman, the administration is paying up to $419 per hour.

Rick Dreyfuss, a retired actuary who now studies pension issues for the Manhattan Institute, a conservative think tank, said the hourly fees being paid by the administration were “well outside any reasonable norms,” based on his experience in the field.

Since the administration is looking for ways to achieve short-term pension savings by underfunding the plans, Dreyfuss said he worries the added expense of the actuarial fees won’t result in serious changes to the underlying problems in the pension systems.

“We are spending $1.1 million to compute how to put less money into already underfunded plans in the name of reform,” he said.

Both pension funds have their own contracts with actuarial firms, but those costs are lower than what the administration is paying.

During the past three fiscal years, PSERS spent nearly $1.5 million on actuarial fees. PSERS contacts with New York-based Buck Consultants.

Under state law, the pension funds are required to hire an actuary. The firm is required to conduct annual valuations of the system, set employer contribution levels — though the General Assembly is free to ignore that when budget-making, and frequently does — and advise the pension systems on tax and legal changes that could affect the pension plans, among other things.

The actuarial firms also advise the pension funds on the consequences of proposed legislation, which can drive up the costs, said PSERS spokeswoman Evelyn Tatkovski.

“Every time a cost estimate is run for a proposed piece of legislation there is a cost to PSERS for the actuarial work done by Buck,” she said.

And that’s why the administration says it needs actuaries, too.

“It only makes sense that we would have professional consultants to help us,” Pagni said. “We don’t have the expertise on staff here, so we have to contract it out.”

Boehm can be reached at Eric@PAIndependent.com and follow @PAIndependent on Twitter for more.

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Eric is a reporter for Watchdog.org and former bureau chief for Pennsylvania Independent. He lives in Minneapolis, Minnesota, where he enjoys great weather and low taxes while writing about state governments, pensions, labor issues and economic/civil liberty. Previously, he worked for more than three years in Harrisburg, Pennsylvania, covering Pennsylvania state politics and occasionally sneaking across the border to Delaware to buy six-packs of beer. He has also lived (in order of desirability) in Brussels, Belgium, Pennsburg, Pa., Fairfield, Conn., and Rochester, N.Y. His work has appeared in Reason Magazine, National Review Online, The Freeman Magazine, The Philadelphia Inquirer, The Washington Examiner and elsewhere. He received a bachelor's degree from Fairfield University in 2009, but he refuses to hang on his wall until his student loans are fully paid off sometime in the mid-2020s. When he steps away from the computer, he enjoys drinking craft beers in classy bars, cheering for an eclectic mix of favorite sports teams (mostly based in Philadelphia) and traveling to new places.

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