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PA pension reform for future employees not enough

By   /   May 30, 2012  /   2 Comments

Funding, liabilities still at issue

By Melissa Daniels | PA Independent
HARRISBURG — Pennsylvania Senate Republicans are thinking long term: Halt the pension crisis by changing the pension system.

But so far, proposed reforms don't address billions of dollars in annual contributions or the unfunded liability. Nor do they address additional pension costs borne by local governments. No plans are announced for those looming matters, but for now, they've come up with a plan to change how the state pays for pensions for future workers.
This week, a group of Republican leaders in the Senate sent a news release announcing plans to reform the state’s pension system. No proposal is on the table yet, but lawmakers expect to introduce legislation in early June. 
The reform would switch public employees from a defined benefit plan to a defined contribution plan. The former determines fixed employer contribution rates based on years of service. The latter is a 401(k)-style plan requiring larger employee payroll contributions.
The proposed Public Employees’ Retirement System would kick in for employees hired on or after Dec. 1, 2012.
The state's pension contributions are scheduled to hit $1.6 billion in next year’s budget and as much as $10 billion by 2035, all of which will not be funding education, transportation or public safety.
Senate Majority Leader Dominic Pileggi, R-Delaware, acknowledged that switching plans is just a start to addressing the crisis. Senate leaders say they'll bring up legislation in June.
“This bill is not a total solution but an important part of the solution, one that is achievable, one that’s easy for people to understand, and one that, in my view, is long overdue,” Pileggi said. “We need to start the process that new employees participate in the same kind of pension system the private sector has completely moved to.”
The new plan would cover state and public school employees, including elected officials, who would otherwise enroll in the State Employees Retirement System or Public School Employees Retirement System
Some doubt a new plan would cause a ripple of savings. If new employees go into a different plan, they would no longer be contributing to the defined benefit plan that is the source of the crisis, said David Fillman, executive director of the Pennsylvania council of American Federation of State, County and Municipal Employees, a union for public and nonprofit employees.
By law, the state is locked into paying legacy costs for existing employees.
“This does not help the problem,” Fillman said, “it helps the problem maybe 30 years from now.”
In addition to the annual payments into the pension systems, an unfunded liability could be as high as $50 billion.
Rick Dreyfuss, senior fellow with Pennsylvania think tank the Commonwealth Foundation, said switching to a defined contribution plan doesn’t eliminate the deficit or reform the plan as a whole.
Funding reform is just as essential as plan reform, Dreyfuss said. For example, whose obligation is it to pay for a pension in the first place, this generation of taxpayers, or the next?
Defined contribution plans could save approximately 2 percent of payroll, but an accurate estimate is hard to come by because contribution rates vary based on the type of employee and plan, Dreyfuss said. More importantly, the switch takes the "politics out of pensions."
“This is certainly not a magic wand, but that said, I think it’s indicative that these programs don’t work particularly well in a political domain, and that’s why we need to go into a different direction going forward,” he said.
But as lawmakers talk about statewide reform, it’s important to look from the bottom up. Dreyfuss said while the pension argument is often focused on state employees, local governments are not exempt from the pension crisis. There are 2,200 different plans statewide, with no mention of a potential overhaul coming from the state.
“Pittsburgh and Philadelphia have very significant deficits in absolute dollars,” Dreyfuss said. “They’re not as large as PSERS and SERS, but, proportionally speaking relative to the size of their government, they’ve got some significant challenges.”
The proposed legislation would not take municipal pensions into account, though legislators have tried to address that problem with separate bills in the past.
To this point, Pileggi said it’s better to lead by example.
“Local government pensions are an issue that we need to address,” Pileggi said. “… . If state House members and senators and state employees are not participating in a defined contribution plan, it’s hard to turn to municipal governments and say their employees and their local elected officials should participate.”