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PA: Pension bills only address future hires, not $40B liability

By   /   August 14, 2012  /   News  /   No Comments

By Eric Boehm | PA Independent

State Rep. Warren Kampf, R-Chester, asks a question during Tuesday’s hearing on public pensions in Harrisburg.

HARRISBURG — Proposed public pension reforms, presented at a joint House committee hearing, address only future hires and not the $40 billion liability Pennsylvania owes former and current employees.

Creating a benefits plan for future state workers and addressing that obligation are not easy tasks, said state Rep. Kerry Benninghoff, R-Centre, chairman of the House Finance Committee.

We have a responsibility to get something constructed in a smart manner so that it sustains itself in the future,” Benninghoff said.

The House Finance Committee and House State Government Committee heard testimony from experts about proposals that would either do away with or significantly alter the existing defined benefit pension plans for state employees, lawmakers and public school employees.  

State Rep. Warren Kampf, R-Chester, sponsor of two bills the committees considered Tuesday, said, “Pension plans cannot be political, and a defined contribution plan — which is what I’m proposing — is safe for the taxpayer.”

Kampf’s proposals would create a new, 401(k)-style defined contribution pension plan for all state and school district employees hired after 2015, with the state contributing 4 percent.

Another proposal discussed at the hearing would move state lawmakers into a defined contribution plan while leaving the existing plan in place for school employees and state workers.

State Rep. Tim Krieger

State Rep. Tim Krieger, R-Westmoreland, who sponsored that plan, admitted it would do very little to address the pension problems, but said it would show constituents that lawmakers were serious about making changes.

Other proposals considered would try to find a middle ground by creating a pension system for future hires that was partially a defined benefit plan and partially a defined contribution plan.

Benninghoff said the bills are the “low hanging fruit,” because they deal only with future employees.

Andrew Biggs

Andrew Biggs, a pension expert for the American Enterprise Institute, a conservative think tank based in Washington, D.C., said transitioning future employees into a defined contribution plan would at least keep the unfunded liability from growing higher.

The State Employees Retirement System has an unfunded liability of more than $14 billion. The Public School Employees Retirement System has an unfunded liability of more than $26 billion.

If the state closed the existing defined benefit systems, pension accounting rules require that the full liability must be paid off before the last current employee retires — meaning the state would have to come up with $40 billion in the next 30 years or so.

Rick Dreyfuss

Keeping the current system allows the state to carry over the liability in perpetuity, which allows politicians to avoid making difficult decisions about how to pay it off, said Rick Dreyfuss, a retired actuary and pension expert for the Commonwealth Foundation, a free market think tank here.

“That’s just bad public policy,” Dreyfuss said. “We need to have better discipline when it comes to funding.”

The state landed in this mess after deliberately decreasing its annual contribution to the two pension systems following an expansion of pension benefits in 2001 and 2002.

Biggs said a major advantage of a defined contribution plan is that it takes some of the political decision-making — like what caused the crisis in the first place — from affecting pension policy.

Steve Herzenberg

Steve Herzenberg, executive director of the Keystone Research Center, a liberal think tank here, warned that moving to a defined contribution plan would leave state workers with smaller retirement benefits and could push some of them into needing state assistance after they retire.

And state Rep. Phyllis Mundy, D-Luzerne, said lawmakers have a big challenge ahead of them, but one thing that really struck me about the testimony today is that it was all about the numbers, and not about the people who will be impacted.”

Gov. Tom Corbett has said he wants to reform the public pension systems before next year’s budget is completed, as the state’s payments are set to climb from $1.6 billion this year to more than $4 billion by 2016.