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PA governor wants pension ‘reform’ now in return for huge costs later

By   /   February 5, 2013  /   1 Comment

HERE’S THE DEAL: Gov. Tom Corbett delivers his budget proposal for fiscal year 2013-14 Tuesday to a join session of the Pennsylvania House and Senate. (AP photo)

By Eric Boehm | PA Independent

HARRISBURG – Proposed pension reforms in Pennsylvania save about $175 million next year at a cost of billions in the long run.

During his budget address on Tuesday, Gov. Tom Corbett called on lawmakers to pass his multi-level pension reform proposal with this year’s state budget. The plan would move new employees to a 401(k)-style pension system, would reduce future benefits for current employees and would reduce the state’s payments into the state’s two pension systems for the foreseeable future.

The first two parts of his plan are intended to save costs in the long run by cutting a small part of the state’s unfunded liability, while the third part would free up about $175 million for the state in next year’s budget.

“Resolving our pension crisis will be the single most important thing we do for decades to come,” Corbett said in his address.

It’s also going to take decades for the reforms to have an effect, and lawmakers seem hesitant to take the bold steps needed to implement Corbett’s proposal.

Under current law, the state’s pension contributions will climb from $1.1 billion this year to about $3 billion in fiscal year 2016-17. But those contributions are already less than recommended by actuaries, resulting in the state’s unfunded liability being projected to climb from $40 billion now to $65 billion by 2018, before declining.

JOINT SESSION: Members of the Pennsylvania House and Senate on Tuesday listen to Gov. Tom Corbett deliver his budget proposal. (AP photo)

With the proposed reforms, the unfunded liability will continue to grow, but will peak at about $62 billion in 2018 – and then only if changes to both new and current employees are enacted, according to Corbett administration projections.

The worst-case scenario would be passage of lower contribution rates without the long-term reforms, a scenario that would push the unfunded liability to as much as $70 billion.

Short-term savings for this year’s budget would not be approved by the governor without long-term savings achieved by reducing benefits and moving new employees to the 401(k)-style plan, said Charles Zogby, Corbett’s Budget Secretary.

State Treasurer Rob McCord blasted Corbett’s pension proposal as “kicking the can down the road” and “fantasy island finance.”

McCord, a Democrat who is widely believed to be preparing for a gubernatorial bid against Corbett in 2014, said he would favor bringing the pension debt on the state’s balance sheet to make policymakers more aware of the $40 billion debt and using pension bonds to pay off some of the liability.

Lawmakers on both sides of the aisle and from both chambers of the General Assembly voiced either outright opposition to the pension reform plan or at least expressed doubts about the likelihood of the General Assembly putting up enough votes for cuts to future benefits for current employees.

“There are more significant hurdles” when it comes to changing benefits for current employees, said House Majority Leader Mike Turzai, R-Allegheny, though he was supportive of other changes.

State Sen. Vincent Hughes, D-Philadelphia, minority chairman of the Senate Appropriations Committee said the budget should not be balanced with savings from pension reforms.

But if those changes do make it to the governor’s desk, lawsuits from public sector unions would be sure to follow.

“If it does somehow pass and they change current employees, we will be going to court, no doubt about it,” said Dave Fillman, executive director of AFSCME Council 13, which represents the largest chunk of state employees.

Some lawmakers are uneasy about planning to use $175 million in savings from a pension reform that could be thrown out in court.

“To change benefits for current employees has some serious constitutional issues,” said Senate Majority Leader Dominic Pileggi, R-Chester. “Do we want to build a number into our budget that depends on a court challenge?”

But the state’s Public Employee Retirement Commission, which serves an advisory role on pension issues, warned in a report last week that “no future benefit modifications are likely to significantly impact these liabilities unless the courts allow changes to the benefits of existing employees.”

That’s because the $40 billion unfunded liability is entirely owed to current employees and retirees. Moving new employees into a different plan will keep from adding to that debt, but will not reduce it.

And Zogby made it clear that any changes to the collars should be made only as part of a deal to cut into that massive long-term debt.

Without those long term cost savings, it would be kicking the can down the road, Zogby said.

In the new plan, state employees will contribute 6.25 percent of their salary and public school employees will contribute 7.5 percent. The state will put in 4 percent.

All sides were clear on their intention to leave intact retirees’ benefits and benefits already earned by existing employees.

Rick Dreyfuss, a senior fellow and pension expert for the Manhattan Institution, a national economic policy think tank, said applauded the attempt to move new employees into a more sustainable pension system, but said the reduction in state contributions to the current plans should be a concern.

“We’re putting less money into already underfunded plans and calling it reform,” he said. “Those debts have to be paid off eventually.”

Contact Eric Boehm at [email protected] and follow @PAIndependent on Twitter for more.