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PA: Pension debate underscores critical debt problem

By   /   October 26, 2012  /   News  /   No Comments

By Eric Boehm | PA Independent

DOYLESTOWN — In the middle of campaign season, debates are a dime a dozen.

But Pennsylvania’s $40 billion public pension crisis — the subject of a Thursday night debate that may have been longer on wonky policy than all three presidential contests combined — carries a much larger price tag: about $40 billion.

More than 200 people attended the “Great Pension Debate” organized by the Commonwealth Foundation, a Harrisburg-based free market think tank and hosted by the James A. Michener Museum here.

Rick Dreyfuss, a retired actuary and pension expert for the Commonwealth Foundation, and Steve Herzenberg, executive director of the Keystone Research Center, a liberal policy think tank also based in the state capital, met on stage in this Philadelphia suburb to duke it out over the causes, solutions and problems of Pennsylvania’s ongoing public pension crisis.

One point of agreement — that $40 billion unfunded liability has to be paid off, one way or another.

The amount owed by the state is increasing steadily to make up for a decade of underfunding the pensions and massive investment losses during the recession.

This year, Pennsylvania taxpayers contributed more than $1.1 billion to pensions last year. That figure will grow to an estimated $4.2 billion by 2016 and $5 billion by 2020.

By Dreyfuss’ estimates, the state should be pouring $2 billion more into the pensions each year. By failing to fully fund the pension obligations now, he said, the state is robbing the next generation to cover those costs.

“We are eroding their standard of living in real time” he said of the children and grandchildren of current workers.

But Herzenberg said making additional payments is “politically untenable” because those dollars are competing with things such as education and transportation.

“Partially we have a revenue crisis in Pennsylvania,” Herzenberg said, a result of cutting corporate taxes for some businesses and a refusal  by politicians to raise taxes.

Rick Dreyfuss

Dreyfuss presented what he called a “five-point plan” to reform Pennsylvania’s pension systems — starting with moving all new hires into a 401(k)-style plan instead of the existing pension system. He would also block the state from borrowing money with bonds to address the $40 billion liability.

Any reforms will be a big political lift, he acknowledged.

“This isn’t the only thing in play. There are always areas where revenue is desired,” Dreyfuss said. “But I think everything has to be on the table.”

Herzenberg disagreed with all five points and argued that switching to a 401(k)-style plan like most private sector businesses use would make it harder to attract good workers to government jobs. He said it would also direct more money from the middle class to the investment banks that manage those accounts.

“It’s not a way forward. It’s a problem that is worse than the disease,” he said of the potential switch to a 401(k)-style plan.

Starting in 2001, the state Legislature voted to increase benefits for current workers and retirees at the behest of public-sector unions. They did so without increasing contributions to the system to cover those new costs.

In 2003, the General Assembly made the problem worse by reducing the state’s contribution to the pension systems, under the assumption that investment earnings would make up the difference. When the economy crashed in 2008, it reveled the problems with that approach.

Steve Herzenberg

Both men agreed that state workers, teachers and other pension recipients should not be punished for the mistakes of politicians.

But something has to give as the costs continue to spiral upward. Gov. Tom Corbett and Republican leaders in the House and Senate have said they want to address the costs in the coming session, which starts in January.

State Rep. Scott Petri, R-Bucks, who attended Thursday night’s event, said he was hoping to hear more specific proposals to address the pension problem.

As lawmakers head into next year’s budget process with one eye on solving the pension crisis, Petri said any plan has to be a long-term solution.

“There really isn’t much of a realistic short-term solution,” he said, adding that the additional costs imposed by the federal health care law — according to some estimates — will drain an additional $2 billion from the state’s coffers annually.


Contact Boehm at [email protected] and follow @PAIndependent on Twitter