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Treasurer: Pension ‘reform’ will cost PA taxpayers

By   /   February 26, 2013  /   No Comments

By Eric Boehm | PA Independent

HARRISBURG – A pension reform plan that adds to the state’s long-term debts should not be called reform, according to Pennsylvania Treasurer Rob McCord.

McCord on Tuesday blasted a public pension overhaul being pitched by Gov. Tom Corbett as part of his fiscal year 2013-14 budget proposal.  Corbett’s plan would reduce in the short term the state’s contributions to its pension system – already more than $40 billion in the hole – in the hope of making fundamental changes to benefits that would secure savings over several decades.

TREASURER: Rob McCord slammed Corbett's proposed pension overhaul on Tuesday.

TREASURER: Rob McCord slammed Corbett’s proposed pension overhaul on Tuesday.

“Fundamentally, what this does is make a big problem worse and fail to do the difficult work of talking about how to fund a real liability,” McCord said.

Corbett’s proposal will increase the state’s unfunded liabilities by $5 billion over the next five years, McCord said, citing data from the Pennsylvania Budget and Policy Center, a liberal think tank based in Harrisburg and backed by unions which oppose the pension changes. The unfunded liability is a calculation of the pension funds’ assets minus the benefits owed to current workers and retirees – in other words, the amount they may come up short.

Pennsylvania’s State Employees Retirement System, or SERS, is facing a $14 billion debt.  The state’s Public School Employees Retirement System, or PSERS, has more than $26 billion in debt.

Corbett has made the pension situation a priority for this spring’s legislative session.

“Resolving our pension crisis will be the single most important thing we do for decades to come,” he said in his Feb. 5 budget address.

Corbett has also described the growing pension costs as a “Pac-Man” that is eating away at other parts of the budget like education and welfare spending as pension costs increase by about $500 million annually for the next few years.

Jay Pagni, spokesman for Corbett’s budget office, said McCord’s criticism fails to take into account all parts of the overhaul being pitched by the governor.

The short-term increase in costs would be offset with long-term changes in payouts for current and future employees.  The governor’s proposal would move all new hires into a 401(k)-style pension plan to shift the investment risk from taxpayers to the employees.

GOVERNOR: Gov. Tom Corbett said in his budget address three weeks ago that fixing the state's pension mess was a major priority.

GOVERNOR: Gov. Tom Corbett said in his budget address three weeks ago that fixing the state’s pension mess was a major priority.

“What our plan does is plan for the future,” Pagni said. “To pay the costs associated with the pension plans and the mandatory costs for core services and functions the government must provide.”

But McCord said Tuesday that the proposed overhaul would not resolve the pension mess and would actually make it worse by “extending the holiday” that the state has been on since 2003, when the General Assembly voted and Gov. Ed Rendell signed off on a plan to decrease payments into the pension plan for a decade.

When the bill was about to come due, the state approved a law in 2010 to reduce the amount that had to be paid into the system each year.

A key part of Corbett’s reform would keep those reductions in place and tighten them further – from 4.5 percent annual growth to 2.25 percent annual growth – in order to achieve $175 million in savings this year and further savings in the next five years.

But by not putting those dollars into the pension system, the liability grows.

James McAneny, executive director of the state’s Public Employee Retirement Commission, a state agency that advises the legislature on pension issues, said he does not like the idea of further reducing contributions.

“It’s not paying what we’re supposed to pay,” he said. “We have to start paying the bill at some point, and every year we don’t pay it, the costs increase.”

Pagni said the administration acknowledged those payments had to be made.

Unions representing state workers and public school teachers have promised to challenge any pension changes in court, if those changes go after future benefits for current employees. Similar cases in other states have produced a mixed bag of results, leaving it unclear whether such changes would be constitutional.

Lawmakers on both sides of the aisle have said they are unsure whether there are enough votes in the General Assembly to go after those future benefits for current employees, and Republican leaders said after the budget address that they were unsure about making changes that would be tied up in litigation.

And if the future benefit changes were to blow up in court, the long-term cost savings would be erased, leaving only the short-term cost increases, McAneny warned.

“That’s the primary reason for disconnecting the two, in my mind,” he said. “You don’t want to base your whole future budget on something that might not happen.”

By not making the payments now, the governor was essentially planning tax hikes on anyone who lives in Pennsylvania after 2019, when the lowered contribution rates would go away, McCord said.

Conveniently, that’s right about the time Corbett would leave office, if he wins a second term next year.

McCord is rumored to be considering a gubernatorial run in 2014 against Corbett. He won a second term as the state’s top bookkeeper in 2012, with financial backing from many of the same unions now opposed to the pension overhaul.

Contact Eric Boehm at Eric@PAIndependent.com.

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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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