As we approach the two-hundredth and forty-second day without a Pennsylvania state budget, 2016 holds no promise of quelling the budget impasse that is raging in Harrisburg. There is one issue that has contributed more then anything else to the Commonwealth’s partisan fiscal tensions present today. This issue has been ignored by some and inherited by others; it is the Public Pension problem. Addressing the fiscal issue that is State Pension Reform is not only essential in providing future generations of Pennsylvanians with opportunities that their parents had, but also imperative if we aim to once again become a leader among the states that comprise our union.
To begin, we will examine decisions made by our leaders in a time when recessions and economic downturns seemed somewhat improbable because of the 1990’s economic boom. This economic boom was the longest, continuous, economic expansion of its size in U.S History and leads many pension programs across the country to increase benefits for retirees. The Pennsylvania State Pension Benefit increase, which is the single biggest contributor to the states budget problems, began in 2001. Decisions made by legislators in 2001 with Act 9 and to a lesser extent in 2002 and 2003 with Act 38 and Act 40, can be traced as some of the roots of our current fiscal predicament. Because the economy was doing so well in the decade prior to 2001, Act 9 seemed feasible at the time it was passed. Basically, what Act 9 did was make a political compromise with the Pennsylvania State Education Association by increasing pension benefits by using positive investment returns to cover the increased cost. The fiscal platform created for Act 9 basically absorbed the increased pension benefit costs over the following decade. Since these new pension benefits required strong investment returns to stay solvent, something legislators at the time took for granted, it is no surprise that this plan ultimately lead to an increase in allocated tax payer money once investment returns decreased. In 2002 Act 38 was passed, which included benefit increases to retirees who were not included in 2001. The following year, after another bad cycle of investment returns, the taxpayer-funded support began to grow. In 2003, once Harrisburg realized that the Act 9 platform was no longer attainable, Act 40 was passed which essentially refinanced the financial deficiencies acquired from Act 9 by spreading pension obligations out over a 30-year period. By 2010, the taxpayer-funded liabilities reached $1 Billion and by the 2015-2016 fiscal year they have reached about $3.8 Billion. The growth rate of our pension benefit system is beyond Pennsylvania’s means and as you can tell, it is not sustainable. The fiscal “Can” has been kicked down the road for far to long and now it is up to our current legislative leadership to pick the can up and throw it away.
This pension dilemma can and will be addressed, there is no other option. The Republican proposed platform for responding to and reorganizing the states public pension system lies in a process that is prevalent among private sector employees and companies. The Republican plan includes a “defined contribution” program that is essentially a 401K-style retirement plan. This plan is aimed more so at future employees. These future employees would be required to contribute about 3% of their earnings. These earnings (about 3%) would be placed into a cash balance plan that would earn interest from yields on U.S Treasury Bonds. The interest would be capped at 4%. Future earnings for both PSERS and SERS employees will see an increased contribution of 3% and 2.5% respectively. This proposed plan transfers the risk from future recessions or other financial problems away from Pennsylvanian taxpayers while also protecting the retirement security of state employees. As stated above, this type of retirement plan is common among private sector employees and can provide public employees a retirement plan that fits the needs of our current economic environment.
This article aims to give the reader a basic understanding of what has contributed to the pension problems but in no way pretends to address every aspect of this very complex situation. It is recommended that anyone seeking more information on this subject review material available on the Pennsylvania state legislative website.
In closing, pension reforms require trade offs and bi-partisan support which has always been clear. But continuing to fund a program created during a fundamentally different fiscal environment can only cause economic catastrophe for future generations. As we walk deeper into this American century, it is clear that Pennsylvanian lawmakers will have to make tough decisions in order to guarantee future generations the ability to grow and flourish.
Commonwealth Foundation, “Pennsylvania Pensions: Man-Made Financial Disasters” (March 7, 2006)
See Pennsylvania Senate Bill 1