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Comprehensive And Sustainable Pension Reform Is Elusive In Pennsylvania

January 29, 2014

By Richard Dreyfuss

As the state closes in on the start of the 2014-15 fiscal year, there have been several reports of estimated state budget deficits in the range of $1.2 billion to $1.4 billion. Approximately $600 million is due to higher pension contributions to PSERS (Public School Employees’ Retirement System) and SERS (State Employees’ Retirement System).

Specifically, these costs relate to the state’s approximately 55 percent share to PSERS and 100 percent to SERS.

Of note, the Corbett administration has clearly stated there will be no new taxes. It has also indicated little desire to reduce overall expenditures.

Many short- and long-term pension strategies are being considered, all using the amorphous phrase reform to justify a particular approach.

After all, who could possibly be against pension reform? Judging by the results of prior actions and the implications of current proposals, the answer is the next generation given they will be responsible for this debt particularly since the common end-result of reform continues to be one of saving money by deferring contributions.

Some suggest “an incremental approach” justified against a baseline of doing nothing. Here the universal goal is to make budgeting easier by adopting pension reforms to enable lower contributions into these already underfunded pension systems.

Sadly, this will only increase existing deficits as will doing nothing. Such financial manipulation avoids adopting the politically-difficult budget decisions which play into election-year politics.

Most proposals will not make these plans sustainable and will inevitably create even bigger problems for future policymakers and taxpayers.

As this discussion continues, all should be mindful of four immovable facts.

First, by proper actuarial and accounting standards, at the state level alone the budgeted taxpayer contribution to these two plans should be approximately $4.8 billion for the current and upcoming fiscal years.

In contrast, the current level is about $2.2B. The projected increase to $2.8 billion is considered by some to be so unaffordable that contributions must be arbitrarily reduced again as part of a 30-year reform plan. Unfortunately the average public employee will retire within 15 years effectively making this a transfer cost to the next generation.

Of course this mindset explains in large part why we currently have current deficits of approximately $57 billion in the first place, using the market value of assets, which are only projected to increase. This deficit alone equates to over $4,400 per resident of Pennsylvania.

Second, many suggest enacting plan design changes to justify avoiding paying next year’s scheduled increase. Placing all new hires in a defined-contribution plan, while certainly desirable by private-sector standards, cannot justify continued underfunding.

Given the unlikely prospects of modifying unearned benefits for existing participants, there are no scenarios which will reduce the unfunded liability absent adopting proper funding policies.

This means that significant future program cuts and/or tax increases are inevitable. The current pattern of projected increases in the unfunded liabilities is a red flag and indicative of poor funding policies.

This represents an immoral transfer of costs to the next generation. This is why funding reforms must precede or at least accompany plan design reforms. However, most policymakers appear very content with limiting the scope of reforms to plan design changes as funding reforms are deemed to be too difficult a political lift.

These poor funding policies were a significant factor in the state’s debt being downgraded by bond rating agencies. Last fall, Fitch Ratings indicated their outlook on Pennsylvania’s debt remains negative “given the current statutory schedule of persistent pension underfunding.”

Third, the subterfuge in Harrisburg will likely involve an emotional and protracted debate on the issue of plan design for new hires.

Buried in the back pages of any proposal will be the language arbitrarily further shortchanging these plans.

Some even want to repeat the failures of the past by adopting another defined-benefit plan while others want to also engage in further borrowing. The common goal remains to defer making the proper contributions to these plans.

Fourth, we are well beyond the point where a defined-contribution plan for new hires or other incremental actions represent a sufficient measure given that the current DB plan will remain unsustainable. Some believe the incremental reform of a defined-contribution plan is wholly sufficient to mitigate the massive, sustained and deferred increases which are all but unavoidable.

Any proposal which does not begin to reduce the current deficit immediately is effectively a political dodge, as unpalatable as the political consequences of adding $2 billion in contributions may appear.

We hardly need more pseudo-pension reforms. Sadly there appears to be an absence of political will to do what really needs to be accomplished.

To place all of this in proper perspective it is noteworthy in 2013 several states actually cut taxes as part of their pro-growth strategies. Pennsylvania’s future generations deserve better.

Original Source: http://www.pennlive.com/opinion/index.ssf/2014/01/comprehensive_and_sustainable_pension_reform_is_elusive_in_pennsylvania_richard_dreyfuss.html

 

 
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