Pennsylvania Budget Left Pension Problem Unresolved
Pennsylvania's budget for 2014-15 left the critical issue of pensions unresolved.
The issue may be one of the most contentious in state budgeting, and everyone seems to agree that something needs to be done - even those who insist that there is no crisis - but few agree on what to do. With insignificant, incremental changes politically popular and any real reform a political land mine, the problem has only grown, while the solutions have been pushed aside. The problem itself begins with the amorphous and preemptive term pension reform.
But there are a few simple truths - and some simple math - that should right policymakers who have been floundering around the term for years. Any meaningful action must focus on comprehensive and sustainable solutions to the state's two largest pension systems, the Public School Employees' Retirement System (PSERS) and the State Employees' Retirement System (SERS). Simple math tells us the problem:
While the combined state and local budgets remain at least $1.2 billion short of the minimum amounts recommended by actuaries, and the combined deficit of PSERS and SERS is between $50 billion and $60 billion - with interest alone on this growing debt more than $10 million a day - these major funds are in trouble. Further, the systems are experiencing negative cash flows that cannot be sustained over the long term.
Properly funding pension systems carries a low political rate of return, and even repeated concerns about noncompliant funding policies from credit agencies failed to move legislators. As a result, the agencies have downgraded Pennsylvania's debt. Policymakers searching for incremental solutions - such as the current hybrid plan, which involves a protracted debate on the unrelated issue of modifying benefits for individuals not yet hired - may be surprised to learn of the likelihood of further downgrades absent an accompanying immediate increase in the required funding.
The latest proposal involves retaining a defined-benefit plan for new hires, even as significant numbers of new employees are excluded from any changes. Actuaries assert that there are likely no all-important present-value savings associated with the hybrid proposal, making pursing the strategy seem a useless venture. That's characteristic of a new reality: The pension reform debate has evolved from an initial goal of accelerating hypothetical savings to justify contributing less money into already underfunded plans to abandoning the stand-alone defined-contribution plans, which are the private-sector standard. This follows in the aftermath of Act 120 (2010), in which 30 years of projected cumulative savings were more than eliminated by a simple reduction in the assumed annual asset rates of return from 8 percent to 7.5 percent. All current policy is now wholly dependent on hitting that 7.5 percent mark.
Defenders of the unsustainable defined-benefit plans continue espousing long-disproven myths, such as that new entrants are needed to sustain a pension system, by exaggerating the transition costs of closing such plans. In addition, tried-and-failed solutions, including the currently prohibited pension-obligation bonds, resurface as "innovative" remedies. After all, why deal with such difficult issues now when one can statutorily burden future generations with them?
Unfortunately, even a closed defined-benefit plan will not quarantine the unfunded liability, since these plans can still underachieve and adopt retroactive benefit increases while continuing to be underfunded.
The problem is centered on the political institutions involved. The public-sector participants have certainly paid their required contributions, just as taxpayers have paid their requisite taxes. And here's a reality that should be made clear: There will be no taxpayer contribution relief during the next 15 years under any scenario involving only plan design changes for new hires.
As politics and defined-benefit plans are a toxic combination, we hardly need vestiges of these plans serving only to encourage new unfunded liabilities. How many times must such lessons be learned?
Sadly, at the moment, politicians are offering only a false choice between plan design changes for new hires or dealing with the implications of sustained contribution increases.
But we are well beyond the point where incremental reforms will suffice, and it is an immoral political dodge to simply defer liabilities, assuming future generations will somehow be more willing, or better able, to afford this already unsustainable debt.
The fundamental and immovable question involves what revenue sources and/or budget reductions will occur to support the required pension contributions. Until such questions are successfully answered and, more importantly, implemented, solvency will be at the forefront of every pension discussion.
In the meantime, don't be surprised that amid the fog of pension myths, our unfunded liabilities increase as our credit rating declines - a pair of treacherous circumstances that future generations hardly deserve.
This piece originally appeared in The Philadelphia Inquirer
This piece originally appeared in The Philadelphia Inquirer