Editor’s Note: This piece will be the beginning
of an investigative series in partnership with Watchdog.org‘s
state-level journalists. Pension budget woes beset nearly every state in the
union and cities and municipalities are also being hit with unprecedented
pension debt. Baby boomers are retiring. Some state and local budgets allocate
more funds for pensions for retirees than they use for actual services and
current worker pay. Once again, the younger generation is saddled with debt
from a previous profligate era.
Pennsylvania’s public pension
liability is one of the worst in the nation, and it’s going to stay that way at
least until next year because lawmakers bent to the will of the state’s
public-sector unions and killed a measure that would have overhauled the
system.
A bill to create 401(k)-style
hybrid defined contribution and benefit plans for future hires in the Public
School Employees’ Retirement System and State Employees’ Retirement
System failed to gain
enough votes in the state House last week.
Despite the measure not affecting
current employees, it was a bridge too far for government employee unions
and the lawmakers who support them.
Union officials did not return
multiple requests for comment. But Jerry Oleksiak, president of the
Pennsylvania State Education Association, wrote in a
PennLive oped that the pension reform bill would drive away
young teachers in a state already facing a teacher
shortage. “The promise of a stable and secure middle class
retirement is a good incentive to enter a high pressure profession that doesn’t
pay nearly as much as other jobs that ultimately require advanced degrees,”
Oleksiak wrote.
But he offered no suggestions on
how to address the $63 billion in unfunded liabilities the pension system has
accumulated.
[Jerry Oleksiak, president of the Pennsylvania
State Education Association] offered no suggestions on how to address the $63
billion in unfunded liabilities the pension system has accumulated.
“The crisis has been caused here
because of benefits increases that weren’t paid for, from not deferring costs
and not making payments, and then from estimating that we’re going to get seven
and a half, 8 percent return on the stock market every single year,” Nathan
Benefield, vice president of the Commonwealth Foundation, told Watchdog.org.
The unfunded pension
liability has skyrocketed from
$7.6 billion to more than $63 billion since 2006. Pension costs have been
partly to blame for driving
numerous school districts to consider property tax hikes and
layoffs during budgets discussions for the upcoming school year.
Benefield said the union’s
unwillingness to compromise on pensions will hurt its own membership because
the result will be layoffs.
He said that a 401(k)-style
defined contribution plan would take much of the politics out of pensions.
“Moving to a defined contribution
plan means that the state makes a matching payment every year, so it’s always
fully-funded. There’s no underfunded liability, no debt in there, and taxpayers
don’t bear the risk from stock market loss.”
Nationwide, the differences
between private sector and government employee benefits are striking. According
to March 2016 data from the Bureau of Labor Statistics, 48 percent of
private-sector workers have a defined contribution plan like a
401(k), while only 6 percent of
state and local government workers do. On the other hand, 57
percent of government workers have a traditional defined-benefit plan, compared
with only 4 percent in the private sector.
A surprise bill for taxpayers
Sheila Weinberg, founder and CEO
of Truth in Accounting, told Watchdog.org that unions have more influence in
these decisions than taxpayers, who often pay little attention to the arcane
world of public pension finance.
Part of the reason for that is
that the depth of the problem began to become transparent only with the
imposition of new reporting standards last year.
Pennsylvania did
not report pension debts before 2015, when it adopted the
Governmental Accounting Standards Board’s new standard, which requires a fuller
disclosure of what is owed.
After reporting no pension debt in
2014, Pennsylvania reported $14 billion under the new regulation.
But Truth in Accounting, a
non-partisan organization that advocates transparent government financial
reporting, estimates that Pennsylvania has an additional $21.7 billion in
unreported pension debt. Weinberg said the state does not report its 50 percent
liability to teacher pensions, but it should because the contribution is
required by law.
“The taxpayers haven’t had skin in
the game where they’ve had to pay for it,” said Weinberg. “Once they’re going
to have to pay for this … then they’re going to start demanding change.”
California and Illinois, notorious for
unsustainable budgeting, had 2015 pension debts of $78.8 billion and $116.8 billion respectively.
Nationwide, states have accumulated $684
billion in unfunded pension debt.
In addition to the $35.7 billion
in unfunded pension benefits, the state owes $22.6 billion in unfunded retiree
health benefits. In total, Pennsylvania is carrying $106.5 billion in debt,
including state bonds, capital asset-related debts and other liabilities, as of
2015. Of that, $65.8 billion is unfunded.
“Current taxpayers should pay for
their bills, but they have pushed those comps onto future taxpayers,” said
Weinberg. “Somebody in the future’s going to have to pay taxes for people’s
retiree health care and pensions. Those people are retired and those taxpayers
aren’t receiving services from that person.”
Weinberg is confident that as the
problem gets more attention, support for action will increase.
A number of Pennsylvanians have
already decided that something needs to be done.
An October poll of 764
Keystone State voters found 54 percent support a 401(k)-style
plan for state employees. This option garnered support across party lines, with
67 percent of Republicans, 51 percent of independents and 41 percent of
Democrats favoring it.
The Federal
Employees Retirement System and 10 states have implemented
hybrid plans of the kind Pennsylvania just rejected.
“It’s kind of inevitable that
we’re going to have pension reform in the near future,” said Benefield. “The
math makes it inevitable that we’re going to, it’s just a matter of when.”
The latest effort at pension
reform was not the legislature’s first pass at the issue.
Democratic Gov. Tom Wolf vetoed a more
far-reaching bill the legislature passed in June 2015. That
bill would have moved new employees away from guaranteed pensions and toward a
401(k)-style plan. Wolf and the unions said the savings would be short-term,
ignoring the unfunded liability the state has accumulated. The June House bill
received substantial bipartisan support, which was not the case in the latest
vote, but not enough to override the veto. Another attempt in December
mustering some Senate Democrats’ support failed in the
House.
Pennsylvania is hardly alone in
failing to confront a mountain of pension debt.
California and Illinois, notorious
for unsustainable budgeting, had 2015 pension debts of $78.8 billion and $116.8 billion respectively.
Nationwide, states have accumulated $684
billion in unfunded pension debt.
“If the states would have truly
balanced their budgets, there wouldn’t have been any liability, and the
taxpayers would have understood the costs of these pension plans,” said
Weinberg.
