Senate Bill 1:  Real Pension Reform

To their credit and in genuine service to the citizens of Pennsylvania that they represent, the state Senate passed real pension reform legislation.  Senate Bill 1 would stop new enrollment in the state pension systems and provide all new state employees and public school employees with a 401k retirement benefit.  Legislators upon election or re-election would also enroll in a 401k plan.

The bill does not change any accrued benefits for currently enrolled participants in the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS).  It keeps promises made.  Going forward, current employees’ can accrue the same benefits they now have but will have to pay in an additional 2.5% for SERS and 3% for PSERS respectively.  If the employee chooses not to pay the additional contribution then their ongoing benefits accrue at pre-Act 9 (2001) levels.

Some relevant history regarding the pension:  In 2001 when the retirement system was well-funded as a result of the preceding years of GNP growth and stock market gains, the Republican legislature passed and Republican Tom Ridge signed Act 9.  Act 9 not only increased future benefits by 25% for all employees but also increased benefits retroactively.

Unfortunately, shortly thereafter the country entered a recession, the stock market crashed, and the state retirement systems went from being flush with cash to being severely underfunded.  This situation persisted through the decade and in 2010, the legislature passed Act 120 pension reform which rolled back new employee benefits to pre-2001 levels and increased the retirement age to 65.

So where are we now?  It is not good.  SERS and PSERS have a stated unfunded taxpayer liability of more than $50 billion.  Unfunded liability is the difference between the likely projected payments for the retirement benefits, and the projected funds available to pay those benefits.  This estimated $50 billion shortfall assumes an optimistic 7.5% return on investments. If the state pension were forced to use the same accounting standards imposed on private pensions, the unfunded taxpayer liability would be more than double that already staggering number. This pension funding shortfall means higher taxpayer payments to the pension systems, leaving fewer funds for other budget priorities.  How has it affected k-12 public education?

Firstly, a falsehood needs to be rectified.  We have been told that Governor Corbett cut k-12 education by billions of dollars.  In reality, state public education spending increased every year under Corbett.  For fiscal year 2014-15, $10.06 billion has been allocated for public education, nearly $1 billion more than his first year’s budget.  The problem is these state education dollars have been increasingly going to fund the pension deficit and that has left fewer dollars for school districts.

Further, over the last five years local school district annual pension payments increased an additional $1.9 billion dollars. Assuming an average salary and benefit cost of $100,000, $1.9 billion is equivalent to 19,000 teacher positions.  And in the next five years, school districts payments to the pension will further increase annually by $1.7 billion, or 17,000 teacher positions. This clearly is not sustainable for taxpayers or for k-12 education.

Senate Bill 1 makes the critical reform.  It stops new obligations to an already hugely underfunded system by giving new state and public school employees a defined contribution retirement benefit rather than a taxpayer guaranteed pension.  It is unfair to put the financial responsibility of “public servant” pensions on the back of taxpayers whose own retirements depend on the return of the market and social security (another hugely underfunded system, but that’s another story).

What has Governor Wolf proposed or more significantly, not proposed?  Rather than ending the financially unsound pension for state and public school employees going forward, he perpetuates it.  Wolf’s reform “modernizes” the state liquor system – modernizing means allowing state stores to raise prices and to sell on Sundays – and takes the increased liquor revenues to pay the costs for a new $3 billion pension obligation bond.

The state’s Public Employees Retirement Commission analyzed the Senate-passed pension reform plan and estimated it would result in $18.3 billion less spending for the state’s pension plans over the next 30 years.   Alternatively, Governor Wolf’s plan would reduce future pension spending by less than $2.5 billion, after making interest payments on $3 billion of new debt.

Why would Governor Wolf propose such non-reform pension reform?  Why has the Wolf administration been demagoguing SB 1, including Lieutenant Governor Mike Stack accusing the GOP legislature of waging a “war on public workers”, rather than engaging in honest debate regarding the pension crisis?  The answer may have something to do with the more than $3.4 million government unions representing state workers and public school employees donated to the Wolf campaign.

True pension reform must begin with stemming the bleeding by ending defined benefit retirements for new employees.  SB 1 is that critical first step.

Contact your state senator.  Thank them for their brave vote and their public service to pass true pension reform. Contact your state representative and tell them to vote for SB 1 when it comes to the State House of Representatives.

Please join the campaign for liberty.  Our future freedom and prosperity depend on it.

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