The budget for fiscal year 2013-14 was presented today by the Governor and reforms for pensions were outlined. To be clear, as we have written before, when the state level reforms are mentioned the focus is on personnel covered by either SERS (state workers) or PSERS (school employees). The remaining county, local, and authority plans aren’t the subject of reform. That’s not to belittle the plan: to be sure, the unfunded liability of SERS and PSERS is a combined $41 billion.
The highlights: as with most retirement cost reform, new employees (presumably all, with no exceptions for public safety) will come under a new pension system, here a proposed defined contribution plan with employees contributing 6.25% of pay; current retirees get no new benefits, and current employees will see no change to the benefits they have accrued, however, the future benefits of current employees will have a lower multiplier and compensation reforms (overtime and Social Security caps).
This will likely be a very contentious issue as there will be much discussion over whether Constitutional language on impairing contracts has an impact on future benefits for current employees. Note that the budget proposal states that current employees can pay more into their pension to keep the multiplier from dropping.
In an opinion piece in today’s PG the president of the PA State Education Association laid down several markers on the impending PSERS pension spike and how to solve it: to wit, the teachers did not cause the mess (even though PSERS participants got enhancements in 2001), teachers are underpaid compared to other college grads but they did not get into the profession to get rich, and switching to a 401k type arrangement would promote a race to the bottom.
But rest assured that the teachers’ union is willing to come to the table to find a long-term viable solution that is acceptable to taxpayers, teachers, and students alike. Just so long as we all realize the three unmovable tenets laid out by the president.
The union will fight to the end to keep the pension system as is, no matter the fallout in the way of state and or local tax increases. This includes resisting any move to a defined contribution system. Why? Because the responsibility for managing investments and the placement of risk moves from the taxpayer to the employee. It does not erase the trajectory of the planned rate spike or the accumulated unfunded liabilities, but it begins the transition to a day when the public pension system becomes affordable and sustainable.
Here are two hard and uncomfortable truths about public pensions that will undoubtedly play an enormous role on policy and legislative decisions by the state and local governments in coming years:
Is there a conservative urban agenda? If so, what does it look like? Even more to the point, are there any cities in Pennsylvania exhibiting the traits if such an agenda existed?
A recent opinion piece in the Washington Examiner outlined "a conservative agenda for cities". Most of the components of the urban agenda of the last half of the 20th century did not work, as the author argued, or "Cleveland, Buffalo, and Detroit would all be booming".
The components ofa new strategy would include:
- Crime-prevention oriented policing based on the New York City experience
- Reform of public sector pensions toward 401k type plans and away from defined benefit plans
- Private financing of infrastructure
- A continued push for competition in public education from charter schools
One could see that there might be pieces of this strategy in some cities around the Commonwealth, but there likely is not any one municipality that encompasses them all. Of course, moving toward some of the reforms would have to come from Harrisburg, which could add revisions of binding arbitration and outlawing public sector strikes to help cultivate this agenda.
Just over the border from Philadelphia-the city that accounts for 80% of the aggregate shortfall of all local pension plans in the Commonwealth-reform of public sector pensions is taking shape.
According to an article in the Philadelphia Inquirer, the reforms would include a roll back of a 9 percent pension increase approved in 2001, a requirement that new part-time workers to receive 401(k)-like plans rather than defined benefit plans, and a minimum threshold of weekly hours worked for employees to qualify for a pension. A constitutional amendment would force the state to fully fund its pension obligations over a seven year period.
These changes follow several attempts earlier in the decade to obtain long-term change in the state’s pension system. With long range pension and health care obligations estimated to be around $112 billion (that’s for the state only, not the locals), some lawmakers have decided to take the issue on. There will be tremendous pushback from the state’s public sector unions. Consider it a prelude to life in Harrisburg in 2011.
Under a plan proposed by the PA School Boards Association-as part of a larger discussion on what to do about the massive problems looming with the state teachers’ retirement system (PSERS)-new school teachers hired after June 30th would receive a "hybrid" plan that would combine features of defined benefit and defined contribution (401k) plans.
According to the National Conference of State Legislatures several states have plans that "provide features of both defined contribution and defined benefit plans…that do not allow an employee to choose between the two elements". Florida, Georgia, Indiana, Ohio, Oregon, and Washington fall into this category and apply to state employees, teachers, or both. Others-Alaska, Michigan, and Nebraska-use a defined contribution plan as their primary retirement plan after establishing a phase-in for employees hired on or after a particular date.
Predictably, the statewide teachers’ union does not like any proposals for change with the head of the union stating that such a plan would take "a secure retirement promise and erase it for our new members". It can be taken to the bank that union officials will resist alteration with the same ferocity that police and fire unions fought municipal pension reform.
Though it has been clear for some time now, no taxpayer can rest easy if they read some of the comments from "in the know" people on the approaching problems of the state’s pensions system for school employees. Thanks to a formula adopted earlier in the decade by the General Assembly to smooth out the gains and losses of the plan’s finances, the employer contribution rate (paid by the state and the school district) is expected to climb incrementally from 4.78% this year to 33.95% in 2014.
That trajectory-which has been known for some time now-prompted some of the following quotes:
- "There is no silver bullet to solve this"
- "It’s scary"
- "The numbers are really almost unimaginable in terms of the potential impact on taxpayers and school district budgets"
- "No district in Allegheny County…is able to budget at the 30 percent-plus rate without significant budgetary cuts in other areas or millage increases."
- "It’s not like you can magically make it disappear"
Worse yet, the existing state law on school spending and school tax growth-Act 1 of 2006-allows school districts to secure an exemption from taxpayer referenda for "increases in retirement payments that rise faster than [the Act 1] index".
The Senate Finance Committee is going to hear testimony on what to do for the teachers’ system and for the state workers’ pension system (it too is expected to face rate hikes). Many of the same suggestions that arose in this past fall’s municipal pension reform effort will be raised and no doubt some of them (such as moving to defined contribution system for employees hired after a certain date) will face opposition from the teachers’ union the same way the public safety unions opposed the municipal effort.
If the health of Pittsburgh’s three pension plans doesn’t soon improve and if pending municipal pension reform legislation becomes state law, the City will see its oversight and administration of the plans transferred to the state and all future employees will become members of a new, uniform system of pension recipients.
The House could consider legislation that would prescribe a remedy for troubled municipal pensions (the degree of trouble measured by the ratio of assets to liabilities, and being under 50% is troublesome) by folding them under the auspices of the Municipal Retirement System and taking the power of administering benefits away from municipalities grouped under the System in the new set-up. There could be other reform pieces in the mix-defined contribution options, more local control, etc.-but the head of the Retirement Commission does not seem optimistic that asset sales alone, like the one Pittsburgh has proposed for parking garages, could solve the problem.
If we are to believe the published report that an analyst told the City they could "conceivably net $200 million" from leasing parking garages and lots then there could be some validity to the Commission director’s statement. Recall that earlier in the year we examined the Mayor’s proposal to sell or lease parking structures (owned and run by the Parking Authority) and take the proceeds to retire the Parking Authority’s $100 million debt and use the remainder for the pension shortfall. The last official valuation (January 2007) pegged the gap at $524 million; but recent reports show that the gap could have grown to over $630 million. An infusion of $200 million-with a hard line on liability growth-would put the funded ratio at just over 51%, just barely meeting the litmus test for pension health under the new reform model.
But that is if the analyst’s estimates are accurate and if the $200 million means after the Parking Authority’s debt is satisfied. Then too there needs to be a plan for what happens to the Authority if its debt is paid off. At that point, the City’s overall parking function would be limited to enforcement, permitting, revenue collection, and traffic adjudication. It should be wholly out of the business of trying to build and operate parking structures and lots. That could be left to the private sector.