Getting Serious About Public Sector Pensions

A Tribune Review article of November 8 reminds once again just how desperate the unfunded pension plan situation is for many Pennsylvania communities, including the two largest cities as well as several midsized cities. With assets to liabilities ratios below 50 percent in Pittsburgh, Philadelphia and Scranton and others below 65 percent, there can be little doubt that a crisis is at hand.

Legislators are saying it is time to get serious. But if the plans being contemplated are not more forceful than the municipal legislation passed in 2009 or the legislation dealing with the state’s own pension difficulties already drafted, we can expect little correction of the underlying problems and no lasting improvement in the underfunding situation.

Drastic steps need to be taken and very soon.

Dealing with the pension difficulties will require legislators to face up to the real problem. Simply put, public sector pension plans are too generous. Municipalities, the Commonwealth, and school districts are saddled with long term obligations to retired and current employees that cannot be met without: (1) diverting large amounts of revenues from fundamental, core functions of those governing bodies or (2) raising taxes to such a punitive level that the affected economies and tax bases stagnate or shrink and populations decline.

Attempts to fix this legacy cost problem by having the state assume more of the responsibility to fund municipal pensions as well as its own will choke off any efforts to reduce the size of state spending and to lower the business tax burden that has been so detrimental to the Commonwealth’s ability to grow economically.

Search for effective and meaningful answers must address the size and growth in pension liabilities-what is owed to retirees and eligible employees. Several proposals have been discussed such as having new employees put in 401 (k) or similar defined contribution plans. Clearly, that is a major initial step but unfortunately will not make a significant dent in the problem for many years.

It is time to tackle the issue head on. Pennsylvania needs to make two fundamental legislative and constitutional changes. First, the legislature must make it easier for municipalities to enter into Chapter 9 bankruptcy to deal specifically with massive unfunded pension obligations for which there is no solution other than ruinous tax hikes or crippling service cuts. Second, the state needs to amend the Constitution to remove the requirement that public sector employees must receive all money they have been granted contractually for any municipality that has entered into bankruptcy because of its legacy cost difficulties. Private sector employees enjoy no such guarantee. If their employer fails and cannot maintain contractual benefits to current or retired employees, adjustments can be made through bankruptcy.

Obviously, legislative language must be very careful to avoid permitting capricious misuse of the bankruptcy provisions. Employees and retirees deserve to be and must be protected to the greatest extent possible consistent with the level of financial distress of a community filing for bankruptcy. At the same time there must be recognition of responsibility. Cities that have made overly generous commitments and now cannot meet their obligations cannot reasonably expect taxpayers in other municipalities who have been more prudent to provide the funds necessary to solve the legacy cost problems of irresponsible communities. Retirees enjoying handsome pension and other benefits in a city that cannot provide for current basic services have no ethical or moral claim on taxpayers in other communities.

Obviously, many hearings and debates will be necessary before these dramatic proposals can move toward legislative language and bill enactment. Still, the very process of entertaining the possibility of forceful steps could engender some meaningful, voluntary compromise that would help ease the crisis substantially.

At the very least, bankruptcy should offer an opportunity to renegotiate the terms of pension plans for future retirees so as to increase the number of years needed to be eligible for full benefits; limitations on the use of overtime or other non-standard pay in the calculation of retirement benefits; and reductions in the percentage of pay received for each year of service.

When dire situations such as the pension crisis arrive, it is necessary to confront the real causes of the problem and not kick the problem down the road for someone else to deal with when it will surely be much worse. Adequate provision of core government services without wrecking the economy with higher taxes must not be held hostage to decisions made by previous governing bodies to be excessively generous to public employees.

Another Alarm Bell Sounded on State Pension Plans

The American Legislative Exchange Council (ALEC) has taken a look at state pension plans and the picture is not pretty: on average, these pension plans were 81 percent funded and carried a total of $359 billion in unfunded liabilities. Pennsylvania-reflecting the SERS, or state workers pension plan-reported a funded ratio of 84 percent and $14 billion in unfunded liabilities. Some states (DE, NY, OR) eliminated any unfunded liabilities while others (IL, LA, OK) were among those with low funded ratios.

With public pension plans assuming a high rate of return and being heavily slanted toward defined benefit type plans, the study notes that the solution lies in "fundamental reform". This would mean looking at the level of benefits and phasing in new defined contribution (401k) type plans for new hires.

This would be sound advice as the state inches closer to the date when huge rate spikes for its state workers pension plan and the teachers’ pension plan as well as the multitude of local pension plans that are in trouble.