Governor’s Pension Reform: Does It Have a Chance?

Well, it is here; the Governor’s plan to stop the impending budget calamity created by unfunded pension liabilities.  To be sure, the far reaching proposals face a very uncertain future in the Legislature.



A little background.  In the fall of 2012 the Pennsylvania Office of the Budget released “The Keystone Pension Report” detailing the steps that have produced a $41 billion unfunded liability for the state’s pension plans covering state workers (SERS) and school employees (PSERS). The report also offered suggestions as to how the state might begin a process of addressing the enormous unfunded liability.


Although no specific reforms were recommended by the report-a pension reform proposal was to come, and did, as part of the FY 2013-14 budget address-there was a five point framework for change:

  1. Taxpayers would be put first.
  2. Retirees who had earned their pension would see no changes.
  3. Current employees would not have their accrued benefits touched but “components of current employee’s prospective benefit” could be altered.
  4. The costs should not be shifted to the future.
  5. Experience from other states should be studied.


The Governor’s reform proposals, as spelled out in the 2013-2014 Executive Budget, match up fairly closely with the framework set out by the Keystone Report. Explicitly, there was no mention of a tax increase to fund pensions, so point one was clearly satisfied.  The benefits earned by retirees would remain unchanged and the benefit plan for current SERS and PSERS members would remain the same until 2015.  However, at that point, a lower multiplier for pension benefits, 2 percent times years of service, would be used instead of 2.5 percent unless the employee elected to contribute an amount sufficient to keep the multiplier at 2.5. An average of the last five years of compensation would determine the basis of pension payments. Further, pensionable compensation would be capped at 110 percent of the average salary of the prior four years when determining final average earnings. Then too, the Governor’s proposal would place a cap on the pensionable income at the maximum Social Security income on which contributions are made and benefits calculated. Thus, the reform plan has largely adopted points two and three of the framework with much detail on the changes to future pension benefits for current employees.


To point four, the Keystone Report stated “…any short-term prospective budget relief should be paid for by long-term reforms…” The same year when the alterations to future benefits for SERS and PSERS members are to go into effect all new hires will be enrolled in a defined contribution plan with SERS members contributing 6.25 percent of pay and PSERS members putting in 7.5 percent.  Basically, the state would be closing enrollment in the defined benefit plans offered by the systems (as of 2011 there were a combined 589,000 active, retired, and vested but inactive members) and placing new hires in a 401(a) system.  As members of the defined benefit plan retire and new employees come in the hope is that the costs of the pension system come down, albeit gradually. 


Lastly, the Keystone Report looked at reforms made in other states in 2010, 2011, and 2012 and classified them along the lines of “strategy” (whether the state was asking for higher employee contributions, raising retirement age or service time, and switching from a defined benefit plan to a defined contribution or hybrid plan) and who the reform(s) affected: new employees or both new and current employees.  Much of that analysis came from the National Conference of State Legislatures which has for many years detailed statewide pension reform plans.  In 2012,   Louisiana, Kansas, and Wyoming among others set into motion plans that would close existing defined benefit plans to new employees or create new tiers with higher age and service requirements for new hires.


Interestingly, not all change is happening at the state level.  In 2012, the California cities of San Diego and San Jose both had local ballot measures to amend their city charters’ language on retirement benefits.  In San Diego, voters approved a ballot question that (1) would put all new hires, with the exception of police officers, into a defined contribution plan, (2) permit the City to seek limits on what constitutes employee compensation (through bargaining and negotiation) for pension calculations, and (3) eliminate the ability of current and former employees to vote to change their benefits.  The San Diego Councilman who spearheaded the reform movement argues strongly that only base salary should figure in pension benefit calculations while factors such as overtime, longevity pay, etc., should play no role in pension benefits.


In San Jose, voters approved a question that would require employees to pay more into their pensions or voluntarily move to a plan with reduced benefits, limit benefits for new hires, and require voter approval for increases to future pension benefits.  The reforms, even though receiving a comfortable majority, face court challenges.


Keep in mind that this is just the proposal stage and that the Governor has stayed true to the ideas laid out in the Keystone Report.  It is up to the General Assembly to debate, modify and possibly enact the proposals. Then Pennsylvanians will see what, if any, the reforms can look like.  Would the General Assembly decide to put the issue of pension reform in front of Pennsylvania voters such as happened in cities in California?  The last time a ballot question related to pensions went before the voters was in 1981 when voters were asked if the state Constitution should be amended to allow spouses to partake of increases to benefits so long as the finances of each system extending the benefits were actuarially sound. It was defeated. 


And how will members react when hearing from public sector unions, who, not surprisingly, have decried the proposals in the strongest terms? A state employee union stated in a press release that by proposing a defined contribution system for new hires the Governor is “…trading the promise of retirement security for retirement insecurity” and wants to give the Act 120 legislation more time to work.  The teachers’ union stated that the “…proposal includes costly, unconstitutional changes that won’t solve the pension crisis, but will reduce your pension benefits and weaken the retirement security that you earned and you paid for.” That statement is quite ironic in that the entire motivation for the reform effort is the huge increase in taxpayer funding that will be required to meet the pension obligations.


At this point it is important to ask whether the Constitution’s language means that something passed in a prior legislative session can create a suicide pact for future ones.  According to the Keystone Report the causes of the massive pension problem can be traced to promises made by laws passed in 2001, 2002 and 2003. What does the Constitution say about this predicament? Article 1, Section 17 prohibits the General Assembly from passing laws impairing contracts. Further language in Article 3, Section 26 says that “…nothing in this Constitution shall be construed to prohibit the General Assembly from authorizing the increase of retirement allowances or pensions of members of a retirement or pension system now in effect or hereafter legally constituted by the Commonwealth…”


So what does that mean?  To the first section, the state’s Municipal Pension Handbook notes that “the Pennsylvania Supreme Court has applied [this principle] to the rights of public employees in their pensions…as such, once a public employee has worked even a single day, he or she has not only earned that day’s pay but a guaranteed right to such future pay that formed part of the employer’s promise of compensation”.  On the second, the implication is that when times are good the Legislature could increase pensions but there is no language that allows for a decrease or a cut in a situation like the one faced by SERS and PSERS now. Obviously, the richer benefits should never have been granted because when the bill comes due as it has, the difficulties in undoing the damage will prove virtually insurmountable.


The question is: if it comes to a court battle, how will the judiciary interpret a plan in which the benefits earned up to a certain point are not reduced, but the pension benefits accruing based on future earnings beyond that point are reduced?  Would the courts rule that the Constitutional sanctity of contracts has been trampled?  If so, where do taxpayers go for relief from the ill-considered actions of earlier Legislatures?  Protection of employees is important, but in the private sector, when the pension benefit costs are threatening a company’s survival, relief can be sought through bankruptcy. State and local governments as well as school districts in Pennsylvania are effectively denied that option.


Moreover, if a Constitutional amendment becomes necessary to overcome the problem, it will almost certainly never get the required votes in the General Assembly to go on a ballot and voters have no right to petition the Commonwealth for a referendum.  And even if the Constitution were to be amended, could the new language ex post facto overturn provisions in currently existing contracts or “employer promises”?


If the pension reform fails, the “Pac-Man” or “tapeworm”, as the Governor’s report characterizes the increasing share of the budget going to cover unfunded pension fund liabilities, will eat away at other portions of the state budget.  If the reforms are enacted the proposal envisions that the employer contribution rates will be lowered from an expected 4.5 percent to 2.25 percent in 2013-14, rising by a half a percent per year thereafter. This is instead of rising 4.5 percent per year to top out at close to 30 percent by fiscal year 2016-17. 


It should be incumbent on those persons and groups who view pensions as sacrosanct and inviolate to suggest areas of the budget that can be cut substantially in order to satisfy the pension plans’ need for ever more finding. 


One thing is certain, with the crucial funding requirements for highways and bridges demanding more tax dollars, and with the state’s taxpayers already taxed heavily by state and local governments and school districts, asking for additional billions of dollars in revenue to cover pensions is simply not politically or economically prudent. If all meaningful reforms in the state’s two big pension plans are blocked and no significant reductions in costs are forthcoming, there will be no choice for the state and school districts but to begin slashing other personnel costs. 


Fewer employees, lower contributions to the generous health care benefits, fewer sick day allowances, heavier workloads, pay freezes, etc., will have to be on the table. Employees with the least seniority will take the brunt of the hits given the rules governing layoffs in most contracts. 


There is no free lunch.  Taxpayers cannot afford the massive additional pension burden that is coming and some relaxation of objections to all attempts to stem the tide of increasing pension fund allocations must be in the offing.  Insistence on the status quo will lead to a raft of problems the opponents of reform will not like.  The divisions between government employees and taxpayers will almost certainly widen and grow increasingly bitter.

Bye, Bye Property Taxes?

Can Allegheny County, by virtue of being home rule, eliminate property taxes for the County, its municipalities, and school districts?

It seems like the chances are slim, but there may be legislation to try just that in the near term. Spurred on by the current reassessment, the legislation would apply only to Counties of the Second Class, in other words Allegheny County. The legislator sponsoring the proposal noted that "the best option for the assessment situation is to apply the Home Rule Charter if our local government cannot determine a long-term solution".

Leaving aside the issue of what a tax shift involves, problems abound with the proposal. The language in Section 2962 of the state’s home rule law-the section that prevented petitioners from rolling back the rate of the drink tax a few years ago-rears its head because the section prohibits a charter from giving a home rule entity powers regarding "regulation of public schools", "fixing the subjects of taxation", and "the assessment of real or personal property and persons for taxation purposes". It would take an act of the General Assembly to remove that language from the home rule law.

But there is language in the Allegheny County Charter itself that prevents the proposal from moving too far forward as well. Article I of the Charter says that "this Charter shall not limit in any way the jurisdiction, rights, powers, or autonomy of the municipal governments in the County". Prescribing a cessation to property taxes and a shift to a new menu of taxes via a County driven referendum as opposed to state legislation for municipalities seems to do that. In addition school districts are not mentioned anywhere in the Charter.

Additionally, the legislation would allow County Council to pass an ordinance eliminating assessments. If Council does not do it by a simple vote, "the county council, or the voters of Allegheny County, will have the ability to propose the ordinance through a public referendum." That’s where other problems arise. Article XII of the Charter says that voters can ask for a referendum on an ordinance as long as the requisite number of signatures is gathered and the issue is singular and germane to County government. While property assessments are the domain of the County, can voters put an issue on the ballot that would affect the taxing powers of the municipalities and school districts in the County? Seems unlikely given the 2962 language. And since the Charter says Council can only call for a referendum by ordinance to amend the Charter, is the proposed law going to spell out that Council would be able to ignore that language so they could put a general question on assessments and tax mixtures on the ballot?

Other home rule counties could provide guidance here. There are six, not counting Philadelphia and Allegheny. Many have been home rule since the 1970s, and all still levy property taxes, as do their municipalities and school districts. It is not clear if the General Assembly has tried something like this proposal for them, but if the referenda and initiative powers vested in them by home rule would allow for the elimination of property taxes and replacement of other sources, one would think they would have done it by now. Curiously, two of them-Lehigh and Erie-have new assessments scheduled to go into effect for 2013, just like Allegheny County, which was to have them ready for 2006 before embarking on the present course.

Long story short, if the goal is a tax shift away from property taxes to something else, particularly giving taxing powers to entities that don’t have them now (like sales taxes to schools or wage taxes to counties), it is going to have to be a statewide plan.

Mechanics of the Library Tax

With voters in the City of Pittsburgh approving an additional 0.25 mill to provide dedicated funding for the Carnegie Library system in a referendum this week the logistics of moving from ballot question to handing over money from City coffers to the Carnegie system will commence forthwith.

The ballot question said that the tax would be levied "effective January 1, 2012 and thereafter" and the "plain English" explanation stated "all money raised as a result of this tax can be used to aid in the maintenance and operation of the Carnegie Library of Pittsburgh and cannot be used for any other purpose".

Four communities in Allegheny County currently have dedicated millage for their local library-Brentwood (0.5 mill out of 8.5 mills), Castle Shannon (.514 mill out of 9.4 mills), Robinson (0.1 mill of 3.05), and Wilkinsburg (0.71 mill out of 14 mills). In 2010 those communities raised anywhere from $150k to $389k for their libraries. Pittsburgh anticipates raising over $3 million annually.

How will this money be accounted for? The additional millage will presumably be tacked on to property tax bills and the money will flow back to the City’s treasury. But then what happens? Will there be a separate library fund, or will the money be counted in the general fund? A quick phone survey of the four communities with a dedicated library tax found that only one (Castle Shannon) has a separate library fund for accounting purposes. The others write a check annually or quarterly to transfer tax money from the general fund to the library. Some provide space and cover utilities for the library as well.

Given the sheer size of the City’s Carnegie system, with 19 branches and 5.2 million items, and a budget of more than $20 million with various public, corporate, and foundation sources currently, and the amount of the tax to be generated, it would be reasonable to assume that the City might create a separate library trust or fiduciary fund. The County created a Transit Support Fund once it began to receive monies from the drink and car rental taxes. Perhaps the City will use that same accounting practice.

Carnegie Library System: Comparative Operating Statistics

After receiving little attention in the way of research since the 1990s, the state of the Carnegie Libraries-a public trust of 19 libraries with a collection of over 5.2 million items based in the City of Pittsburgh-has been a much covered topic since 2008.


Continue reading

How Would Library Tax Affect Corporate Giving?

Recommendation Three by the Public-Private Task force concerned with the finances of the Carnegie Libraries of Pittsburgh said this: "provide the citizens of Pittsburgh an opportunity to vote on whether dedicated funding support should be provided to the library". All reports point in the direction that there will be a ballot question in November asking voters if the City’s millage rate should increase .25 of a mill to support the libraries.

Of course, the impact of a voter-supported tax increase goes far beyond those who get to pull the lever. Much of the property value in Pittsburgh is tied to commercial uses, and that includes corporations that may donate voluntarily to the library system. For instance, the ten largest property taxpayers in the City are commercial in nature, accounting for $1.6 billion, or 12% of the total taxable assessed value in the City.

The 2010 annual report for the Carnegie system shows that "unrestricted corporate donations" were $129k, and the overall total from corporations was $818k. How will this giving be affected if a dedicated property tax were to be levied? Will there be a "side effect" on other charitable organizations that receive money from those that give to the libraries voluntarily?

The quarter mill proposed tax increase would raise just under $3 million, of which $2 million would come from non-residential sources (based on previous work on City market values and land use). It is possible that some corporations might view a compulsory tax as a substitute for their voluntary giving. It is also possible that some corporations might keep committing to restricted giving for specific projects while focusing less on unrestricted or general contributions. How the corporate community at-large comes down on the issue of a tax increase will be determined at the time the merits of the tax are discussed.

Act 1, Take Two

210, 102, 61, 133, and 228. Those numbers represent the total number of school districts that received referendum exceptions in the last five fiscal years under Act 1 of the 2006 special legislative session. Act 1 was set up to give taxpayers some say over school property taxes: each district would have an annual index that would determine how high school taxes could increase before triggering a referendum vote in that district. Nothing prevented a school board from increasing taxes up to the index, and the law built in ten exceptions that, if any were granted, would prevent a higher-than-the-index tax increase from going in front of the voters.

In other words, an out.

Legislation just passed last week that would take away seven of the ten exceptions. Left in place are three: for pensions, special education, and for school construction debt. It should be noted that in the last two fiscal years nearly all of the districts that secured an exception (and it is possible to get more than one in a single year) got one related to pension costs.

Conversely, there have been very few chances for voters anywhere in Pennsylvania to get a school tax increase measure in front of them on the ballot and to give it an up or down vote. Just goes to show how extensive the exception net was cast. Voters did get the chance to decide whether they wanted higher earned income taxes or to create a personal income tax in order to shift even more burden away from property taxes: few districts did so.

Is this the first step toward moving to a referendum with no exceptions? Or possibly one where any school tax increase, no matter how large, is put on the ballot in front of the electorate?

Library Referenda: A Condensed History

Proponents of finding additional funding for the Carnegie Libraries within the City of Pittsburgh’s borders want to place a question on the November ballot asking voters in the City to approve a 0.25 property tax increase.

Will the measure pass if placed in front of the voters? Informal data collected by the state Department of Education’s Office of Commonwealth Libraries shows that about half of the recent library tax questions were approved in recent years. Going back to 2001 the data shows eleven referendum questions posed around the state. Five questions were approved, six were voted down. Two of those approvals came in North Apollo Township (Armstrong County); first a levy was approved and then voters opted to retain the tax four years later.

The proposed property tax millage increase for funding libraries ranged from 0.10 mill in Robinson Township (Allegheny County) to 1.5 mills in Chester City (Delaware County). Two countywide referendum proposals (Perry County in 2002 and Pike County in 2009) were defeated. Two questions in the western suburbs of Allegheny County that both went on the ballot in 2003 went in opposite directions: the aforementioned Robinson approved, Moon Township rejected theirs.

If the question does get on the ballot in the City both proponents and opponents can make their respective cases known. According to the 2009 annual report of the Carnegie Library system, its biggest source of revenue is the Regional Asset District sales tax ($17.6 million) followed by the Commonwealth ($5.9 million). The City of Pittsburgh provided $74,000 that year. Both the RAD and state contribution were up compared to 1998’s financial report, but the City’s contribution was down. So one the one hand there could be an argument that the City needs to give more while on the other hand there could be a case made that there is sufficient public sources invested in the libraries.

Charter Members

The respective partisan caucuses of Allegheny County Council will soon be meeting to select members to fill the two vacancies caused by Council members who vacated their seats in order to run for the office of County Chief Executive.  The Home Rule Charter of the County, in essence the local “Constitution”, spells out how vacancies on Council have to be filled (Article III, Section 9b) and that Council members who want to run for another office must first resign their seat (Article III, Section 6b).  Therefore, by all indications we have an instance of the Charter being followed as written.


Continue reading

Is Taxpayer Referendum on Its Way to Pittsburgh?

Pittsburgh Councilman Burgess has introduced a measure to give City voters the power to approve or reject property tax increases. The proposed ordinance calls for a referendum asking voters if they want to change the City charter to require a referendum on all property tax increases. As Reverend Burgess notes, “this is about giving the people the power to fight a tax increase.”  The Councilman should be congratulated for this bold initiative. 



Continue reading

Will Citizens Ante Up for Libraries?

In a decidedly non-Pittsburgh recommendation, The Carnegie Library task force has suggested that if residents are as gung-ho to keep libraries open as they claim to be, then put the question of raising a new tax or diverting an existing revenue stream from City coffers to support the libraries before the voters. How wonderfully novel for the Burgh: a group actually recognizes that there is no free lunch and that going to the state legislature or the philanthropic community is unlikely to produce the money that will be needed over the long term.

In the past it has been all too easy for folks to demand goodies with emotional pleas of how important those goodies are for the community while having no idea of where the money will come from other than an amorphous "stash" someone is holding. And when pressed, the answer is always, "the government wastes money, let them save some and give it to our project."

However, rarely will they go before a legislative committee or council and say for all the world to hear, "cut xyz program and give us the money." And that’s because xyz program has its own advocates and supporters. Thus, the task force was very wise to say to the people of Pittsburgh that if they want more funds for the libraries it is up to them to ask council to put the question to a referendum and then do the campaigning to convince voters that it is crucial for libraries to be kept open and thriving.

Perhaps just making an enormous grass roots effort to convince council to take the referendum step would be sufficient to encourage the members to redirect some funds from less worthy programs. In the words of the old adage, "it is better to light one candle than curse the darkness." Bemoaning inadequate funding for the libraries and the inevitable reductions in service is only meaningful if one is willing to pay a little more for the libraries or work to convince City government that something else it spends money on is less worthy.