Kick the Can

When you see the words "fresh" and "collar" together you probably think of laundry detergent, not pensions. But the state House has just passed their idea of pension reform for the two statewide systems SERS (state employees) and PSERS (teachers) that involve a fresh start for unfunded liabilities and collars-or maximum percentage amounts that the state or school districts have to contribute will grow year over year.

What does that mean? It means that there would be annual caps on how high employers would have to put in to the pension system in coming years. For PSERS the employer contribution rate (both the state and school districts pay in) would rise from 5.64% in FY11 to 21.20% in FY15 instead of the current trajectory of 8.22% to 33.60% over that same time frame. For SERS (only the state pays in) the employer rate would increase from 5% in FY11 to 20.50% in FY15 as opposed to the current planned increase of 5.64% to 27.72% over the same time period. The year over year incremental growth rates beginning in FY11 would be 1%, 3%, 3.5%, and then 4.5% from FY14 on. Savings on the state’s share from the changes range from $211 million in FY11 to $1.2 billion in FY15.

In other words, get immediate, short term relief for nagging pension pain by spreading it over a longer time frame.

Step Right Up and Play the Pension Shell Game!

Here is a story that could only come out of New York: there is a plan afoot to allow the state and its municipalities to borrow money from the pension fund in order to make pension payments into the pension fund and then repay the money back, at higher interest, beginning in 2013. In all the state would borrow somewhere in the range of up to $2 billion and local governments could take on $4 billion or so. According to the most recent Census of governments New York has 57 counties and over 1,500 municipalities.

The symptoms sound eerily familiar to what is going on in Pennsylvania: enhanced benefit packages and a declining stock market have caught up with each other to weaken the underpinnings of the pension system. Rate spikes are projected for the Commonwealth’s two plans for state workers and school teachers in the next few years as a result of deals brokered in the early part of the decade, and municipalities have been granted tax increases (Philly and Pittsburgh) and some time to get a breather from retirement contributions.

But no one has yet suggested dipping into the pension trough to take care of the obligations.

State Pensions on Fed’s Tab?

Piggybacking on a theme at the end of today’s Brief an article in today’s Financial Times examines recent research done on the condition of statewide pension systems done in part by a professor at Northwestern University that asserts more than half of the states might find themselves with insolvent pension systems in two decades.

The professor notes that the fiscal strain could put "pressure on the Federal government for a bail out that could potentially cost more than $1,000 billion".

In 1994 the university’s home state of Illinois had a $17 billion gap for its statewide pension fund that it planned to retire by 2011. Today its unfunded liabilities stand at $78 billion.

As we pointed out today with the expected rate spikes for PSERS, as well as SERS and the weight of unfunded liabilities in Philadelphia and Pittsburgh, pressure is building toward finding a long-term solution. A Federal bailout would be far from it.

Teachers Can Help With Impending Pension Funding Increase

With school districts facing as much as a sixfold jump in the amount they must pay for teacher pensions by 2012, teachers are very worried that school boards will have to cut programs and/or staff.

School districts and teacher unions are asking Harrisburg for a fix that will help cover the additional funding. Good luck with that. The state faces its own enormous pension payment increase and its finances are very shaky with looming huge deficits.

What to do? If teachers and their union leadership want to avoid program and staff cuts, they should offer to help. They should agree: (1) to accept a voluntarily salary freeze and (2) agree to pay more for health care. These actions would help to offset some of the impending huge pension payment increases.

Union leaders argue that school districts have been derelict by underpaying into the pension system. Maybe they should consider that the strident position taken by unions during bargaining, backed by the right to strike, have already stretched to the limit the ability of taxpayers to support schools. No group has fared better economically than Pennsylvania’s teachers during good times and bad. Virtually no layoffs, protection of underperformers, excessive, blind support by Harrisburg of the public school system, and lack of accountability are the real problems. Addressing those is the best place to start. In the meantime, let’s see if teachers are willing to offer school districts any help with the pension payment hike.

Is There Any Optimism on the Pension Situation?

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.

The Perfect Storm

When will elected officials tackle the building pension crisis? According to researchers at the American Enterprise Institute "it is only when the gloom of crisis finally descends that public officials will muster the will to address the mismatch between [pension] promises and resources".

Obviously in Pennsylvania that gloom arrives at different times-with two statewide systems (one for teachers, one for state workers) and more than 3,000 local government plans-depending on the funding status and weight of unfunded liabilities. It could be easily argued that the gloom is on Pittsburgh. Just yesterday the Council approved its Act 47 amendment that calls for an additional $10-$14 million per year to be put toward pensions. Philadelphia is at that point as well with unfunded liabilities of close to $4 billion and a funded ratio of 55% in 2008, only besting Pittsburgh (29%) and Atlanta (53% in 2007) according to a Pew Charitable Trust study of the issue. The majority of other local plans entered the economic downturn with healthy funded ratios. Now the Public Employee Retirement Commission is trying to build consensus for municipal reform, including an option to shuttle the most troubled municipal plans to state control and oversight.

The day of reckoning for the statewide systems in Pennsylvania is closer to 2012 when rate spikes are expected to take hold. A presentation made to the Senate Finance Committee last month showed that the employer (school district) pension contribution is supposed to grow from 4.75% in 2011 to 16.40% in 2012. The companion state retiree system shows employer contribution rising from 8.79% in 2011 to 28.30% in 2012.

That same AEI study notes an expert as saying "once granted, a pension is a contractual obligation of the employer" and taxpayers will be on the hook for any shortfall. Not a reassuring situation for a state contemplating tax hikes or a region where its largest County just added two new taxes and its largest City is looking for a variety of tax and fee options.

Lumping in Pensions

Obviously content with the progress in merging the City of Pittsburgh and Allegheny County, the Chief Executive (along with other county officials) convened a panel on local pensions yesterday that examined what should be done with the 3,100-plus plans that dot the Commonwealth. "Should there be a statewide municipal pension fund?" was one question the Executive asked.

The answer is "it depends". If the plan is to absolve local governments completely of there liabilities, it is unlikely to happen. Philadelphia alone accounts for nearly $4 billion in unfunded liabilities, the lion’s share of the total local unfunded liability. If there is a voluntary movement to the existing PA Municipal Retirement System where there would be management of investments but local governments still make contributions, it would be possible but it would be a gradual process.

But it is not true that consolidation would allow municipalities to withstand market downturns or pressure from parties interested in increasing benefits as the Executive seemed to imply. Consider that the state’s two statewide pension plans-SERS for state workers and PSERS for teachers-have been hammered by the downturn. And since these huge plans cover so many workers the impact of rate spikes are much more widespread. We already know that both systems are set for big jumps in the employer contribution rate due to promises made by the Legislature in the early part of the decade. School districts could see a tripling of their rates. One school official noted "even though we know we are coming up to a cliff, nobody’s been willing to address that cliff ahead of time".

Strength in numbers? Maybe, maybe not.