April 2010 Column - Pension Reforms Needed if Pennsylvania is to Avoid a Financial Crisis in 2012-13
By Dave Hickernell, State Representative
98th Legislative District
Pennsylvania ended the last fiscal year with a deficit of more than $3 billion. In other words, we spent more than $3 billion more than the revenue we collected last year. This year, revenues are already $487 million below estimates. Even more troubling is the fact that Pennsylvania’s current economic troubles are small compared to the problems we will face in 2012-13 if something is not done to address the looming crisis in our public employee pension systems.
The Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) are the pension plans for hundreds of thousands of Pennsylvania teachers and public employees. These plans are funded by a combination of contributions from the employee, the employer which in the case of PSERS and SERS means the taxpayers of Pennsylvania, and returns on investments made by the retirement systems.
In the 1990s, PSERS and SERS were flush with cash. Because investment returns were high, contribution amounts for employers were reduced and benefits were increased for retirees of both systems.
Following the terrorist attacks on our nation on Sept. 11, 2001, the financial markets experienced a dramatic downturn. Because the return on investments made by PSERS and SERS began to diminish, both systems started to feel the financial pinch. Act 40 of 2003 changed the funding methodologies for both systems allowing them to spread the effects of those investment losses over 30 years, while enjoying the benefit of investment gains over a 10-year period. While Act 40 enabled the pans to spread the losses over a period of years, the 10-year period is set to expire in 2012-13.
The current economic recession is also having a serious negative impact on the value of these plans. The employee contribution level is set by law, so when investment returns are down, as they are now, Pennsylvania taxpayers are on the hook to make up the difference when the 10-year period expires in 2012-13. That is particularly troubling news given the tremendous budgetary pressures we are already facing.
Although the exact amount of any rate increases depend on market conditions, it is likely that both PSERS and SERS will see substantial rate increases in 2012-13. Something must be done to reform the systems and offset these massive liabilities or Pennsylvania families will be facing a large tax increase.
Some have suggested the best way to address the crisis is to switch from the current defined benefit plan to a defined contribution plan. Unlike a defined benefit plan which promises retirees a specified monthly benefit at retirement, a defined contribution plan requires the employer and the employee to make contributions to the employee’s individual account under the plan at a set rate. The employee’s retirement benefit is based on contributions plus or minus investment gains or losses.
While this seems like a good solution, the state Constitution and supporting case law make it clear that benefits cannot be reduced for current employees already enrolled in the retirement system. So, while switching to a defined contribution system could help avoid this problem with future system participants, it will do nothing to resolve the immediate problem we are currently facing.
The House Republican Policy Committee’s Government Reform Task Force has been examining the problem and considering legislative solutions to help solve it. The Task Force has met with various stakeholders including school boards, educators, local governments and representatives from SERS and PSERS, and they are developing a legislative package to address this crisis.
Every option is on the table as the task force prepares their recommendations. I look forward to working with my colleagues in the Legislature to develop a solution that will enable us to avert this crisis without imposing a tax increase on Pennsylvania families.
Rep. Dave Hickernell
Pennsylvania House of Representatives
Contact: Sean Yeakle
House Republican Public Relations