June 2010 Column - House Passes State Pension System Reforms
By Dave Hickernell, State Representative
98th Legislative District
While our state and national economies may be showing the early signs of recovery from the worst financial crisis in generations, Pennsylvania still faces some very difficult challenges. When the 2009-10 fiscal year ends on June 30, Pennsylvania will have a budget deficit of more than $1 billion. Very simply, state government is spending more money than we have available and sooner or later, taxpayers are going to get the bill.
Unfortunately, that very serious problem is minor compared to the financial crisis facing 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. Both are defined benefit plans, which means each employee is entitled to a specific retirement benefit, established by a formula based on years of employment, at his or her retirement. These plans are funded by a combination of returns on investments made by the retirement systems, contributions from the employee, and contributions the employer which, in the case of PSERS and SERS means the taxpayers of Pennsylvania.
In 2012, PSERS and SERS will be faced with a serious cost spike because investment income is down. Because the employee contribution level is set by law, Pennsylvania taxpayers will be on the hook to cover the costs of retiree benefits. That means school boards will be forced to raise property taxes and the Legislature will be forced to increase taxes.
In an effort to mitigate those costs, which could increase by as much as 245 percent, the House recently passed House Bill 2479 which would make changes to the methodology by which the employer contribution rates are calculated. The bill addresses the coming spike in employer contribution rates by incrementally increasing the rates in order to help lessen expenditures by school districts and in the state budget.
In addition, the bill includes several reforms to the pension systems. These reforms would impact only new hires into the system and would not affect the benefits of current PSERS and SERS members or current retirees. First, the bill would rescind benefits provided to system members under Act 9 of 2001. In addition, the bill increases the retirement age and vesting periods for system members and it eliminates the so called “lump sum payout” option for retirees.
Pennsylvania’s public employees enjoy some of the greatest retirement benefit plans in the nation. But if something is not done to address this looming crisis, state government will not be able to afford to continue paying for them without imposing a massive tax increase on Pennsylvania families. While House Bill 2479 will not solve all of the problems facing our state pension systems, I supported it because I believe it is an important first step toward keeping the systems healthy without placing a greater burden on Pennsylvania taxpayers.
Rep. Dave Hickernell
Pennsylvania House of Representatives
Contact: Sean Yeakle
House Republican Public Relations