A Plan For Pension Reform

A Plan For Pension Reform

Glen Grell

The numbers are staggering.

When Pennsylvania’s 500 school districts hammer out their 2014-15 budgets, barring any action from state lawmakers, the employer contribution rate for pension benefits will increase from about 17 percent to 21.4 percent of payroll. In four years, the anticipated rate is scheduled to increase to 32.08 percent.

School district officials across the state are already warning of property tax hikes, program cuts, larger classroom sizes or all of the above.

At the state level, Pennsylvania’s annual share of school district and state worker pension costs is expected to hit $2 billion in the coming fiscal year – a figure estimated to increase to $4 billion within a few years, Gov. Tom Corbett warned during his February budget address.

Corbett repeated last year’s call for state lawmakers to work with him toward a solution. He pointed to the current $50 billion unfunded liability to cover future retirement costs.

But unlike last year when Corbett’s proposal to move new workers to a 401(k)-style plan and impose certain plan changes upon existing workers fell flat, two Republican House members are advancing plans for pension reform. There are expectations that something will get done – if not by the fiscal year starting in July, then by the end of 2014.

The fact that Gov. Corbett is up for reelection this year plays no small part in the chance that some kind of reform will happen. With the latest Franklin & Marshall College poll in January finding that only 23 percent of registered voters believe Corbett is doing an “excellent’’ or “good’’ job, the governor needs a win on the pension problem. Corbett remains “an endangered incumbent,’’ said G. Terry Madonna, the poll’s director.

Corbett’s options on the pension issue include two different plans, one from Rep. Glen Grell, R-Cumberland and the other from Rep. Mike Tobash, R-Schuylkill-Berks.

Grell advocates switching to a “cash balance’’ plan for future employees. Instead of tying an employee’s benefit to years of service, retirees would be guaranteed a 4 percent return on money put into the plan by the employer and employee, and they would share in the “up-side” if actual investment returns exceed the 4 percent threshold. To make budgetary amends for 10 years of plan underfunding by the Commonwealth, and to provide some much-needed liquidity to the retirement funds, Grell calls for the Commonwealth to convert $9 billion of the $50 billion unfunded liability to bond debt, thereby guaranteeing future adherence to the repayment schedule. He said the package of his proposed reforms could lower the employer contribution rates schools are facing to approximately 18.5 percent in the 2014-15 year, rising more gradually and cresting around 25 percent.

Tobash is proposing a “hybrid plan’’ to keep most elements of the existing defined benefit plan for the first $50,000 of employee earnings and shift anything more to a 401k-style plan. Rather than decreasing the looming pension payments for the state and school districts by borrowing, Tobash calls for refinancing the current pension debt and extending the payment schedule. The additional interest costs created would be covered by his plan’s savings, he said.

Neither lawmaker has yet presented legislation for their respective plans; both approaches face skepticism from unions. There are doubts of Republicans supporting the proposed $9 billion of bond debt as called for in the Grell plan. On the flip side, floating bonds to reduce the state’s pension liability appears to be the only aspect Democrats and union members support.

The governor’s office did not return a call seeking comment on the plans, but those familiar with the situation, and according to some media reports, indicate that the Corbett administration is favoring the hybrid solution.

To decrease the state’s $2 billion pension payment for 2014-15 – a $610 million increase – Corbett is asking lawmakers to reduce the payment by about $170 million. Half of the remaining $440 million in new pension costs would be covered by a one-time transfer from the state’s Tobacco Settlement Fund.

The Corbett administration says the deferred payments would be covered by passing a plan to lower future pension costs. This short-term fix is raising concerns that the governor is merely “kicking the can down the road’’ – a phrase heard repeatedly in connection with Pennsylvania’s history of underfunding its pension system. Reducing or skipping payments led, in part, to the current $50 billion unfunded liability and the rise in annual pension contributions faced today.

“This is truly the greatest hole in Pennsylvania’s financial future,’’ said Tobash, who plans to introduce more details about his proposal soon.

Grell agreed that a solution must be found.

“In my opinion, pension funding is the single most critical issue facing the Commonwealth and our school districts,’’ he said. “I don’t know where the breaking point is for people on property tax rates. The more the rates go up, the more likely it is that more people will not be able to afford their taxes.’’

Read the full article in March’s issue of Transactions. Not a subscriber? Visit the Transactions page on this website or call PACB at 717-231-7447 to start receiving the magazine.