Rapp:?Major work ahead on pensions

There’s a growing problem in Pennsylvania.

Years of continual neglect in Harrisburg have created a monster that could gobble up ever-larger slices of the budget pie.

For nearly a decade, through four governors and an ever-changing state General Assembly, Pennsylvania’s public pension system has been chronically underfunded.

In the heady days of early 2001, fresh from the economic boom of the Clinton years, Pennsylvania faced a far different pension situation. At the time, the Public Schools Employees’ Retirement System (PSERS) and State Employees’ Retirement System (SERS), Pennsylvania’s two public pension systems, were actually funded at more than 120 percent. In other words, the funds had over 20 percent more money than was needed to meet all liabilities.

That May, the state legislature and former-Governor Tom Ridge made Act 9 law. Under the measure, future benefits for public employees were increased, but the law worked retroactively as well, giving then-current employees a boost to benefits already earned.

In the wake of the September 11, 2001 attacks, financial markets declined decreasing returns on state pension fund investments. Under a defined benefit plan, like the state’s pension system, when investments decline, employers make up the difference to meet payment obligations.

Rather than cover the losses, in an effort to keep spending down, in 2002 and 2003, the state passed legislation limiting the maximum share of pension funding the government could provide.

Since then, investment returns have not increased to make up the difference between state contributions and liabilities creating a steadily growing cancer within the budget.

By the 2010-11 fiscal year, SERS contributions made up five percent of payroll costs and PSERS contributions made up 5.6 percent. This year, SERS contributions make up 16 percent and PSERS contributions make up 16.9 percent. These figures are projected to grow to at least 30 percent by the end of the decade.

What this means in real dollars is the system currently has $50 billion more in liabilities than total assets.

This growing deficit has led the state to a position where employee contributions for pension are expected to increase by approximately $600 million, more than double the contribution necessary two years ago.

According to Gov. Tom Corbett’s current budget proposal, “This unfunded liability is essentially a state debt owed to state workers and public school employees.”

With that in mind, Corbett’s proposal again brings reforming the pension system forward as a major policy initiative in the coming year. Last year, along with transportation legislation and liquor privatization, pension reform was one of Corbett’s major policy initiatives. Of the three, only transportation reached passage.

Corbett is advocating a plan to move toward a defined contribution, rather than the current defined benefit, plan such as a 401K and gradually increasing the maximum percentages the state is permitted to contribute to the funds until they meet annual required contribution amounts; all while maintaining current benefits for retirees and preserving benefits already earned by current employees.

Meanwhile, what any final plan to address pension reform looks like, ultimately will be up to the Pennsylvania General Assembly.

While a number of proposals have been floated over the past year, none have yet gained traction in the legislature.

Locally, state Rep. Kathy Rapp agreed the issue must be addressed.

“As far as pensions, that’s another issue that’s in the stages of talk. It’s in discussion,” Rapp said. “That’s another issue where we are at the point where I believe we must do something. We’re about $47 billion in underfunded pension. We can’t just keep paying less than the expense and that’s where we’re at.”

How she would vote potential legislation, however, depends on what form that legislation might take.

“I don’t know where I’ll be on the pensions,” Rapp said. “It’s still in the discussion stage of what the governor wants, what we in the House and Senate want. Typically, what happens is the leadership in the House and the Senate, they’re going to get together with the governor and then they come back to us and say, ‘Here’s what the discussions were and we’re going to move ahead on this and we’re in agreement with the governor on that but we’re not in agreement with the governor on that area.’ It’s a process that we’re working very hard at to bring a final document to present to the people of Pennsylvania. Hopefully with no new taxes and no new spending.”

Rapp said that whatever form reform might take, it needs to preserve the benefits promised to current and former employees that have paid the required contribution to their pensions.

“We are committed that they receive that pension,” she said. “I have said all along that our focus needs to be on new employees. That’s where we need to start and have our new employees go into that defined contribution. At the same time, while we do that, we have to make sure that that pension is solvent. So whatever we do, it’s still going to affect the people at the other end. What I’ve heard from the house majority leader is that the House is going to be focused on new employees and we need to make sure that our retirees right now receive their pension. That was a promise.”

Rapp tried to put the issue into terms that are easy to understand.

“He was stating to me and this is just an example, we can’t continue to pay $3 billion in pensions when just the interest at seven-and-a-half percent is $4 billion,” she noted, cited an example of how the situation is being handled now in a fellow legislator’s words. “We cannot continue that. We have to do more. Pay in more than what gets eaten up in the interest. If you have any type of bill, if you pay less than the interest, you’re going to be paying on that bill a whole long time.”

Any decision, according to Rapp, is going to be difficult.

“So these are tough decisions and tough times regarding the pension,” she said. “Nobody likes it, but I think we have to step up to the plate and do more. I don’t know where we’re going to get the money, but we’re just constantly kicking the can down the road. So I’m hoping that we can tackle this issue. That’s my hope. That’s been a priority of many of us for a couple years, but there hasn’t been the courage there and the wherewithal to really take it on.”