The PA State Pension Crisis: What Happened and What Can Be Done?

It is no great secret that the PA state teachers retirement system (PSERS) is seriously underfunded.  PSERS, along with the other state system (SERS), is in the hole by about $50 billion. Surprisingly, PSERS not long ago had a sizeable surplus which topped out at about $6.9 billion in the late 1990's.  So how did we go from surplus to crisis?

A Manufactured Crisis

In 2001 the Republican leadership in the General Assembly and Governor Tom Ridge foolishly decided to increase state pensions by adopting Act 9 into law.

• The amount of years needed to become vested in the pension system was reduced from 10 to 5.
• Lawmakers increased their pension multiplier from 2 to 3 (50% increase in benefit).
• Prior to this change, a Governor's staff would not get a pension, even if they served two terms with that Governor.
• The multiplier for PESERS participants went from 2 to 2.5 (25% increase in benefit).

Local lawmakers voting yes to the 2001 pension grab included Pat Browne, David Argall, Julie Harhart and Bob Freeman.  Amongst those voting no were Jennifer Mann, former teacher Richard Grucella, Steve Samuelson, Lisa Boscola and Charlie Dent.  The result was an increased number of retirees in the system and a relatively steep icrease in retirement benefits.

It is important to understand that at the same time the legislator was passing Act 9 they were also reducing their own payments into the system; in essence taking a payment holiday.

Yr.           Member Contributions  Employer Contributions 

97-98            5.62%                            8.76%

98-99            5.69%                            6.04%

99-2000        5.72%                            4.61% 

2000-01        5.77%                            1.94%

2001-02        6.43%                            1.09%

It is also worth noting that teachers steadily increased their contribution rate eventually reaching roughly 7.5%.  The combination of the Act 9 pension grab, the pension payment holiday, and two economic downturns, erased the earlier surplus and the pension crisis was born. 

Pension Reform was Passed in 2010

• New hires moved back to the 2% multiplier and now again needed 10 years to be vested.
• The qualifications for full retirement (superannuation) were increased.
• New employees could not utilize the lump sum option.
• A shared risk clause was added to guard against the effects of lower investment returns.

Act 120 was estimated to save PA taxpayers about $33 billion through 2033/34 and was supported by the public sector unions.  The new law also set up a payment schedule which spread the employer contribution increases out over time.  Obviously Act 120 helped, but did not erase the unfunded liability.

Additional Reform

Let's Get Rid of the System or Put All members into a 401K

In considering reform it is important to understand that the state pension system is protected by the state constitution. Article 1 section 17 of the state constitution prohibits changing plans for current members.  On at least two occasions PA courts have prohibited employers from changing benefits for present members.  See City of Erie v. Pa. Labor Rels. Bd. 2011 and  FOP v. City of Johnstown, 2012.  Moving new hires to a 401 K plan would be legal but would not solve the present liability.  In fact, with no additional payments coming in from new hires, the underfunding of the present system would probably get worse.  Most, if any, cost savings from moving new hires into a 401 K would not be realized until those new hires retire many years down the road.

Governor Corbett's Plan

• Introduced last year during the budget season.
• Seeks to move all new hires into a 401K and places present employees into a hybrid system. 
• Benefits already earned would have been frozen and all of the new money earned would go into the new 401K plan.  
• The final calculation of benefits would be based on the final 5 years of service as opposed to 3.  
• It is unclear how the courts would have viewed the governor's plan had the General Assembly brought it up for a vote.

The Max Myers Plan

• Max Meyers was a candidate in the Democratic Gubernatorial primary who dropped out early. 
• Advocated for a tax on financial transactions to be utilized until the system became fully funded. 
•  This plan never received much attention.

The Grell Plan

•   Establishes a cash balance plan for new hires.
•   Borrows $9 billion to help fund the present pension plans. 
•   Received some initial enthusiasm but never moved forward for a vote. 

The Tobash Plan

• Establishes a hybrid plan for new employees. 
• The first $50,000 would be part of a defined benefit plan while everything after that would go towards a defined contribution plan.  
• Supporters estimate the plan would save $11-15 billion dollars over 30 years.  
• The Public Employee Retirement Commission recently released their actuarial note on the proposal, which estimated the savings at only $3.5 billion to $7.2 billion over 30 years. 
• Both supporters and opponents of the plan agree that the Tobash plan does not save money in the immediate future and would have no effect on the budget for next year.

Fortunately state pension plans do not have to be 100% funded unless every single person who is vested retires at the same time.  Experts on the subject often site 80% funded as relatively healthy.  Both PSERS and SERS are probably between 60 and 70% funded with PSERS in slightly better shape.  

I'm sure pension reform will continue to be a hot topic.  In searching for a solution, perhaps it would be good for the legislature to hold hearings to study some of the options.  It also might be wise to bring all of the stakeholders together to discuss the issue and work towards a solution.  Presently, pension reform in PA seems to be little more than a political football with no real end in site.