There are 24 million active and retired members of state pension systems. Prior to 2008, most of these beneficiaries and future participants of retirement plans felt secure with their retirement plans because of steady contributions from states and stable market conditions that assured that pension assets would grow, not decline.
As the economy tightened, states deliberately withheld contributions to funds to pay for other priorities. Pension fund investments in securities teetered and crashed in 2008. These forces combined to plunge pension funds into a hole nationally that may be as high as $3 trillion.
In Pennsylvania, we are looking at a financial abyss of $41 billion with projections that the unfunded liabilities of our own pension funds may reach as high as $60 billion in the next few years.
Some legislators point to the Act 120 pension fix that was enacted in 2010 and believe that it adequately addresses the problem. Nothing could be further from the truth. The “fix” contained in Act 120 actually placed additional burdens on every school district in the state.
What this means is that, unless substantive pension reforms are made now, school districts will be faced with their own $1 billion shortfall. They will be forced to make drastic cuts in their budgets – meaning firing teachers, cutting kindergarten and pre-school programs, trimming course offerings – or increase property taxes.
Make no mistake: a vote against pension reform in 2013 is a vote for tax increases at the school district level in the very near future.
State workers point out that they are not the cause of the problem. This is true. Workers have been putting their own portion of contributions into the system for years. But, because of bad decisions on benefits and underfunding by state officials over the years, combined with market realities that exacerbated the debt, the current structure is simply unsustainable.
Walking away from the reality of the pension crisis would be irresponsible. Worse, it would force the state and school districts to cut into the bones of vital services to meet pension obligations that will only grow worse.
The governor has proposed a dramatic change from the so-called defined benefit arrangement for state employees to a defined contribution plan for new employees that would shift the risks of market swings from employer to employee. While this has become the standard system throughout the private sector, it does present some realities that must be considered.
It may be that a revised system that “stops the bleeding” but does not place the onus entirely on workers is possible. For example, a “cash balance plan” is a type of defined benefit plan that incorporates the minimum benefit of a traditional defined benefit plan with the transparent, predictable cost and flexibility of a defined contribution plan.
At least one proposal has surfaced that is seeking this middle ground.
Other tweaks that should be considered in order to save the system may include:
-- Extending the service years required for benefits eligibility.
-- Increasing employee contributions.
-- Adding anti-spiking provisions.
Whatever the final package looks like, one thing is absolutely clear: the Legislature cannot afford to do nothing. Pension reform is an urgent problem in need of statesmanlike solutions.
With other “big ticket” items like transportation funding, liquor sales and the General Fund budget deadline looming, it is possible, and, perhaps predictable, that legislators will walk away from the tough decisions on pension reform.
Their constituents deserve better. They deserve elected officials who square their shoulders and tackle pension reform head-on. The consequences of taking no action are severe for all Pennsylvanians.
I am convinced that voters will come to understand
what is at stake in the weeks ahead and demand that their elected officials rise to the occasion.
Mark Singel, a Johnstown native, is former lieutenant governor of Pennsylvania as well as former acting governor (1987-1995). He is president of the Winter Group of Harrisburg, dealing with government and public affairs.