The Tribune Democrat, Johnstown, PA

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June 18, 2013

11th-hour pension reform push begins

HARRISBURG — The head of the union representing Pennsylvania public school teachers and Gov. Tom Corbett’s budget secretary are two of the speakers expected to testify today before a House panel examining pension reform.

The committee hearings come days after the pension plans received a report from an actuarial group that raised new questions about the cost of pension reform. That analysis, completed by Buck Consulting, estimated that the changes could end up costing the state billions of dollars more than doing nothing. The actuary found that the reforms would save Pennsylvania money each year for more than a decade. Then, the state would begin to lose money each year. By 2045, the state would have lost $21 billion, according to that actuary’s analysis.

As the fund nears its the time in which it is dissolved, the pension’s investment managers have fewer options available to them. Some of the best performing investments have 10-year commitments, and with those no longer in play, the pension would expect to make less from its investments, said Evelyn Tatkovski, Public School Employees’ Retirement System spokesman.

“An analogy to this example is when an individual nears their retirement date; they need to change the structure of their investments as their investment horizon has shortened,” Tatkovski said. “It is important to have a total, transparent understanding of the impact of any pension reform before any important policy changes are made. While transition costs may be more of an issue in future years than current years, that does not make understanding the impact and cost any less important.”

A spokesman from the governor’s budget office dismissed those estimates as a “red herring.” Budget Secretary Charles Zogby has repeatedly tried to dismiss these concerns by arguing that other studies have found that the costs associated with closing out a defined-benefit pension are “trivial” compared to the other savings that would come from the pension reforms.

The Corbett administration has estimated that the two main public pension funds in Pennsylvania have a combined funding shortfall of $47 billion.

For fiscal year 2010-11, the commonwealth’s General Fund contributed $518 million in state taxpayer dollars to SERS and PSERS. By fiscal year 2017-18, that contribution is expected to rise to $3.359 billion, a

548 percent increase.

Rep. Fred Keller, R-Union, a co-sponsor of a House bill that would implement the governor’s suggested reforms, said that people who do not have a stake in pension reform may not feel like it’s an important issue.

But the cost of dealing with the pension will be crippling, and the state got into the pension mess by using tax dollars on other priorities instead of the pension, he said.

Rep. Brad Roae, R-Crawford, another co-sponsor of that legislation, said that if the state doesn’t act, within five years

10 percent of the state budget will need to go toward pension costs.

The House bill would solve this problem by delaying some of the state’s employer contributions and switching new employees to a 401k-style pension plan.

Those who have already retired will see no change in their pension benefits. The plan would not change the benefits already given to existing employees, either.

The governor and House Bill 1350 would add reforms to control costs associated with existing employees future benefits.

The reforms include capping pensionable income at Social Security maximum wage base of $113,700 and using the employee’s average salary from his or her highest five years of earnings.

“Pension reform is the most critical of the three” big ticket issues being considered this spring, Roae said.

But with so much focus on liquor privatization and transportation funding, “It will be an uphill battle to get pension reform done by the end of June, so we will end up passing it in the fall,” Roae said.

 

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