Why Pennsylvania needs Public Sector pension reform

Governor Corbett discusses pension reform in Dresher

Governor Corbett discusses pension reform in Dresher

Last week I had an opportunity to attend one of Governor Tom Corbett‘s mini-town hall meetings on Pennsylvania‘s precarious public pension situation.

The Governor is spending a lot of time this Summer pushing the need for public sector pension reform to improve the State’s financial health and put a lid on spiraling property taxes.  The problem he is facing is that the Pennsylvanians who pay taxes do not view Pension Reform as a problem let alone a problem-with-high-priority.

Much of this disconnect comes from the plain fact that most voters do not understand how State pensions work; how much they cost; or how they affect the other real problems with which my fellow Pennsylvanians can readily identify.

Recent polls (Quinnipiac University 2013, Franklin & Marshall 2014) found that Pennsylvanians recognized Unemployment, the Economy, Education, and Taxes as the biggest problems being faced in the Keystone State. These opinions are even more disconcerting from a taxpayer’s point-of-view, because it illustrates a very basic fact about the magnitude of the pension problem …

Few appreciate how the State’s pension mess plays into the perceived problems in Education, Taxes and the Economic Health of Pennsylvania.

For that you must look at the numbers.

  • $47,000,000,000. (billion with a capital “B”) … The current pension funding gap in Pennsylvania
  • $65,000,000,000. (also with a “B”) … The projected pension gap by 2019.
  • 63 cents of every $1 in revenue … 63% of PA State revenue currently goes to cover State pension responsibilities
    • That is, $2 Billion per year, all covered by PA tax payers
  • $13,000. … The amount each Pennsylvanian would have to pay to cover the current pension fund gap.

State-pensionsForty-one percent (41%) of the annual State budget goes to Education funding.  Another 40% goes to support Health and Human Services (and yes, that’s BEFORE you factor in the potential of accepting ObamaCare’s proposed Medicaid expansion, which will be funded by the Federal Government to only 90% of costs after 2016) …

The budget percentages for Education and HHS are equally important in understanding the overall picture.  Why?

For one, they illustrate the impact both Education and Social Services have on the State budget.  When you spend 81-82% of your budget in two specific areas, it does not leave much room for the other good things State government can do.  These huge obligations place the State in a financial straight jacket.  Pension costs make up a significant burden to school districts and public healthcare providers insofar as those costs are a subset of whatever funding is provided by the State.

As an example, when a School District receives its annual budgeted funding, they must – each and every year – immediately set aside a significant portion of that funding to be applied towards that school district’s allotment of pension coverage.  As pensions costs grow, school districts are forced to pay more and more for their pension service; meaning they will have less and less to spend on actual education.

pension-reformSo when you speak of those “real problems” facing Pennsylvania … Education, Unemployment, the Economy and Taxes … there is a genuine, behind-the-scenes connection between pension costs obligations and all those REAL problems.  And more importantly, to financing any solutions to those REAL problems.

So what’s State and local Government to do?  What tough choices do you make now?  Do you raise Property Taxes again?  Do you raise Corporate Taxes in a state which is already has the HIGHEST corporate tax rate in the country?  Or do you do something about the most easily identifiable and underlying problem?

As a taxpayer, this is a chilling reality.  If you subscribe to the theory that high taxes kill Economic Growth, raising Corporate Taxes is not the BEST alternative.  (And yes, that also goes for a Job Creator like the Natural Gas Industry.)  Neither is raising Property Taxes, which is what school districts must do to meet the growing pension budget hole.

Pension reform won’t lower current property taxes however.  Replacing pension plans does nothing to alleviate the pension obligations already facing the State and local school districts.  It’s a solution for the future, by putting a lid on rising property taxes by replacing an unsustainable pension structure with one that lessens the future burden on taxpayers!

If you are not yet convinced, take a look at recent examples in countries like Greece and Italy, where excessive pension costs drove cataclysmic threats to economic stability.  Or take a look closer to home …

CT Emanuel_Method_04.JPG

Chicago Mayor – and former White House Chief-of-Staff Rahm Emanuel

When uber-Liberal Rahm Emanuel left the cozy confines of The White House as President Obama’s Chief-of-Staff to become the Mayor of Chicago, the first major initiative he undertook was to tackle Chicago’s financially threatening pension problem.  To take a peek at what could happen to cities in Pennsylvania if leaders do nothing, look at what has happened in Detroit!

The Rahm Emanuel story is critically important for one reason many people might overlook.  It illustrates that this is not a problem restricted to one political party or the other.  Pension costs with all its ramifications – from taxes to education to health services to economic vitality – is a Democrat and Republican problem.

So what is the real problem with Pennsylvania’s nightmare pension scenario?  It’s reliance upon Defined-Benefit public pensions …

This is not a new problem, not in the pubic sector, not in the private sector, not in the manufacturing sector, not in the financial industry.  Individual companies, whole industries, other States, even the Federal Government have recognized the threat to financial stability presented by growing defined-benefit pension obligations.

In the interest of full disclosure, I am employed in the Public Sector by the Federal Government since 1980.  In 1986 the federal government introduced a two-tier retirement system under the Federal Employees Retirement System Act of 1986.  The Act essentially grand-fathered all existing employees under the existing Civil Service Retirement System (CSRS), while requiring all new employees – hired after the laws effective date – to participate in the Federal Employees Retirement System (FERS).  The reasoning behind the switch from a Defined-Benefit CSRS to a hybrid Defined-Benefit/Defined-Contribution plan was much the same in 1986 as it is now for Pennsylvania in 2014.

This is pretty solid framework for changing Pennsylvania’s Pension Problem.  Allow those already vested in current defined-benefit pensions alone.  Address a change in pension structure only towards new employees at all levels of government!

In the Federal Government, FERS provides its own two-tiered approach, consisting of a Defined-Benefit where a minimum government contribution is mandated.  Then the federal government fully matches any employee contributions up to 5% of salary (the percentage matched drops on additional employee contributions) made to the Thrift Savings Plan (TSP), which acts essentially like a 401(k) with employees able to choose investment options of differing risk and return.

That the Federal Government is out in front of Pennsylvania on anything – by nearly three decades no less – should be more than a little troubling to Pennsylvania tax payers!  And this again is a problem whose responsibility falls squarely on BOTH political parties.

Former Gov Tom Ridge, not exactly the brightest light on pension sanity

Former Gov Tom Ridge, not exactly the brightest light on pension sanity

In 2001 it was the Tom Ridge Republican administration that cut a foggy-headed deal with the Pennsylvania House of Representatives, where both Democrats and Republicans agreed to significantly increase the pension benefits of Legislators, state workers, and teachers.  (Not surprisingly, those same Legislators all got fat pay increases as part of the deal!)  Then they compounded their stupidity by slashing the taxpayer contribution to service that very same pension obligation. 

It’s a case of an entire government turning a blind eye towards its very own economic future!

Changes to the way employee pensions are managed and financed have been rippling through the entire U.S. economy, most drastically of course in the private sector, where change depends not on the consensus of 250 State Legislators, who are so intimately tied to the very benefits economic reality demands must change.  It is virtually impossible – in this day and age – to find an employer who will provide an employee with a defined-benefit pension plan.

It’s a Republican-Democrat problem that will need both parties in the State Legislator to step up to the plate and get fixed.

Now, I’m not sure Governor Corbett’s approach is necessarily the best alternative for Pennsylvania’s particular pension situation. The devil is always in the details.  However, you must admire Corbett’s tenacity in pushing for pubic awareness of a problem very difficult to fully understand and always controversial … And for doing so during an election year!

That – my friends – is Leadership with all its risks and political exposures.  Like the national bi-annual conniption over Social Security insolvency, it’s always the first person who goes through the door that gets bloodied. 

Yet this is a problem to which even tax & spend liberal Tom Wolf has begun to awaken.  Oh wait a minute … That was for his furniture company, not necessarily the tax-paying citizens of Pennsylvania!

All politics aside, the message is clear.

If you live in Pennsylvania and believe that the REAL problems we face are Education, Taxes, and Economic Growth, you simply must recognize the threat that growing pension costs pose to the economic health of The Keystone State.  Tell this story to your Pennsylvania neighbors.  Let your voice be heard by demanding your State Representatives and Senators act together with Governor Corbett to address pension reform NOW!

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4 thoughts on “Why Pennsylvania needs Public Sector pension reform

  1. Unfortunately, Corbett is a spokesman that no one listens too. I hope Wolf will help correct the problem, cause Corbett has been thrown out with the trash.

    • Thanks for the comment …

      You are a bit too optimistic on Wolf’s ascendency, I think. But Wolf shows absolutely no interest in REAL pension reform so far. Why? Well for one thing, he’s a Democrat desperate for support from the Unions, particularly those in Philly. Wolf will NEVER take up the aggressive measures needed. He will band-aid it so as to maintain his power base.

  2. You’re not going to see much change until the Legislator stops it’s corrupt direction. Then crack open that juicy fruit that is the Turnpike Commission.

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