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Pa.’s unfunded pension liability up to $74B

Reformers estimate that public-sector pension burden increases $172 per second

There is still time to cut Pennsylvania’s public-sector pension liability, which now stands at an estimated $74 billion, according to a pension debt clock unveiled last year by state retiree and pension reform activist Barry Shutt.

But action by the General Assembly and governor needs to happen soon, said Shutt who was joined at a news conference Tuesday by lawmakers, a government watchdog group, and an actuary and pension policy specialist.

The biggest problem with most recent reform bills, reform advocates said, is that they address only future benefits of new state and public school hires. They do little, if anything, to tackle the unfunded liability, which advocates calculate is growing by about $172 per second. 

Most recent reform plans call for a move to a defined-contribution, or 401(k)-style plan for new hires. Some lawmakers have proposed hybrid plans that blend elements of the current defined-benefit pension system with a defined-contribution plan, while decreasing the vesting period and increasing the retirement age and length of service.

Rep. John McGinnis (R-Blair), who supports many of these plans for new hires, said that is just one step.

Without a companion bill to pay down the existing liability, lawmakers are simply “kicking the can down the road,” he said. 

The last so-called reform law, Act 120 of 2010, is “not working and has never worked,” McGinnis said. That law helped address an anticipated spike in pension costs for state government and school districts by “smoothing” the increases over a long period of time, plus it reduced benefits for new hires.

But all the law did was grow the pension liability, McGinnis said. Also, pension investments don’t always appreciate in value as much as expected each year, which adds to the problem.

He is planning to introduce a plan that would gradually increase state and school district contributions above current levels and hopefully retire the current liability problem by 2037, which is when many current state and school employees in the pension systems will be retiring.

The proposal would require the state and school districts to increase their payments by about $800 million in the first fiscal year, with annual payments growing by 2 or 3 percent range thereafter.

When asked why more politicians aren’t pushing to increase pension payments, reform advocates such as Rick Dreyfuss, an actuary, said it’s a big political risk.

Increased pension spending generally means cutting funding from other programs or raising taxes. Republicans and Democrats routinely battle on those issues, which usually leads to a bipartisan agreement to do neither, reform advocates said.

McGinnis compared the pension issue to the opioid crisis in Pennsylvania. If the consequences of doing nothing on pensions manifested tomorrow, lawmakers would be out in force trying to solve the issue, much like they are doing with opioids.

But it will likely be 15 years yet before Pennsylvania reaches “D-Day” on pensions, when all pension fund assets are fully depleted, so most legislative proposals go after what most people deem the easier route, which is a new plan for future hires that stops the bleeding. 

If and when depletion day arrives, payments to retirees will be made on a pay-as-you-go basis and will have to come out of the state’s general fund, reform advocates said. Those payments will likely consume 40 percent or more of annual general fund revenues in perpetuity.

The current general fund budget is $31.6 billion.

“The cost of doing nothing should frighten all Pennsylvanians,” said Shutt, who said he would be happy to pay taxes on his retirement income if it meant addressing the debt burden.

“We need to do the right thing and fix the problem,” said Eric Epstein, a government watchdog with Rock the Capital. “The price of doing nothing is not an option. This is the issue. This is the main issue.”

Gov. Tom Wolf will deliver his next budget address on Feb. 7. Pension reform is expected to be a top issue in the Republican-led General Assembly during budget season. 

McGinnis said he’s hoping for meaningful reforms this year to keep pensions from becoming a campaign issue in next year’s gubernatorial election.

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