Pension Reform Plan Fiscally, Legally, Ethically Defensible

Legislative leaders have rightly characterized the reform of our public pension systems as Pennsylvania’s top budgetary issue. On May 13, with six weeks to go before the June 30 budget deadline, the Senate Republicans moved on Senate Bill 1 (SB1), an extensive reform plan. The legislation will help keep spending under control and negate the need for new taxes, especially the massive tax increases proposed by Governor Tom Wolf.

The decisive 28-19 vote on a bill that would alter pensions for state workers in SERS, and school district employees in PSERS, came in the face of protests from public sector unions and their allies in the General Assembly. In the past, this powerful alliance underwritten by union PAC money, has managed to block other key legislative reforms, restricting business growth.

The trouble for the public sector unions is that they have no natural allies outside the General Assembly on this one. No one, as Senator John Eichelberger (R-Blair) points out, but the public sector unions oppose SB1. “I talked to business people. I talked to hard working people in the private sector who not only support the bill they are starting to get resentful (of the cost of the public pensions),” Eichelberger said.

The protests from the unions and their allies were predictable: the bill is unfair; they didn’t have time to read it; it will be overturned in court.

What’s unfair is how the combined $53 billion unfunded liability in SERS and PSERS is undercutting other government services. The Independent Fiscal Office estimates that it will take $2.4 billion in General Fund revenues next fiscal year to cover the state’s obligation (as the employer) for SERS and PSERS. That’s money that could be spent on other core government services. The sin is compounded by the fact that most of the $2.4 billion only covers the cost of the unfunded liability. 

What’s more, even though the Senate acted quickly after the bill’s introduction, the substance of the bill has been known and debated for years. At its core, SB 1 places future state and school district employees in a defined contribution rather than a defined benefit plan. The new 401(k) style system would be more in line pensions in the private sector. 

A PSERS's analysis calculated that teachers starting their careers this year, if this legislation were law, would receive an end-of-career pension of about 30 percent of a teacher starting this year under the current retirement system. At a recent Monday Morning Briefing at the PMA, Rep. Warren Kampf (R-Chester) noted that those retiring in the PSERS and SERS systems now receive between 75 percent and 90 percent of their full compensations while working.

To get at the heart of the unfunded liability, SB1 reduces a multiplier in the final calculation of the pensions of those currently working. It returns the multiplier to 2.0 from the 2.5 bump the General Assembly approved in 2001 (Act 9). Employees can stay at the 2.5 level but must contribute more to the system. Senator Majority Leader Jake Corman (R-Centre) explains:

“We were able to change the contract with employees during good economic times, increasing their benefits under Act 9 of 2001. At times when we are struggling due to the economy, this bill provides a choice for employees to pay more to maintain that extended benefit or return to the previously agreed to levels and keep more money in their pockets.”

PMA President David N. Taylor added that the Senate took the important first step in a debate that has to happen. “We can’t continue to go down this road pretending these massive pension costs will just go away,” Taylor said. “It’s serious enough to lead us into ruin.”

The unions are predicting the courts will overturn any bill that adjusts benefits of current employees. Recently, the Illinois courts shot down a 2013 law there that reduced future cost-of-living adjustments for retirees and raised the retirement age for some workers.But a spokesperson for the Senate Republican Caucus said they are confident the plan will be upheld, if it’s challenged.

A Caucus legal analysis provided by Jennifer Kocher: 

“SB1 allows employees to choose to keep the increases provided in Act 9 or choose a reduction in contribution and benefit. Act 9 changed employee benefits, representing an increase during good economic times. The bill is prospective only and will not affect benefits from series rendered prior to the effective date of SB1.”

“Courts will allow impairment of contract in order to protect the public interest. We believe that SB 1 protects the public given the instability of the pension fund combined with the structural deficit of the Commonwealth. It also makes this a case of first impression (case in which a question of interpretation of law is presented which has never arisen before in any reported case) for the PA Courts. The U.S. Supreme Court has acknowledged that legitimate state interests may exist which would allow for Constitutional impairment of a contract. For example in Rhode Island, given the financial distress of the state, the general assembly updated unearned current and future employee benefits to ensure that the cost of current and future benefits does not jeopardize the state’s ability to provide for public education, infrastructure, programs for the elderly and other vulnerable populations, and public safety.” 

With no sound arguments, the public sector unions and their allies are left with downplaying the seriousness of the crisis. They want to let Act 120 of 2010, the only prior attempt to stop the runaway pension train, play out.

Act 120 began as a Rendell Administration effort to limit the state’s obligation to SERS and PSERS, an obligation that was spiking that year. Republicans then insisted on some reform in exchange for the “collars” desired by the Administration. The General Assembly enacted limited reforms along with the “collars” but lawmakers have said they knew that would have to come back sooner rather than later to enact real reform. In fact, even the author of the bill, then State Rep. Glen Grell (now the newly hired executive director of the Public School Employees' Retirement System) said at the time that this was a temporary fix and that more would need to be done in future legislative sessions. 

Even Governor Wolf has slightly changed his stance. He campaigned by saying there was no pension problem at all and that we need to simply let Act 120 work. But he now has a disastrous plan to borrow $3 billion to place in PSERS, the more troubled of the two systems, and attempt pay the debt off with increased profits through the modernization of the liquor system. That’s a topic for an entirely separate PMA Bulletin, but as Warren Kampf said at the recent PMA briefing, the Wolf plan simply replaces one debt for another.

Meanwhile, the House State Government last week approved a Kampf bill that moves future hires to a 401(k) style pension plan but doesn’t touch the multiplier for current employees. The House State Government Committee is scheduling hearings on SB1, and the pension crisis in general, soon after lawmakers return to Harrisburg June 1.

Whatever version is finally approved, the public pension crisis is now rightfully at the forefront in the budget process . As Senate Majority Leader Jake Corman said at a recent Press Club luncheon in Harrisburg, there will be no budget until there is action on meaningful pension reform because pensions are the budget.