November 26, 2012

Budget Office Releases Report On State, School Pensions

The Governor’s Budget Office released the Keystone Pension Report Monday, providing a comprehensive overview of Pennsylvania’s public pensions and demonstrating the impact pension contributions and unfunded liabilities have on the state’s budget.
The report outlines the current pension situation facing Pennsylvania, identifies factors that have contributed to Pennsylvania’s pension crisis, and offers a framework for considering structural redesign and reform of the pension system to ensure long-term stability of the plans.
“Absent meaningful structural pension reform, the state’s General Fund budget is on a very predictable path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government,” Budget Secretary Charles B. Zogby said. “With a clear understanding of the crisis and the challenges we confront, it is imperative that Pennsylvania find a workable solution.”
Contributing factors to today’s pension crisis include previously instituted expansions to retiree and member benefits, nearly a decade of state and school district underfunding of contributions, and less-than-expected investment returns.
As a result, both the State Employees Retirement System (SERS) and the Pennsylvania School Employees Retirement System (PSERS) pension programs are less than 68 percent funded. A healthy pension funding ratio is about 80 percent funded.
In addition to the unfunded status of the pension systems, the report describes the growing nature of required employer contributions needed to fund the current cost of the pension benefits, as well as addresses the unfunded liability.
Contributions are expected to rise significantly in the coming decade, reducing the state’s ability to pay for mandated programs and services like medical assistance, public education, public safety, roads and bridges.
Next year’s revenue growth is expected to be nearly $819 million. Of that total growth, pension costs are projected to claim about 62 percent. That translates to more than $511 million that could have been spent on programs and services.
Without any pension reform, the state must continue spending reductions to account for this amount in balancing its budget.
While the report paints a stark picture of the pension crisis in Pennsylvania, it also outlines a framework for developing a solution to the crisis. It calls for a unified approach to pension reform involving the General Assembly, stakeholder groups and the pension systems.
The goal will be to build long-term stability to the pension systems and make them more affordable for the state and, ultimately, the taxpayer.
“The taxpayers did not create this problem, nor did commonwealth or school district employees. As we move forward, we must keep the taxpayer top of mind and not harm current and past employees,” added Zogby. “We will not touch accrued benefits, nor will we allow the pension problem to continue for future generations. We need to fix this problem for the future stability of both the pension systems and the Commonwealth’s budget.
“Over the next several months, it is my hope that by working together we can begin to institute meaningful reform.”
The Keystone Pension Report is available online.