Pension Reform: Consolidation Is Not the Answer

Pennsylvania’s pension funding problem didn’t happen overnight, and it can't be fixed overnight.

By David M. Sanko

Executive Director, Pa. State Association of Township Supervisors

Pennsylvania’s pension funding problem didn’t happen overnight, and you can’t fix it overnight. Recently, there’s been a lot of buzz about pension reform, and rightfully so. Pennsylvania is on the fast track to a crisis.

The commonwealth’s pension programs for some 800,000 state workers and public school teachers are in the hole to the tune of $40 billion, a figure that’s expected to climb to $65 billion by 2021 if lawmakers don’t do something soon.

Hastened by Gov. Tom Corbett, the General Assembly and others are searching for solutions, some of which have come to light during a series of fact-finding meetings hosted by the Pennsylvania Employee Retirement Commission. The hearings have focused on the state’s financial predicament, which may force more cuts in services to fund promised retirement benefits.

It appears the meetings have also served as a stage to exaggerate the degree of Pennsylvania’s pension troubles, with calls to consolidate hundreds of healthy municipal plans to fund the debts of a few. This “redistribution of pension wealth” is a bad idea and penalizes the successful while rewarding those in trouble.

Yes, it’s true that a few local governments, primarily large and midsize cities like Philadelphia, Pittsburgh, and Scranton, have retirement programs that are underwater, too. But it’s inaccurate to paint the picture that every municipal pension plan is troubled, or “woefully underfunded,” as some have suggested.

The truth is, many communities – large, small, rural, urban, and suburban – oversee plans that are doing OK, and in some cases, they’re doing much better than OK.

Proof of this comes from PERC itself, which measures the distress level of the 1,439 municipal pension plans that receive roughly $200 million a year in state aid. The money offsets the costs of state-mandated retirement benefits for local police and firefighters and supports pension plans for non-uniformed municipal employees, too.

What quickly becomes clear from the most recent PERC report is that the number of solvent municipal pension plans significantly exceeds the number of troubled ones.

In 2011, 776 were classified as “not distressed” while just 27, including those belonging to Pittsburgh and Philadelphia, were declared “severely distressed,” a term that means the plans are funded at less than 50 percent of liabilities.

This reality, however, hasn’t stopped some from turning the pension problems of a few into a statewide epidemic, and what’s their remedy? Lump everyone together, much like the commonwealth did for state employees and teachers, and create a single statewide municipal pension system.

The consolidation crowd needs to face the fact: The State Employees Retirement System and the Public School Employees Retirement System are bigger, but they’re certainly not better. In fact, they are the lion’s share of Pennsylvania’s pension debt and demonstrate what can happen to large one-size-fits-all systems.

Despite this current state of affairs, though, some state officials continue to insist that the commonwealth is better equipped to oversee municipal pension plans than local government leaders, many of whom have their pension houses in order.

How’s that for irony?

Lawmakers should instead focus on the state and its more severely troubled pension systems. Then, after they know how to tame that $40 billion (and growing) beast should they turn their attention to municipal pension plans. But rather than focus on consolidation, lawmakers should provide local leaders with common-sense reforms that not only preserve locally administered pension plans but also do something we all agree makes sense: save tax dollars.

There are some solutions already on the table that would help all municipal pension plans right away, and there is no need to wait. A proposal by the Coalition for Sustainable Communities would be a good first step. The measure would enable municipalities to move away from the defined benefit plans mandated by law for some local police and firefighters and remove retirement benefits from the collective bargaining process – a practice responsible for strapping current and future generations with budget-draining obligations.

The way I see it, the pension crisis remedy shouldn’t be to make the healthy swallow the same bad medicine as those in trouble. Instead, we should be tailoring solutions that keep healthy plans off life support and put ailing ones back on the road to recovery.

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Stop-Raising-Taxes October 17, 2012 at 04:31 AM
TBP, I've done my economic model already for this scenario. The delta of what this teacher has contributed over 35 years of service, in this scenario, and what this same teacher extracts in retirement is staggering; over $2,000,000 more using the same 5% compounding return. I want to get one thing straight, teachers deserve to be compensated fairly and play a vital role in our society, however their and other municipality CBA’s have become one of the most abusive and destructive root causes for our economic burdens. This is a fact and undeniable. I was just trying to enlighten you to this very disturbing determination. I was hoping you would come to this same conclusion, but unfortunately it seems you cannot. Look, I understand, if I was a teacher I would not want any of my cookies taken away…they are so, so, so tasty and loaded with all types of chips and candy sweets…..? does TBP stand for "To Be Principle"...LOL
TBP October 17, 2012 at 06:36 PM
your math has a lot of assumptions. you seem to be stating all teachers across the entire state are making your high average salary. you also are stating that all teachers work the max in terms of years of service and then all live 30+ years post retirement. if so, that's being a bit dishonest to make a point. regarding the total amount of $$. many people who work in similar professional careers, and have 401k's, amass similar amounts of wealth over the lifetime of their earnings. that is if i use your same formula and say these workers contribute 5%-10% of their salary, get matched 5%-10% of their salary and earn 5%-10% interest over the lifetime of their retirement nest egg. let us not forget that these same folks may also get stock options and bonuses that aren't calculated into the 401k equation. public and private plans have pros and cons. a big pro of a 401K is that all the money you put in is yours and you can take the entire nest egg out all at once (not advised because of tax reasons). a person with a pension can not. they get monthly checks like S.S. non of the above really matters. the issue isn't what teachers have or what a person from the pharma industry has, but how politicians have purposely broken the pension system so as to do away with public education in our state. i can not afford private school for all my children and rely on public school for their education. for all our sakes, i hope we can put our differences aside soon.
DJ2 October 17, 2012 at 08:21 PM
So.... can someone answer this question for me: Finally, can someone more 'in the know' answer this for me: If I have a 401K with company X and my consultant is John Doe, does John Doe make money off of my account (commission or similar)?
Stop-Raising-Taxes October 18, 2012 at 12:42 AM
TBP, See we do agree! Our political leaders have abused the tax payer’s trust and teachers should go to a 401K plan. Teaching is more a calling to public service….and should not be the capitalistic endeavor it has morphed into. As I would have expected, your understanding of 401K is a huge stretch from reality. As for stock options, yes they are nice but they are dilutive to real shareholder value who have bought shares on the open market in whatever investment vehicle they use. DJ2. 401k’s are a huge ruse. Employers typically match a small percentage of the employee’s own contribution using their company stock which is dilutive to real shareholder value and cost the company very little in real money. You are limited to what funds you can buy. These funds typically hold shares in your company stock also “wink-wink” and yes, there are expenses each fund has that pay for management and brokerage fees. Again, 401k were created as an collusive venture between the corporations who got to terminate defined pensions, wall-street where the employees 401K money got funneled too that now allows some greedy fat-cat to gamble with and our politicians who don’t have to play by the same rules they set-up that created 401K’s. In addition, unlike normal investments 401k are very restrictive in when and how an employee can sell out of them. So unlike normal investments that you can set sell order levels on when shares in your 401k start to tumble…you just get to watch.
Arthur Christopher Schaper January 06, 2013 at 08:54 PM
Rhode Island is engaging in comprehensive, decisive pension reform. Everyone, and I mean everyone, is taking a hit, or the state will have to disband all core services just to service the state's massive pension obligations. There must be some way in which state officials can enact a hybrid-transition from public liability into ublic-private funding streams. Gov. Christie of New Jersey requested that the teahers' unions support a 1% increase in their contributions. Because they rebuffed, Christie had to lay off teachers. Walker's buget reforms have saved millions of dollars for cities and school districts while preventing massive layoffs and tax increases. Pennsylvania has a similiar demographic to Wisconsin. Perhaps Corbett should initiate similar budget reforms.


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