October 21, 2016
Laura Ellsworth and Nick DeBenedictis
A solution is on the table in Harrisburg, and it's time to get it done
Why should you care about the pension crisis in Pennsylvania? Because just about every issue that is important to you is impacted by pensions.
Do you care about education? In 2016, 51 percent of every new education dollar in the state budget goes to pensions, not into the classrooms.
How about public safety? This year, 55 percent of new spending for corrections is going to pensions.
Would you like to see local property taxes come down? School district real estate taxes are by far the largest local tax we pay in Allegheny and Philadelphia counties. In Allegheny County, for example, from 2013 to 2016, 73 percent of the school districts increased real estate taxes. The most frequently cited reason was pension costs.
Do you love our beautiful state parks and our environment? Thirteen percent of new funding for the Pennsylvania Department of Conservation and Natural Resources is taken up by pensions.
In total, more than one-third of all state spending increases over the past year are due to pension costs. That’s more than the full budgets of the state Health Department and state police combined.
Mandated pension payments for state employees and teachers in 2017 are $6 billion, a figure that is expected to increase to $7 billion by 2022. That’s another $1 billion a year that won’t be available for human services, or to fix our roads, or to improve our environment or to improve our classrooms. Meanwhile, the taxes we pay go up.
Whatever issue you care about in Pennsylvania, it is being affected by a pension crisis that is eating us alive.
How did we get here? It’s pretty simple.
A government funding its pension system isn’t all that different than your family saving for a big future financial obligation, such as buying a retirement home. You put a little money away every month and expect it to earn a certain amount of interest. Your deposits plus that interest are supposed to add up over time to pay for the retirement home you hope to buy.
A state pension system works the same way. The state puts away a certain amount of money every year and expects it to earn a certain amount of interest. The idea is that, by the time an employee retires, there is enough money to pay the set amount of his or her pension.
The problem, however, is that two things have happened.
First, in some years the state didn’t make annual contributions to its pension funds and spent the money for other things.
Second, interest rates and market performance over the last decade or so have been much lower than they have been historically. As a result, the money didn’t grow as fast as expected.
Where does that leave us? With not enough money to pay everyone in the pension system as they retire.
But here is one important difference between the state pension system and your family: If you don’t save enough, or if your money doesn’t grow as much as expected, you simply won’t be able to buy that retirement home. The state, however, is obligated to pay its employees the pension benefits they were promised. It’s as if you had agreed decades ago to buy that retirement home, whether you had saved enough to pay for it or not.
The difference between the amount the state has saved to meet its obligations and the amount it will owe its employees is, roughly speaking, the “pension shortfall.” This shortfall – for just our state pension systems – is estimated to be $41 billion, which is more than $3,000 per resident of Pennsylvania. If you add in the shortfalls from our local schools and municipalities, that number balloons to $66 billion.
And then there’s this: Just as your credit score would take a hit if you defaulted on your obligations, so, too, does Pennsylvania’s credit rating, And, just as you would have to pay more to borrow money if your credit score were lowered, Pennsylvania does, too.
Let’s also consider the state workers and teachers whose pensions are so dramatically underfunded. They are our neighbors, friends and members of our families, and they have worked and saved their whole lives with a certain expectation of what their pension benefit would be at the end of their working lives. We have an obligation to do what is right by them.
The good news is that there are solutions on the table in Harrisburg that meet key objectives – to maximize costs savings, mitigate taxpayer risk, provide for cost predictability, ensure adequate retirement security for beneficiaries and meet the expectations of existing employees. That’s because these solutions would apply only to employees not yet hired — new employees who would have new expectations.
It is time to follow the old adage, “What’s the first thing you do when you find yourself in a hole? Stop digging.”
After years of effort, our elected leaders in Harrisburg are on the doorstep of real and meaningful pension reform, but there are only a few days left to get it done in this legislative session. We need to get this legislation passed, and your voice is necessary to make that happen.
Our governor and legislators need to hear from the people that we want commonsense pension reform now. Make your voices heard. Contact your representatives.
Laura Ellsworth chairs the Greater Pittsburgh Chamber of Commerce. Nick DeBenedictis chairs the Policy Research Legislative Committee at the Chamber of Commerce for Greater Philadelphia.