Pennsylvania law might guarantee state employees a set pension when they retire, but mathematics has its own laws.
All the legal protections in the world mean nothing if a pension plan is insolvent. Retirees in Detroit just found this out. If our commonwealth is to avoid this hard lesson, we need to act with a political resolve that has been lacking too long.
Every dollar saved through pension reform is another dollar for our children's educations, or another dollar to help get someone off the waiting list for services they need, or another dollar to keep our citizens safe.
The facts are simple:
For nearly a decade beginning in 2001, the state significantly expanded pension benefits without covering the costs of this expansion and then compounded the error by failing to pay what it should have into its two pension funds - the State Employees' Retirement System and the Public School Employees' Retirement System - underfunding the systems by more than $5.9 billion.
The Great Recession of 2008 brought the political games with pensions to an abrupt halt. Global financial chaos in past decade, coupled with the near collapse of the mortgage industry, set off a chain of events that produced close to zero gain for investments of all types - including pension funds, which rely heavily on investment income.
Pennsylvania, like many other states, had counted on a 7.5 percent return on investment. It never arrived. Instead, the burden went on the taxpayers to make up the difference and the pension hole deepened.
Right now, SERS and PSERS are a combined $50 billion short of what they need to cover current and future retirees, and the figure is climbing. By 2018, the unfunded liability for pensions will pass $65 billion. Every household in this state will owe $13,000 to cover that debt.
The financial world has noticed.
In the past year Moody's and Fitch, two of the major investment ratings firms, lowered the state's rating. The lower your credit rating, the higher the interest you pay on what you borrow.
So what happens next?
If we do nothing the short answer is, "pay more, get less."
In the case of PSERS, roughly half the pension cost is borne by school districts, meaning skyrocketing property taxes.
As more of the state budget goes to covering pension debt, money is crowded out for everything from classrooms to public safety. Potential job creators will take one look at this tax burden and turn away.
Pension debt could drag Pennsylvania into an economic death spiral.
We need to do two things:
First, we need to face economic reality.
We must address our spiraling pension costs at both the state level and in every school district across the commonwealth. This will mean hard choices, including how the state will pay for another $600 million in state funding to our current obligations to our employees and retirees. Doing nothing is no longer an option. It will only make the bad worse.
Second, we need to rethink how we do pensions in the years ahead.
The traditional pension structure must be replaced with 401(k) style defined contribution plans. We can no longer have the taxpayer foot the bill when investments don't live up to expectations. Nor should we rely upon old return assumptions in hope that we can grow our way out of the problem.
I am urging the General Assembly to help our state and local school districts by passing pension reform by the end of this session. I ask each of you to call your local legislator and do the same.
With your help, we can pass pension reform now.