Pa. bolsters pension system amid deficit concerns

| Monday, June 30, 2014, 11:00 p.m.

HARRISBURG — Pennsylvania will raise payments into the state's pension systems by $600 million in the new budget year, but experts caution it won't be enough to pay down the deficit.

House and Senate lawmakers didn't vote on Gov. Tom Corbett's proposal to make the pension contributions lower than guidelines outlined in a 2010 law. Other pension reform proposals are pending. The House could vote before recessing for the summer on Thursday, said Stephen Miskin, a House Republican spokesman.

A budget proposal to which legislative leaders agreed would increase payments into the retirement funds by $600 million and contribute $2 billion to combined pension systems for state employees and school workers.

Pennsylvania has $47 billion in unfunded liability in pension obligations, analysts say.

That liability has prompted warnings from credit rating agencies and raised concern that Pennsylvania could be subject to higher interest rates.

The problem is more than a decade in the making and intensified with losses on investments during the Great Recession, actuaries have pointed out.

A 2010 pension reform law under former Democratic Gov. Ed Rendell outlined a “spike and plateau” program to bring pension funding in line with obligations. This proposal will take decades to pay down the deficit, state records show. The estimates assume a return rate of 7.5 percent on retirement fund investments.

“I believe (the schedule) is optimistic and not the most likely to be achieved,” said Rick Dreyfuss, a pensions expert and consultant with the conservative Manhattan Institute for Policy Research. He said there is no guarantee the state will pay down its pension deficit on schedule.

Corbett's idea of reducing the payment would have compounded the underfunding problem, Dreyfuss said.

“What the bond-rating agencies are saying is, ‘We want a debt-management program,'” he said.

Corbett spokesman Jay Pagni said the governor wanted to limit the increase in pension contributions by half, in order to free up about $300 million that could go to struggling school districts and other education expenses.

“Combining that immediate relief with long-term reforms, you're looking at savings of $11 billion to $15 billion in pension costs,” Pagni said, referring to projected savings on a pension reform proposal that Corbett has backed publicly.

The proposal would save money by covering new hires under a hybrid plan. The plan by Rep. Mike Tobash, R-Schuylkill County, would cover earnings up to $50,000 a year under a guaranteed pension plan like that offered to current state employees; above that figure, new employees would switch to a 401(k)-style plan.

Savings would be reinvested into the pension fund to help pay the deficit down more quickly, said Tobash.

The billions of dollars in savings promised from the plan would take 30 years to add up, but Republican supporters say it's a start.

“At some point, you gotta turn the spigot off,” Miskin said.

Stephen Herzenberg, executive director of Keystone Research Center, a policy group funded by labor groups, cautioned against relying on these long-term savings to forestall a reduced credit rating.

“What the rating agencies care about is whether the state has the revenue it needs to cover its long-term obligations,” Herzenberg said.

The House delayed voting on Tobash's proposal for more than two weeks. It is short of the needed votes.

“The Democrats and unions have refused to come to the table,” Miskin said.

House Democratic spokesman Bill Patton said caucus members see too many uncertainties in the plan.

Rep. Dwight Evans, D-Philadelphia, who sponsored the 2010 pension reforms, said Republicans who push for another more reform haven't given these changes a chance to address the shortfall.

Along with scheduling repayments, Evans' measure raised the retirement age for new state workers from 62 to 65. It doubled the time period before new employees were guaranteed benefits to 10 years.

Gideon Bradshaw is a Pennsylvania Legislative Correspondents Association intern. Reach him at

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