In Pennsylvania, state lawmakers have had a problem common among politicians. They’ve liked to increase benefits, but didn’t like making anyone pay for them.
This history of generosity has helped put Pennsylvania’s public pensions into a deep financial hole. But steps to remedy that are now catching up with state teachers and taxpayers.
Forced to cover the higher pension checks, state and local taxpayer funding for PSERS, the big retirement plan for public-school educators, has risen year after year, soaring from just over $600 million in 2010 to $5 billion this year.
Now a little-noticed provision of a reform passed in 2010, known as the “shared risk” rule, has come back to haunt PSERS officials — and teachers, too.
Under the rule, teachers, not just taxpayers, must pay more into the $64 billion pension system whenever profits fall short on investments.
In an embarrassing admission, its board said on Monday that the policy meant many teachers will face a hike in their payments this year. This was the first time this has happened since the law was adopted.
The board for PSERS — the Public School Employees’ Retirement System — acknowledged it had previously endorsed an inflated number for investment returns, a figure it incorrectly thought was just high enough to spare teachers any increase.
PSERS’s sister plan, a $35 billion fund for retired state workers, is bound by the same risk-sharing test. But that plan, known as SERS, said it passed its exam last year, with profits easily cresting the official target.
Even so, the plan for SERS, the State Employees’ Retirement System, remains $22 billion short of what it needs to pay its future pension obligations. The bigger PSERS plan, for its part, has an unfunded liability twice that.
For teachers and other retired public-school workers, PSERS’s reversal means about 100,000 staff hired since the 2010 law was passed will see their payroll deduction bump from a typical 7.5% to 8%. The most recently hired will pay a little more than that.
How does Pennsylvania compare to other states when it comes to its pension burden on taxpayers and teachers?
Comparative figures show that PSERS and SERS now collect 35 cents in annual funding from taxpayers and teachers for every dollar of payroll. That’s more than twice the 17-cents median for 50 selected state plans, according to the Center for Retirement Research at Boston College.
Why are costs so high?
One factor is historical.
When Social Security started nearly a century ago, government employees were largely exempt. Even today, some police departments, including Philadelphia’s, don’t require participation in the federal retirement program.
While Congress brought most public workers into Society Security over the years, a lingering result was a legacy of more generous public pensions, built up when those pensions for workers were the only safety net for them.
Moreover, in Pennsylvania, the state constitution has been interpreted to forbid any reduction in public-employee benefits once they are negotiated, though changes can be made for future hires.
Retirement costs also go up as retirees live longer and as slow-growing states and cities find themselves paying more retirees than active civil servants, as Pennsylvania and Philadelphia have in recent years.
But the main reason for the high cost comes down to politics — the clout of public and teachers unions and the timidity of lawmakers who approved raising pensions but left them underfunded for years.
As a result, the payments to Pennsylvania’s retired teachers and government workers are typically higher than to retirees in similar jobs in the private sector, studies show.
Unions are well represented on the pension boards.
Of the 15 PSERS board positions, five are members (one retired) of the Pennsylvania State Education Association, the main union for the state’s teachers.
The board chairman is the former president of the union for teachers at Lower Merion School District in Montgomery County. At the plan for state workers, the chair is the executive director of AFSCME Council 13, the largest union for such employees.
As for politicians, the price of their timidity in Pennsylvania is now $65 billion, their combined deficit.
Underfunded pensions boost government costs in other ways. The large deficits have helped depress the state’s credit rating, adding millions to the interest taxpayers pay Wall Street to finance public projects. Pension deficits are larger, and credit ratings lower, in only a few states, notably Illinois and New Jersey.
Philadelphia’s plan has around half the assets actuaries say it needs. Just to keep that deficit from getting worse, the city spends more each year shoring up the pension fund than it pays police.
The struggle to fund the pensions will now be hitting home for teachers, as well as taxpayers, while PSERS leaders struggle with investigations and calls for reform.