PENNSYLVANIA GOVERNOR RELEASES PENSION REFORM PLAN: YET ANOTHER “LESS DRASTIC” ALTERNATIVE TO THE BREACH OF VESTED RETIREE PENSION CONTRACTS.
– ACCRUED PENSION BENEFITS WILL BE HONORED; HOWEVER GOV. CORBETT WILL PURSUE CHANGES TO CURRENT EMPLOYEE RATES OF PENSION BENEFIT ACCRUAL GOING FORWARD.
– NO ATTEMPT TO BREACH CONTRACTS, OR TAKE VESTED RETIREE PENSION BENEFITS. “THE TAXPAYER BEARS THE ENTIRE INVESTMENT RISK OF THE PLAN.” “THIS UNFUNDED LIABILITY IS ESSENTIALLY A STATE DEBT.” “A HEALTHY FUNDING RATIO IS CONSIDERED 80 PERCENT.” “THIS IS A DEBT OWED, AN OBLIGATION ON WHICH THE STATE MUST MAKE GOOD.”
On November 26, 2012, Pennsylvania’s Governor released a proposal for pension reform in the state. He proposes that the state honor its current public pension debts to retirees, (as well as accrued pension benefits of current employees.) The Governor proposes that the rate at which current employees accrue public pension benefits going forward be reduced. This is essentially a proposal made by Professor Amy Monahan of the University of Minnesota School of Law.
The Governor’s proposal is admirable in that it does not attempt to deny the state’s public pension debt. Denial of the state’s public pension debt is the immoral and illegal approach that was taken by the Colorado PERA Board of Trustees in SB 10-001, adopted at the 2010 session of the Colorado General Assembly.
A reduction of the rate of future accrual of public pension benefits by current employees is unquestionably a “less drastic” alternative than the actions taken by the Colorado Legislature . . . breach of vested PERA pensioner contracts. This immoral and illegal act on the part of the Colorado PERA Board of Trustees will delay true, legal, prospective pension reform in Colorado by up to five years, thus the PERA Board action’s will result in Colorado taxpayers bearing additional billions in public pension debt. A question exists regarding whether this action on the part of the PERA Board constitutes breach of fiduciary duty.
The Governor of Pennsylvania also forthrightly states that public pensions are well-funded at an 80 percent funded level. Thus, he agrees with the U.S. ratings firm, Fitch Ratings, and with professionals in public pension administration in the United States who are not seeking to welch on the public pension debt. This position of Pennsylvania’s Governor exposes the stunning level of deceit and hypocrisy in this regard on the part of the Colorado PERA Board of Trustees.
Here are excerpts from a recent news article in Pennsylvania:
“Gov. Tom Corbett’s Budget Office released the Keystone Pension Report Monday in a press release, providing a comprehensive overview of Pennsylvania’s public pensions and demonstrating the impact pension contributions and unfunded liabilities have on the state’s budget.”
“The report outlines the current pension situation facing Pennsylvania, identifies factors that have contributed to Pennsylvania’s pension crisis, and offers a framework for considering structural redesign and reform of the pension system to ensure long-term stability of the plans.”
“We will not touch accrued benefits, nor will we allow the pension problem to continue for future generations. We need to fix this problem for the future stability of both the pension systems and the commonwealth’s budget.”
Full article available at this link:
Governor Corbett’s Keystone Pension Report is available for download at www.budget.state.pa.us.
From the Keystone report:
“Like the stone that locks an arch into place, Pennsylvania seeks a keystone-that integral lock that can both secure the delivery of essential programs and services to our more than 12 million residents and make good on the state’s pension obligations to public employees.”
“Reform must pave the way to a future that enables us to provide sustainable support for the core functions of state government and fulfill our consitutional mandates, while meeting our pension obligations to Pennsylvania’s state government and public school employees.”
“An important characteristic of DB plans is that the commonwealth, and ultimately the taxpayer, bears the entire investment risk of the plan, which is reflected in the annual employer contribution rate that the commonwealth must contribute.”
(My comment: Colorado PERA, apparently, does not understand that PERA retirees do not bear market risk. This is extremely odd, since Colorado PERA employs more than 200 public pension professionals.)
“In other words, the total liabilities (future retirement benefits to be paid) exceed the total assets of the combined plans by $41 billion in 2012. It is important to note that this unfunded liability is essentially a state debt owed to state workers and public school employees.”
“The latest actuarial valuations show that SERS is 65.3 percent funded, while PSERS is 69.1 percent funded. When the valuations of the two systems are combined, as Exhibit 9 shows, they are just under 68 percent funded. A healthy funding ratio is considered 80 percent. The funded ratios of the two systems are expected to continue to decline in the next several years, hitting a low of 55.2 percent for SERS and 59.4 percent for PSERS before they begin to slightly rebound.”
“Former public and school district employees worked throughout their careers to feel secure in the fact that the pension payments they now receive in retirement will not be affected by any reform that the commonwealth undertakes.”
“That being said, components of current employee’s prospective benefit can be changed to conform with prior court determinations regarding deferred compensation. Given the current state of both pension systems, it may be necessary to explore changes to prospective benefits for all current public and school district employees.”
“Pennsylvania has incurred $41 billion in unfunded liability. This is a debt owed, an obligation on which the state must make good.”
“As part of their pension reform efforts, several states have instituted increased member contributions. Depending upon the state, increases have been instituted for either current or new employees, and in some cases, both.”
“Increasing the retirement age even two to three additional years can yield significant savings. Pension benefits would still remain competitive, while allowing public and school employees to retire with security.”
“Changes in how the basic pension formula is calculated, particularly the factor by which years of service and salary are multiplied could result in significant long-term stability to the systems.”
Governor Corbett’s public pension reform proposal has been advocated by Law Professor Amy Monahan at the University of Minnesota School of Law.
In her paper, Public Pension Reform: The Legal Framework, Monahan writes:
“What if, ten years into X’s tenure with the state, the state announces that effective immediately, pension benefits will only accrue at the rate of 1% of salary per year? I have argued that such prospective changes should be permitted absent an explicit agreement protecting against such changes.”
“This Article has argued that pension benefits that have already been earned through services rendered to the state should be protected against impairment, but that it is hard to find legal justification for protecting the rate of future benefit accruals.”
Link to Monahan law article: