By Bill Hileman, PFT Vice-President
The PSERS (Pennsylvania School Employees’ Retirement System) logo is a handshake with the slogan “Partners for Your Future.” But it's not an agreement that PA Governor Tom Corbett and some Harrisburg lawmakers want to keep. Instead, they are planning drastic changes to the public sector pension systems, claiming that the systems are not sustainable. And the public school employee pension fight will be in full swing when Governor Corbett presents his 2013-14 budget proposal in February.
Last spring, Governor Corbett let his true feelings about teachers’ retirement security be known when he stated that PSERS and SERS (State Employees’ Retirement System) together are a “tapeworm” eating the state's budget.
There is no doubt that the state's two public employee pension systems are currently underfunded. But, instead of addressing the funding troubles, the Governor wants to break the deal with teachers and state workers as a way to balance the budget. And he is not going to let the Pennsylvania Constitution get in his way.
In 2000, PSERS was funded at 123.8%. The outlook was promising, with projected payments to retirees sustained by the combined PSERS assets of active member contributions, employer contributions and return on investments.
A decade later, a PSERS report shows the teachers' pension system funded at 69.2%, and the governor says the decline can only be fixed by abandoning the defined-benefit plan and replacing it with a 401(k)-type plan that puts the investment risk on the employee while more than doubling the needed lifetime employee contribution.
Several things have put pressure on the pension system, most notably two big stock market crashes and a decade of employer underpayments into the system. (Employer contributions include both school district and state contributions to the pension plan.)
More than 70% of the value of PSERS comes from return on investments. In 2001, the pension system lost over $3 billion in the market and 2.5 billion in 2002. But the big hit was a result of the 2008 worldwide recession that affected the pension system's value, which declined by a net $15 billion in 2009 after losing $16 billion in investments. The overall growth of investments during the last decade was positive, but not enough to keep the funding ratio near 100%. At the same time, school districts and the Commonwealth were paying into the system at historically low rates.
Other pressures on the system include Act 9 of 2001 that created Class T-D membership and the associated 2.5% multiplier (up from 2.0%) in the basic benefit formula. The new Class T-D members saw their contributions increase to 7.5% of their annual earnings in return for the healthier multiplier. But the increase in employee contribution alone could not cover the increase in pension benefits paid by the 2.5% multiplier, the cost-of-living-adjustment (COLA), and the increase in the post-retirement health care premium adjustment (from $55/month to $100/month). At the same time, an adjusted valuation methodology allowed the employer contribution to fall. Act 38 of 2002 permitted the employer contribution rate to fall to 1.15% of payroll for the 2002-03 school year.
During the 2001-10 decade, active employee contributions to PSERS averaged 7%, while employer contributions averaged 4% of payroll.
To address the increased liability in the system, pension reform legislation (Act 120) was signed into law in 2010. Along with other changes, the new law created PSERS membership classes T-E and T-F for new hires. Class T-E maintained the 7.5% contribution rate with a return to the 2.0% multiplier in the benefit formula. Class T-F increased the contribution rate to 10.3% in order to maintain the 2.5% multiplier. Both Class T-E and T-F have a shared-risk that could increase the employee contribution rate to 9.5% and 12.3% respectively.
Act 120 softened the sharply rising employer contribution for the 2011-12 school year and will limit rate increases for the employer contribution for future years to prevent a "rate-spike" that would bust local school district budgets. The employer contribution rate rose to 8.65% in 2012.
The Act 120 adjustments mean the system is essentially cost neutral for employees hired in 2011 and later. But that does not address the overall underfunding, and Governor Corbett is unequivocal in prioritizing pension reform. Mr. Corbett is holding his cards close to his chest right now. But, in his pension world of finite options, it is clear that he wants to do away with the defined-benefit plan and replace it with a 401(k)-style defined-contribution plan.
In standard 401(k)-style defined-contribution plans, each employee has his or her own account and gains access to it upon retirement. When the distribution payments run out during retirement, the pension is gone.
Governor Corbett may propose a hybrid or "cash-balance" plan. Cash-balance plans have characteristics of a defined-contribution plan for the employee and a defined-benefit plan for the employer. For the employee, it is little more than a 401(k) plan that is administered by a statewide system. A cash-balance plan does not provide the security of a defined-benefit plan.
The Governor and lawmakers who want to change the pension systems are facing a stark constitutional issue that appears to prevent them from turning PSERS and SERS into 401(k) managers. The PA Constitution (Article 1, Section 17) addresses contracts, including the contractual rights of public employees. The retirement benefits provided through PSERS and SERS are, and should be, recognized as deferred compensation for work already performed.
The PA Constitution may be the reason that the Governor and the legislature are not divulging their plans. However, in February 2013, they may push forward with the reform without regard to its constitutionality. Plowing ahead on shaky constitutional footing may land the pension fight in court, consume untold resources while taking years to resolve.
During the past decade, teachers and other public school employees continued to pay their required share into the pension system. Politicians allowed school districts and the Commonwealth to take reduced payment formulas and payment vacations. Now, the Governor and some Harrisburg lawmakers are mapping out an escape route from their obligation to pay the employer debt. Act 120 made significant changes to the pension system--on the backs of the employees. Teachers have done their part. Teachers have paid their share. Now is the time for the Governor to become a true partner for our future.
Now is the time to contact your state legislators and remind them that the Commonwealth has already made an agreement with its public school employees. Legislators need to work with school districts and the teachers’ unions to solve the unfunded liability of the pension fund. It can be done without robbing teachers of the deferred compensation that was promised at the beginning of their careers.