Pennsylvania's public pension system is drowning in sea of red ink.
The Pennsylvania School Employees' Retirement System (PSERS) has unfunded liabilities of over $27 billion, and the State Employees' Retirement System (SERS) has unfunded liabilities of over $17 billion. Together, both have combined unfunded liabilities of more than $44 billion -- an amount that increases every day.
Nothing is being done to stop money going out faster than it's being collected; the current annual negative cash flow of SERS and PSERS is $3 billion a year. This is a prime reason why Pennsylvania's bond rating was recently downgraded.
For those of you who know me, and know what I stand for, you are aware I'm not part of any public pension system. I personally do not believe elected officials are entitled to pension benefits, and my belief comes from Article II, Section 8 of Pennsylvania's Constitution, Compensation: "The members of the General Assembly shall receive such salary and mileage for regular and special sessions as shall be fixed by law, and no other compensation whatever, whether for service upon committee or otherwise. No member of either House shall during the term for which he may have been elected, receive any increase of salary, or mileage, under any law passed during such term." (The latter is why I also return my legislative cost-of-living adjustment to the Pennsylvania Treasury with a monthly personal check).
I believe Pennsylvania is at a crossroads with its public pensions. Doing nothing means liabilities will continue to rise, threatening to crowd out funding for other programs. The two fastest growing items in the state budget are SERS and PSERS costs. Their combined unfunded liability represents over $8,000 for each Pennsylvania household.
If we were operating under actuarially sound principles or accounting standards, like the Governmental Accounting Standards Board (GASB), the commonwealth would be contributing $4.6 billion to ensure the public pension systems are properly funded (16 percent of the current state budget). Municipalities and school districts would be contributing an additional $2 billion, or $6.6 billion total would be going into SERS and PSERS.
Under the current state budget, actual pension contributions are $3.1 billion -- $2.1 billion from the state and a billion dollars from local entities. We are sending huge liabilities to our children and grandchildren.
Whenever the General Assembly deliberates the annual state budget, there's a clamor for spending: education, public safety, the arts, agriculture, tourism, parks and other natural resources, libraries, job training, colleges and universities, economic development, health initiatives, programs for children and/or seniors, welfare, museums, and roads and bridges. Few call to adequately fund the public pension systems to ensure they are able to pay both current and future benefits. As a result, the unfunded liabilities grow as state government continues to spend and borrow on other things.
Meanwhile, current retirees and future retirees fear changes as they worry about whether pension benefits they are now receiving or future pension benefits they expect to receive will continue "as promised." To me, a larger fear should be whether the pension systems will be financially healthy to pay current and future benefits.
A properly designed pension plan ensures future benefits through adequate employer and employee contributions. A "healthy" funding ratio is considered 80 percent. The funding ratio for SERS and PSERS is 65.3 percent and 69.1 percent, respectively. The funded ratios of the two systems are expected to continue to decline in the coming years, hitting a low of 55.2 percent for SERS, and 59.4 percent for PSERS.
Some of the so-called "solutions" to our pension problem includes raising taxes (a Marcellus Shale tax is especially popular), however, even if taxes were raised $1 billion, it would take 47 years to resolve the commonwealth's current public pension problem. That is assuming spending does not continue to outpace income.
Another "solution" is to allow Act 44 of 2009 and Act 120 of 2010 time to work. I was not able to support either of these measures, as both simply defer current pension liabilities to future years through "collars" that limit annual contributions (adjustments were made to some future pension benefits).
As previously noted, under an actuarially sound pension system, benefit costs are covered by employer and employee contributions and investments. Each employee and their employer contributes to the plan to ensure employees' future benefits are covered. Having current or future employees pay for others' pension benefits represents a government-run Ponzi scheme.
Pennsylvania's public pension problem represents a microcosm of the larger national debt and pension problems we face. If we keep ignoring the seas of red ink, they will soon become a tsunami: By 2018, the state pension debt will rise to $65 billion, a staggering $13,000 owed by each Pennsylvania family.
-- State Sen. Mike Folmer is a Republican serving Dis trict 48, which includes parts of Berks, Chester, Dauphin, Lancaster and Lebanon. His district will include parts of York County when redistrcting takes effect next year.