Pennsylvania Pensions: From Surplus To A Deep Hole

There's a ticking debt bomb, and taxpayers are on the hook. From California to New Jersey, public employee pension systems are underfunded.

In Pennsylvania, generous benefits, underfunding from the state and worse-than-expected investment returns have pushed the state's two large public pension funds into multibillion-dollar holes.

Like many other states, Pennsylvania hasn't done a very good job of setting aside enough money to make good on the pension promises it made.

Pressure On Schools

Soon, school districts around the state will have to dramatically increase their pension contributions. For the Derry Township School District in Hershey, Pa., the bill will jump from about $600,000 this year to $3.7 million in 2013.

"It's very significant," says Superintendent Linda Brewer.

Brewer faces some stark choices: cut programs and increase class sizes, or raise property taxes.

"Our retired citizens are saying, 'Do not raise our taxes,' " Brewer says. "And our parents are saying, 'We don't want you to raise our taxes, but if that's what it takes to maintain these solid programs, that's what we want you to do.'"

There's another option: Gov. Ed Rendell and others want to soften the impact of the looming crisis with an accounting maneuver. They want to spread the pain of making the pension funds whole over a longer time frame. But critics say that will just kick the can down the road.

Hershey Elementary School Students work in a computer lab. i i

Hershey Elementary School Students could ultimately have a higher tax burden to pay their teachers' pensions. Courtesy of Derry Township School District hide caption

itoggle caption Courtesy of Derry Township School District
Hershey Elementary School Students work in a computer lab.

Hershey Elementary School Students could ultimately have a higher tax burden to pay their teachers' pensions.

Courtesy of Derry Township School District

Passing The Bill To Future Generations

The fourth-graders playing in the gym at Hershey Intermediate Elementary School don't know it, but they could ultimately have a higher tax burden to pay their teachers' pensions.

"They're going to be paying for this down the road, when they're grown and they have jobs," Brewer says.

But as Brewer sees it, these pensions are how school districts attract highly qualified teachers. Jerry Oleksiak became a public schoolteacher 25 years ago, partly for the pension benefits.

"I knew I was not going to make the money that I could make elsewhere," Oleksiak says. "I was willing to do that because, first of all, I loved teaching, and secondly, I knew that there was something worthwhile at the end of that."

Unfunded Liabilities Mount

Combine the pension obligations for state employees and teachers, and Pennsylvania currently has more than $20 billion in unfunded liabilities. That amount is expected to balloon in the next few years to more than $55 billion.

By The Numbers

A closer look at the Public School Employees' Retirement System of Pennsylvania.

2000: $9.5 billion surplus (funded ratio: 123.8 percent)

2009: $15.7 billion unfunded liability (funded ratio: 79.2 percent)

2013: $40.1 billion projected unfunded liability (funded ratio: 54.2 percent)

But just 10 years ago, these pension funds were running surpluses.

"Some of the worst things are done in the best of times," says Steven Nickol, who now works for the state teachers union. In 2001, he was a member of the Pennsylvania House of Representatives.

Back then, he says, the pension funds were flush with cash, and those surpluses were burning a hole in the state's pocket.

"There was, like, euphoria, and legislators in Pennsylvania and other states basically dipped into their surpluses and increased benefits for employees," he says.

Nickol, a fiscally conservative Republican, was one of the very few lawmakers to vote against the expanded benefits.

Before the ink was dry, it became clear that the surpluses weren't going to last. But instead of putting more state money into the pension system, the legislature opted to defer the suffering for 10 years.

Robert Gentzel, policy director for the Pennsylvania State Employees' Retirement System, says the legislature's decision didn't make the state's unfunded pension liabilities go away — it only made them worse.

"The commonwealth has basically been saying to us, 'Keep paying that money. Pay this increased benefit,' " Gentzel says. "And we say to them, 'It's going to cost you a lot of money.' And they say, 'Just put it on our tab.'"

And he says the tab keeps getting bigger and bigger.

The market crash in 2008 dashed hopes that stellar investment returns could solve the state's pension problems. Both of the state's big pension funds lost more than 25 percent in a single year.

The Impact Of Politics

Rick Dreyfuss, a senior fellow with the free market Commonwealth Foundation in Harrisburg, says Pennsylvania's pension predicament, like in so many others states, is the result of politics.

"Pension plans are run for a political rate of return," Dreyfuss says. "That is to say that it's easy for a politician or a policymaker to give benefits right now, even retroactively, and then defer that cost up to 30 years."

There's really no political upside to raising taxes or cutting programs to make pension funds whole. In Pennsylvania, as in all states with public pension funds, obligations to retirees are iron clad. And eventually, state residents will have to pay.

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