LINDA WERTHEIMER, host:
All this week, NPR is looking at the serious problems facing many public pension funds. A recent report by the Pew Center on the States says 21 states have pension plans that are not properly funded. Eight states are in especially bad shape.
In Pennsylvania, the state's two large public pension plans are viewed as relatively healthy, but even there, generous benefits and worse-than-expected investment returns have combined to raise doubts about the future. NPR's Tamara Keith reports.
TAMARA KEITH: These fourth graders at Hershey Intermediate Elementary School don't know it, but paying for their teachers' retirement benefits is going to cost them. Dr. Linda Brewer is the superintendent of the Derry Township School District in Hershey.
Dr. LINDA BREWER (Superintendent, Derry Township School District): They're going to be paying for this down the road when they're grown and they have jobs.
KEITH: Brewer may be projecting into the future, but what she's talking about is on a lot of people's minds. Pennsylvania, like many other states, hasn't done a very good job of setting aside money to make good on the pension promises it's made. Soon, school districts around the state will have to dramatically increase their pension contributions. For the Derry Township schools, the bill will jump from about $600,000 this year to $3.7 million in 2013.
Dr. BREWER: It's very significant.
KEITH: Brewer is looking at some stark choices: cut programs and increase class sizes, or raise property taxes.
Dr. BREWER: Our retired citizens are saying: Do not raise our taxes. 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.
KEITH: Pennsylvania's governor 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 they're just kicking the can down the road. This plan would avoid a property tax increase today, but will no doubt hit those fourth graders and their families eventually.
But as Brewer sees it, these pensions are how school districts like hers attract highly qualified teachers. Jerry Oleksiak became a public school teacher 25 years ago, partly for the pension benefits.
Mr. JERRY OLEKSIAK (Teacher): I knew I was not going to make the money that I could make elsewhere. I was willing to do that because, first of all, I love teaching, and secondly, I knew that there was something worthwhile at the end of that.
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.
But the amazing thing is just 10 years ago, these pension funds were running surpluses.
Mr. STEVEN NICKOL (Pennsylvania State Education Association): Some of the worst things are done in the best of times.
KEITH: Steven Nickol works for the state teachers union now. But 2001, he was a member of the Pennsylvania House of Representatives.
The pension funds were flush with cash, and those surpluses were burning a hole in the state's pocket.
Mr. NICKOL: There was, like, euphoria, and legislators in Pennsylvania and other states basically dipped into their surpluses and increased benefits for employees.
KEITH: 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 is policy director for the state workers pension fund. He says what he legislature did didn't make the state's unfunded pension liabilities go away. It only made them worse.
Mr. ROBERT GENTZEL (Policy Director, Pennsylvania State Employees Retirement System): The commonwealth has basically been saying to us: Keep paying that money. Pay this increased benefit. And we say to them, well, it's going to cost you a lot of money. And they say, well, just put it on our tab.
KEITH: 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.
Rick Dreyfuss, with the free-market Commonwealth Foundation in Harrisburg, says Pennsylvania's pension predicament, like in so many others states, is the result of politics.
Mr. RICK DREYFUSS (Senior Fellow, Commonwealth Foundation): Pension plans are run for a political rate of return. And 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.
KEITH: There's really no political upside to raising taxes or cutting programs to make pension funds whole. Like all public pension funds, in Pennsylvania, obligations to retirees are iron clad. And eventually, state residents will have to pay.
Tamara Keith, NPR News.
WERTHEIMER: In California, retirement benefits owed to hundreds of thousands of workers are placing another big burden on the state's economy. Our coverage of the pension crisis continues later today on ALL THINGS CONSIDERED.
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