Pennsylvania's pension system is heading over a cliff in 2012.
How steep the drop is, and how hard the landing will be, remain the multibillion-dollar questions.
"The cliff" is Harrisburg shorthand for the day of reckoning — created by legislative tinkering with gains and losses in the pension plans — approaching in four years, when pension costs are expected to jump from 4-7 percent a year to 10 percent.
And that's an improvement over earlier estimates that the state and other employers that participate in the two big pension plans would have to begin contributing 18 to 28 percent of payroll in 2012 to stay solvent.
Two county legislators are taking different approaches toward solving the pension crunch.
One bill, sponsored by Sen. Gib E. Armstrong, R-13th District, may be considered by the Senate this week. It aims at forcing the state to keep contributing to the pension plan, even in years when the Legislature could get away with putting in no money.
The other, sponsored by Rep. Scott Boyd, R-43rd District, is bottled up in committee because it would move new state employees from a defined-benefit program to defined-contribution, or 401(k), system.
"It is not reasonable to continue to expect the taxpayer to provide for the forever benefit of a state employee," Boyd said.
Armstrong, who chairs the Senate Appropriations Committee and is on the state pension board, isn't so sure.
"It's not a crisis unless the market tanks in the next couple of years," he said.
Boyd's legislation also faces stiff opposition from labor groups, and with a Democratic majority in the House, it's unlikely that such a radical change will happen any time soon.
"We're open to adjustments, amendments, discussions," Boyd said.
"... Defined benefit plans are simply too subject to not just market volatility but also to legislative volatility. It's not fair to the employees and it's not fair to the taxpayers to have a system that can be so substantially altered by legislative manipulation."
The pension crunch has its roots in the late 1990s, when big returns on investments by the State Employees Retirement System and the Public School Employees Retirement System tempted the Legislature to sweeten the retirement pot.
Using a $13 billion surplus, lawmakers gave state workers a 25 percent increase in pension — and gave themselves 50 percent hikes.
Richard Dreyfuss, a senior fellow for the conservative Commonwealth Foundation, said lawmakers enacted a 10-year plan to pay for higher benefits.
"What they didn't plan on was 9/11," Dreyfuss said. A market downturn after the terrorist attacks bit into investment gains. Then the Legislature was faced with finding a way to pay for higher benefits.
Their answer, Dreyfuss said, was to enact a 2003 law that continued to draw down the $13 billion surplus over 10 years and to spread any shortfall in future liabilities over 30 years.
The 2003 law "has refinanced the pension mortgage from a 10-year term to a 30-year term," the SERS Web site says, and will end up eventually costing employers more because of financing costs over 30 years.
Boyd said the 2003 law "amortized gains from the system over a 10-year period of time and amortized losses over a 30-year period of time."
"It really played some accounting games to stabilize employer contributions in the early part of the decade, but it really projected them out into the later part of the decade."
The gains that were spread out over 10 years will come to an end in 2012, he said, and losses "are all of a sudden going to show up." That's when the state and other employers will have to begin paying a higher percentage of payroll.
How much higher? Dreyfuss estimates around 10 percent for PSERS, thanks to solid investment returns in the last few years. Armstrong pegged the number at 9.09 percent for SERS.
But in 2003, when the last pension bill was passed, the figures were estimated at 18 percent for SERS and 28 percent for PSERS.
SERS, the smaller of the two funds, covers more than 213,000 workers and retirees from state government and other agencies. PSERS, with 425,000 active and retired members, is mostly for public school employees.
About 80 percent of the income in the two funds comes from investments. School districts contribute about 7 percent of their payroll to PSERS, a figure that is split with the state.
The state, which in some years hasn't contributed anything to SERS, paid 4 percent this fiscal year. Dreyfuss argued that it should be 8.25 percent.
A year ago, The Associated Press reported that pension contributions of $1 billion a year for SERS and PSERS would soar to $3 billion in 2012.
Armstrong pointed out that stock market gains in the last few years have moderated the height of the "cliff."
"The funds have done fantastic," he said. "They're both up 22 percent."
Still, Dreyfuss said, "If you're a school district right now contributing 7 percent of pay ... your costs are still going north. Maybe not as dramatically as projected, but they're still going up."
How to give the pension plans a soft landing is a question that's been on the legislative radar over the last year.
One simple answer, in Armstrong's view, is to require the state to contribute to the plan every year.
He is sponsoring legislation, which he expects to come out of committee this week, to require the state to contribute a minimum 5 percent every year to SERS and school districts 7 percent to PSERS.
If the state had continued to pay into the plans in years when investment gains were large enough that no employer contribution was necessary, he said, the pension plans wouldn't be heading for a cliff at all.
Boyd thinks the state needs a whole new approach to pensions.
He is proposing that workers hired after Dec. 1, 2008, would be covered by a 401(k)-type pension — which wouldn't change existing employees' pensions or affect the 2012 "cliff."
Boyd said Dreyfuss' analysis shows a worker, hired at age 30 for $40,000, who gets a 4 percent annual raise and contributes 6 percent to the pension plan along with the state, would retire with a pension of 107 to 117 percent of final-year salary — assuming annual investment returns of 8.5 percent.
Now, pensions are calculated by multiplying final average salary by years of service by 2.5 percent. Average annual benefit is $19,000.
Defined-benefit plans are too expensive for taxpayers, Boyd said. It's also not fair that as a legislator, he gets a fatter pension than a police officer, even though the state contributes the same percentage to both pensions.
The other advantage of a defined-contribution system, Boyd said, is that it eliminates political machinations.
Dreyfuss noted that "any time the plan tends to generate surpluses … this is where policymakers come in and spend it."
"Legislators are being lobbied for another pension cost-of-living increase," which would "add more cost to the system and basically spend some of the accumulated gains that we have in the system."
HB1977 "takes the politics out of pensions. That's why this legislation makes all the sense in the world."
Labor organizations are opposed.
"The inherent weakness of defined-contribution plans is that they are inadequate savings plans for retirement, as most retirees underestimate their actual financial needs," said Wythe Keever, a spokesman for the Pennsylvania State Education Association.
"Defined-contribution plans historically underperform defined-benefit plans by as much as 3 to 4 percent annually, according to Barclays Global Investors."
He said other states that switched have found the system either failed or cost more, and Nebraska and West Virginia are scrapping defined-contribution plans.
Dreyfuss said public employees are used to contributing to their own pensions, so a 401(k) wouldn't be as difficult as in the private sector.
Kathy Jellison, president of Service Employees International Union Local 668, which represents more than 20,000 public service workers, noted that "Our retirees are not paid the outrageous retirements of the legislators and agency heads, as are often reported in the press.
"... Our retirement is acknowledged across the country as one of the best run and most productive. The shortfall projected for 2012 could and should have been avoided if the commonwealth had paid their fair share over the years. It is wrong to risk the pensions of our current retirees, our present workers, and all working families in Pennsylvania."
Armstrong also questioned whether a defined-contribution system would be fair to employees. The current system works, he said, if funded properly.
HB1977 is in the House Finance Committee. "It's not going to get any immediate consideration," Boyd said. He hopes the committee might hold hearings on the legislation.
Sen. Pat Browne, R-Allentown, has introduced a companion bill in the Senate, where Sen. Mike Folmer, R-48th District, who represents northwest Lancaster County, is a co-sponsor.
"We have to turn the ship away from the financial iceberg it's headed toward, by bringing the public pension system in line with the common-sense transformations implemented by the private sector in recent years," said Folmer, a freshman who has not enrolled in the state pension plan.
"It's something that we have to begin to talk about," Boyd said. "And that was the purpose of the legislation."
Helen Colwell Adams is a Sunday News staff writer. E-mail her at hcolwell@lnpnews.com, or phone 291-4962. 