Gov. Tom Wolf wants to issue $3 billion in bonds and cut management fees on the state’s two big pension systems by $200 million per year to pay down their combined $50 billion-plus in unfunded liabilities. Republicans in the state Legislature have called for structural changes that will make the state's pension systems more affordable in the future.
Payments on the pension funds for Pennsylvania’s teachers and state employees will be nearly $4 billion this year and are expected to grow to more than $4 billion next year.
That’s about 12 percent of the total state budget — nearly 50 percent more than will be spent on the state’s correctional system and 50 percent less than the state expects to collect from its two levies on business profits, the Corporate Net Income and Capital Stock and Franchise taxes.
The governor is right about one thing: It’s time for the state to start paying its share of pension costs. Failing to pay its share is a big part of what caused the state’s pension liabilities to explode.
The other contributor was the vote by the General Assembly in May 2001 to increase teacher and state employee pensions by 25 percent and lawmaker pensions by 50 percent.
The results of those decisions cannot be walked back. Virtually everyone in Harrisburg agrees that courts would block any change to current employee pensions as a contract violation. And the state’s failure to make contributions to the pension funds means gains that would have been made on those contributions have been lost.
Wolf says the state should pay down the debt, reduce costs through management fees and move forward.
Local school superintendents and business leaders are with Republicans on this one: The systems’ rising costs must be addressed.
The governor is calling for new revenue — a 5 percent extraction tax on natural gas, boosts in the state sales and income taxes and an expansion of the state sales tax — for important priorities that include education funding and reduced property taxes. Leaders of the Republican-controlled state House and Senate want structural reforms to the state’s two big pension funds to reduce future pressures on the state budget.
Inadequate school funding, rising property taxes and a pension crisis that threatens future state budgets are all significant problems for Pennsylvania. They all must be addressed. The two sides should work together to solve them.
With pension payments set to cut further and further into the state budget in future years, and with few private sector employees enjoying defined-benefit retirement packages, the state’s pension obligations should be addressed on a structural level.
Whether that means a 401(k) plan for all employees, a hybrid that offers a limited defined-benefit plan or giving teachers, state employees and lawmakers a choice between defined benefit and defined contribution plans, the governor should be willing to discuss pension reform options.
One positive to come out of this debate is that both the governor and GOP leaders in the General Assembly agree that it’s time to pay down the state’s pension liability. That’s a responsible start. Now is the time to begin negotiations toward reducing the state’s future pension costs.