The Senate Finance Committee took a closer look at the financial challenges of state and municipal pension systems and gathered suggestions for possible solutions during a public hearing Wednesday.
“There is a great deal of concern regarding the ability of the Commonwealth and local school districts to meet rising pension obligations in future years,” said Senate Finance Committee Chairman Sen. Mike Brubaker (R-36). “This hearing gives us an opportunity to determine the extent of these challenges and to gather information we can use to work toward solutions.”
The committee heard from testifiers about the pros and cons of alternatives that include defined contribution plans, hybrid plans, and cash balance plans. According to testimony from several participants, the unfunded liabilities of the major state-run pension systems present a significant obstacle to reducing pension costs because those liabilities must be paid even if a switch is made to a different type of plan.
Public School Employees’ Retirement System (PSERS) Executive Director Jeffrey Clay and State Employees’ Retirement System (SERS) Director of Member Services David Durbin reported a combined total of more than $29 billion in unfunded liabilities in the two pension funds. They noted that the unfunded liabilities have been building for some time due to persistent underfunding of the systems, benefit increases and market downturns. Under current contribution rates, Clay said unfunded liabilities for PSERS alone could grow to $45 billion by 2018.
Durbin and Clay said that the SERS and PSERS funds could not pay down existing unfunded liabilities through investment returns alone and added that significantly higher levels of funding would be required to keep the funds solvent. They said that any potential one-time cash infusions would need to be massive to make a difference and that cash infusions are not likely to be a viable solution on their own.
Public Employee Retirement Commission (PERC) Executive Director James McAneny said that municipal pension systems did not suffer as much as state systems in the aftermath of the market downturn in 2008 due to requirements for those plans to be fully funded. McAneny added that switching from the state’s current defined benefit plan to the defined contribution plan favored by many private businesses would be prohibitive due to the current unfunded liabilities in the pension systems.
Pennsylvania Municipal Retirement System (PMRS) Secretary James Allen noted that the system manages both defined benefit and cash balance plans for local governments. Allen discussed asset allocation and the differences between the six percent assumed rate of return for PMRS in contrast to the higher rates of return assumed by PSERS and SERS. He described the six percent assumption as conservative and suggested that it has worked for the system based on the requirements of its governing statute.
Video and audio of the hearing is available online at senatorbrubaker.com.
Brubaker said he intends to solicit additional input from experts and members of the general public in future public forums.
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