More than five years after the sub-prime mortgage collapse, state and local governments and school districts across Pennsylvania continue to struggle with the impacts of the economic crisis. While revenues are slowly improving, the reverberations of the economic crisis are about to hit state and local governments again, this time in the form of the state’s public pension crisis.
A recent report by the Corbett Administration outlined the significant challenges facing Pennsylvania. In a nutshell, public employee pension plans face a $41 billion gap between their assets and liabilities. Without major reforms, state government will be forced to significantly increase the amount of tax dollars it puts into the pension plans. Without these reforms, 62 percent of the state’s projected $819 million increase in revenues will need to be allocated to pension costs. That’s more than $510 million that will not be available for other government priorities, such as education.
In order to avoid the mistakes of the past, we need to understand the roots of the pension crisis, which originated in the economic boom times of the 1990s, the peak of the dot-com era. Investment returns were through the roof and the state’s pension obligations were funded at 130 percent. With so much excess funding, in 2001 the legislature enacted generous increases in pension benefits, raising pension benefits for state and school employees by 25 percent and reducing the years of service to earn a pension from ten years to five years.
Then, soon after the pension changes passed, the dot-come bubble burst. And all of those rosy assumptions went out the window. When those same investments that had seen record earnings lost their value, employers — state and local governments — were on the hook to make up the difference. In 2003, faced with skyrocketing employer contributions that would have to be made up by taxpayers, legislators put a cap on employer contributions for a ten-year period.
It was a gamble, a bet that the dot-com drop in stocks would rebound over the course of the next ten years, negating the need for a massive influx in funds from employers. By 2007, when I was first sworn in as a member of the legislature, it looked like the gamble by my predecessors was going to pay off. Then the sub-prime mortgage crisis hit and the stock market began another free fall.
We have been dealing with the aftermath for the past five years. In 2010, I worked with my colleagues to pass legislation that sought to address the impending spike in public pensions. Those reforms included restoring the vesting period for both the state pension plans from five years to ten years. We also imposed the “Rule of 92,” which requires that state employees must have a combined total of 92 years of age and years of service in order to receive full retirement benefits. But those changes did not go far enough.
So where do we go from here? First, we need to protect the public sector employees who are currently in a pension plan. We made a commitment to these individuals — our teachers, police officers, and other government employees — that they would receive a pension in return for their employment. We need to live up to that commitment.
However, at the same time we need to be mindful of taxpayers. We cannot continue to increase the tax burden to a point where it becomes unaffordable for working families. With the market underperforming the guaranteed rate of return of 8 percent, we face a huge unfunded liability and it falls on taxpayers to make up the difference. We need to address this rapidly increasing unfunded mandate before every taxpayer ends up paying for it on the backend.
That means change is necessary. As a result, the pension plan for new employees will have to look different than it does for current employees. So just as is happening in the private sector, new prospective employees will need to be asked to consider a different, sustainable pension program.
It is far from ideal, but the alternative — substantial tax hikes or massive cuts in government funding of crucial program — is unacceptable. We need to make this right and if we work in a bipartisan manner with the goal of doing the best we can for both public sector employees and taxpayers, I believe we can find a middle ground.
State Sen. Bob Mensch is a Republican who represents the 24th Senate District of Pennsylvania, which includes portions of Bucks, Lehigh, Montgomery, and Northampton counties.