“In the 1990s, with the dot-com bubble yet to burst, those investment returns were through the roof. The state had so much investment money coming in that pension liabilities were funded at 130 percent, meaning that for every $1 the state owed, it had $1.30.
It was the perfect time for state legislators to push for long-sought-after pension increases, which they received in 2001 when Gov. Tom Ridge signed Act 9 into law.
The legislation gave most legislators a 50 percent increase in pension benefits, while school and state employees saw their benefits go up by 25 percent.” (Daily Times / Delaware County/read more)
While the law benefited PSERS members and other state employees, it was proposed by legislators seeking to increase their own pensions.
Teachers never lobbied for Act 9 but were included to make the pension hike for lawmakers more palatable to the public, said Steve Nickol, a former state lawmaker who now works for the Pennsylvania State Education Association.
“It was 100 percent driven by the legislative increase,” said Nickol, who voted against Act 9.
“The legislation boosted lawmakers’ benefits by 50 percent, increasing the “multiplier” used to determine their annual pensions from 2 percent to 3 percent.
Act 9 boosted the multiplier for PSERS members from 2 percent to 2.5 percent, a 25 percent increase.
The law also reduced from 10 to five years the amount of time it takes a PSERS member to become vested, or eligible for benefits. In exchange for the higher pensions, PSERS members had to agree to an increase of about 22 percent in their contribution rate…. Act 9 added billions of dollars in unfunded liabilities to the PSERS system.” Source
Act 9 (2001) – 25%/50% increase in pensions
By the time Act 9 passed, the economy was already sputtering, then came 9/11.
Act 38 (2002) – Retiree pension COLA?
At this point, it because obvious that the 8% rate of return formula used was a flawed projection and to make up the difference would require a tax increase. In the legislatures infinite wisdom instead, they kicked the can down the road-for ten years
Act 40 (2003) – Deferring unaffordable costs to 2012 and beyond
In 2007 the Pennsylvania School Board Association Report on Act 9 reads:
Whatever the final peak contribution rate will be, lessons from the Act 9 experience will notbe forgotten soon. Indeed, in creating such a burden on school budgets, the benefit liberalization contained in that law has raised fundamental questions about the appropriate type of pension system the Commonwealth should have for its public employees and, bluntly stated, how much taxpayers are prepared to support.
It is possible that this discussion would take place in Pennsylvania in any event. Competing demands for limited tax revenues, coupled with a national trend in which private employers increasingly have abandoned guaranteed pension benefits based on years of service that remain relatively commonplace in the public sector, were almost certain to raise the question about the kind of pension benefits taxpayers would be willing to subsidize. Indeed, the debate over
shifting from defined benefit (DB) plans to defined contribution (DC) alternatives has beenunderway for years in many other states. ”
Report to the PSBA Executive Board 2007
Act 44 (2009) – City of Philadelphia & Municipal Pension
Facts
1. Deferring unsustainable pension liabilities does not make future liabilities sustainable. Why is contributing less into already underfunded plans considered “reform”?
2. We have over-leveraged our pension system. The challenge is to
finally restore proper funding while offsetting these increased costs
elsewhere within the state and local budgets without increasing
overall spending (or borrowing).
Act 120 (2010) – PSERS & SERS Readjustment -
Pension Crisis
“In the 1990s, with the dot-com bubble yet to burst, those investment returns were through the roof. The state had so much investment money coming in that pension liabilities were funded at 130 percent, meaning that for every $1 the state owed, it had $1.30.
It was the perfect time for state legislators to push for long-sought-after pension increases, which they received in 2001 when Gov. Tom Ridge signed Act 9 into law.
The legislation gave most legislators a 50 percent increase in pension benefits, while school and state employees saw their benefits go up by 25 percent.” (Daily Times / Delaware County/read more)
While the law benefited PSERS members and other state employees, it was proposed by legislators seeking to increase their own pensions.
Teachers never lobbied for Act 9 but were included to make the pension hike for lawmakers more palatable to the public, said Steve Nickol, a former state lawmaker who now works for the Pennsylvania State Education Association.
“It was 100 percent driven by the legislative increase,” said Nickol, who voted against Act 9.
“The legislation boosted lawmakers’ benefits by 50 percent, increasing the “multiplier” used to determine their annual pensions from 2 percent to 3 percent.
Act 9 boosted the multiplier for PSERS members from 2 percent to 2.5 percent, a 25 percent increase.
The law also reduced from 10 to five years the amount of time it takes a PSERS member to become vested, or eligible for benefits. In exchange for the higher pensions, PSERS members had to agree to an increase of about 22 percent in their contribution rate…. Act 9 added billions of dollars in unfunded liabilities to the PSERS system.” Source
Act 9 (2001) – 25%/50% increase in pensions
By the time Act 9 passed, the economy was already sputtering, then came 9/11.
Act 38 (2002) – Retiree pension COLA?
At this point, it because obvious that the 8% rate of return formula used was a flawed projection and to make up the difference would require a tax increase. In the legislatures infinite wisdom instead, they kicked the can down the road-for ten years
Act 40 (2003) – Deferring unaffordable costs to 2012 and beyond
In 2007 the Pennsylvania School Board Association Report on Act 9 reads:
Whatever the final peak contribution rate will be, lessons from the Act 9 experience will notbe forgotten soon. Indeed, in creating such a
burden on school budgets, the benefit liberalization contained in that law has raised fundamental questions about the appropriate type of pension system the Commonwealth should have for its public employees and, bluntly stated, how much taxpayers are prepared to support.
It is possible that this discussion would take place in Pennsylvania in any event. Competing demands for limited tax revenues, coupled with a national trend in which private employers increasingly have abandoned guaranteed pension benefits based on years of service that remain relatively commonplace in the public sector, were almost certain to raise the question about the kind of pension benefits taxpayers would be willing to subsidize. Indeed, the debate over
shifting from defined benefit (DB) plans to defined contribution (DC) alternatives has beenunderway for years in many other states. ”
Report to the PSBA Executive Board 2007
Act 44 (2009) – City of Philadelphia & Municipal Pension
Facts
1. Deferring unsustainable pension liabilities does not make future liabilities sustainable. Why is contributing less into already underfunded plans considered “reform”?
2. We have over-leveraged our pension system. The challenge is to
finally restore proper funding while offsetting these increased costs
elsewhere within the state and local budgets without increasing
overall spending (or borrowing).
Act 120 (2010) – PSERS & SERS Readjustment -
Act 120 eased the 2012 Pension Crisis by again deferring the immediate funding, however, it kept the problem in place, an unsustainable defined benefit program.
True Pension Reform
True Pension Reform Must Satisfy Three Basic
Principles – Using Realistic Funding Assumptions
1. Funding must be current.
Benefits should be funded as they are earned and?
“paid-up” in the aggregate at retirement
Achieving a 100% funded ratio?
Significant private sector pension funding reforms?
occurred in 2006.
2. Costs must be predictable.
3. Costs must be affordable.
4-7% of payroll (net of employee contributions)?
The Commonwealth Foundation has suggested a :
Five Step Pension Reform Plan
1. Establish a Unified Defined Contribution plan for new state and local government workers, school employees, judges, and legislators
- Curtails open-ended liabilities; Eliminates long-term commitments on behalf of taxpayers
- Removes politics from pensions
2. Prohibit pension obligation bonds or other post-employment benefit
(OPEB) bonds
- Prevents “generational theft” – deferment of liabilities
3. Mandate pension and OPEB liability management reforms for current and any newly created liabilities.
- Achieve an annual employer cost of 4% to 7% of payroll with standardized actuarial assumptions, shorter amortization periods, all generally similar to PPA of 2006.
Prohibit “fresh-starting”.
- Prohibit benefit improvements if this would result in a funded ratio below 90%.
4. Consider modifying unearned pension benefits (if legal and feasible)
- Reduced formula; Redefinition of eligible earnings; Increasing the normal retirement age; Curtailing early retirement subsidies; Eliminating COLAs and Deferred Retirement Option Programs (DROPs)
5. Consider funding reforms only after prior steps are achieved
- Challenge is to do this without increasing taxes or through new borrowing
Commonwealth Foundation Pension Reform Guidelines
(if legal and feasible)
- Reduced formula; Redefinition of eligible earnings; Increasing the normal retirement age; Curtailing early retirement subsidies; Eliminating COLAs and Deferred Retirement Option Programs (DROPs)
5. Consider funding reforms only after prior steps are achieved
- Challenge is to do this without increasing taxes or through new borrowing
Resources for further study:
A pension reform white paper- Governors Budget Office-2008
http://www.repaument.com/Display/SiteFiles/127/041_PensionReform_WhitePaper.pdf
Daily Times/ Delaware County
http://www.delcotimes.com/articles/2010/04/05/news/doc4bb91d64698d3180009658.txt?viewmode=2
The school employee pension mess: What went wrong?
Read more: http://lancasteronline.com/article/local/249696_The-school-employee-pension-mess–What-went-wrong-.html#ixzz1loRW1Wd0
Effect of Legislative Changes
http://www.psea.org/uploadedFiles/LegislationAndPolitics/Pension_Issues/PSERS_EffectOfLegislativeChanges2001-2010.pdf
A Half-Billion Saved is a Half-Billion Earned
http://www.commonwealthfoundation.org/policyblog/detail/a-half-billion-saved-is-a-half-billion-earned
Taxpayer Contribution to Pensions to Triple
http://www.empowerpa.org/Pension-Votes.php
State Employee Retirement System
http://www.portal.state.pa.us/portal/server.pt/community/pension_funding/19115
Sunshine Review- State Unfunded Pension Liabilities
http://sunshinereview.org/index.php/Public_pensions#State_unfunded_pension_liabilities
Pensions need more than big payday to get back on track
http://paindependent.com/2011/12/pensions-need-more-than-big-payday-to-get-back-on-track-2/
State Pension Funding- PSERS and SERS Report
Pennsylvania State & Local Taxpayer Debt
http://www.commonwealthfoundation.org/research/detail/pennsylvania-state-local-taxpayer-debt-2