Pension Reform Shell Game: Part 2

Posted by By at 5 July, at 22 : 13 PM Print

by Eric Epstein

I am convinced we are on the cusp of a pension debacle due in large part to our marriage to a defined benefits’ system. I also believe that we should implement defined contribution plans for incoming government workers.

I view this year’s version of “pension reform light” – docketed as House Bill 2497 – as a bookend to last year’s version of “pension reform dark” – House Bill 1828.

Flashback to last summer. No matter how you feel about state and municipal pensions, most Pennsylvanians agree that sunlight is the best cure for what ails our system. With that prescription in mind, you’ve got to wonder why the Senate passed far-reaching pension legislation under a bill initially designed to bail out Philadelphia.

HB 1828, as approved by the House, laid out the authority for the City of Philadelphia to raise $700 million over a five year period to prop-up ailing municipal pensions and balance the City’s budget. By the time the Senate Finance Committee reported the legislation to the floor, the twelve page text ballooned to a 97 manuscript. The scope was changed from a City of Philadelphia bailout to statewide pension changes affecting 41,000 police officers, 10,000 fire fighters, and tens of thousands of municipal employees.

The Senate legislation was classic “cut-and-gut” legislation.

Now – under the watchful eye and heavy-hand of Rep. Dwight Evans (D-Philadelphia) – comes the next, best pension delaying ploy: House Bill 2497.

HB 2497 sets the clock back for new state hires. This legislation creates a two-tier, hybrid retirement system. The newbies would be swaddled in pre-2001 pension guarantees. The bill would provide for longer vesting periods. Not a bad start.

But the plan is weighted down in false hope, and does not address the impending pension melt down. This package is a kinder, gentler pension Frankenstein.

“We don’t think the current defined benefit plan is sustainable,” PSBA Executive Director Thomas J. Gentzel said. Ok. But this legislation simply postpones the inevitable, and shifts a greater share of the tax burden from school districts to the state. Code for increased state taxes.

The tax shift does not deal with core spending and liability issues. In fact this legislation re-amortizes pension liabilities over 30 years. Together with PSERS’ unrealistic return assumptions of 8%, HB 2497 actually increases tax payer exposure for our kids.

Talk about kicking the can down a dead end road.

I find myself in agreement with State Sen. Pat Browne (R-Lehigh) who chairs the Senate Finance Committee. Mr. Browne called the proposal an improvement, but not a solution. “There needs to be a liability management plan,” Browne said. “To just kick the can down the road and manage the liability without recognizing what is happening is plan redesign. It is not reform.”

We need to create a defined contribution system for new hires that allows for a menu of options. This system would decrease the potential for an intergenerational bail out, increase user choice, and allow for optional, aggregate investment strategies.

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