by Eric Epstein and researched by Richard Dreyfuss,

Pennsylvania’s pension time bomb continues to grow despite the rhetoric kicked around the Capitol.  Official “figures” tend to not fully account for the magnitude of the problem. Pennsylvania’s pension funding standards are determined by state statute, which fully explains why underfunding has been a matter of bipartisan agreement.

PSERS determines its annual employer contributions based upon the actuarial value of assets.  In this particular case, the plan uses a 10 year rolling average which was established in 2010 under Act 120. The recommended actuarial standard for asset valuation is to use an averaging period not to exceed five years.   Of note, SERS uses a five year asset averaging period.

The calculations below are based on the market value of assets, not the actuarial value. Both the Government Accounting Standard Board and Moody’s develop their respective figures based upon the market value of assets.

As of June 30, 2015 the accrued PSERS liability was $94.6974 billion. The market value of assets was $51.7062 billion. Therefore, the unfunded liability was $42.9912 billion.  Adding 10 months interest at 7.5% per annum to May 1, 2016 results in a figure of $45.6618 billion.

As of December 21, 2015 the accrued liability for SERS was $46.3289 billion. The market value of assets was $26.0503 billion.  Therefore, the unfunded liability was $20.2786 billion.  Adding 4 months interest at 7.5% per annum to May 1, 2016 results in a figure of $20.7734 billion.

The May 2, 2016 total unfunded liability for PSERS + SERS is $66.4484 billion. The interest cost for taxpayers is $158.03 per second.

The unfunded liability based upon the market value of assets for PSERS and SERS combined is about $6 billion higher than the figures commonly referenced at the Capitol.

HB 900 is the only vehicle which actually deals with the difficult issue of managing down the unfunded liability. Unfortunately the bill died in Committee, and its demise was facilitated by a bipartisan posse of Democrats and four Republicans who claim to be fiscal conservatives.”

On May 17 the House Government Committee moved a stacked-hybrid bill known as the Tobash Plan. That scheme does not address the $66 billion unfunded liability.

The Tobash Plan design would never be found in the private sector since it would be cumbersome to administer as well as too convoluted to justify conceptually. The plan also exempts State Police, other uniformed employees, SSHE and other groups.

Mr. Tobash’s notion of “savings” is really one of future cost avoidances from yet-to-be hired employees. That is, his projections reflect lower costs than could otherwise be the case.  As we saw in Act 120, proponents assumed a significant increase in future new hires in order to maximize the “savings”.  Yet-to-be-hired members are never reflected in the official annual valuation figures such as the $66 billion.

The inability of policy makers to adopt an immediate debt reduction plan remains a key factor in the state’s continuing cycle of debt downgrades.

Given that all pension design reform proposals being considered will have little, if any, impact in the short and intermediate term on the combined and ever-growing PSERS & SERS unfunded liability, it would seem the recurring question is when – and not if  – Pennsylvania’s next credit downgrade will occur.

This would be analogous to a homeowner telling his banker that even though he is woefully behind in his first and second mortgages, that he will save money over the next thirty years by reducing his future annual family vacations from four weeks to three weeks.

“We wonder if Pennsylvania is next up in the state downgrade column,” said Alan Schankel, a managing director at Janney Capital Markets, noting that ratings reviews of the Keystone State will precede its planned June 1 GO sale . (“Connecticut Woes Trickle Down To Its Big Cities,” Paul Burton, May 20, 2016.)

The Tobash proposal is a diversion and not a solution.

Bringing it closer to home, as a Board member of the Central Dauphin School District, our pension liability is $212,549,000 million. By the end of the next school year the number will climb to $218 million, then move up to$223 million in 2018. Our annual contribution of $21,791,614 million is 12.21% of the total operating budget. Even if taxes were increased at the upper-end of the permissible band of 2.4% – or the equivalent of $1,976,477 – it would not meet this year’s pension obligation. The increase in PSERS from last year to this year for our District is $3,011,055.

If this issue is not confronted, and the unfunded liability continues to balloon, then many schools will be forced to shutter rooms, reduce staff and modify extracurricular activities.

I would note that proper pension reform will require contributions even higher than those currently in the state and local budgets. Dealing with such a reality will ultimately require a combination line item budget reduction and/or consideration of new revenues.