Monday, December 18, 2006

Pennsylvania's Pervasive Public Pensions Problem

Starting yesterday, and continuing through Thursday, both the Post-Gazette and the Tribune-Review are running a series of stories on the looming crisis in Pennsylvania's public pensions. The series is being written by Associated Press reporter Mark Scolforo.

The basic nature of the problem here is simple enough. In 2001, just as the dot-com stock market bubble was disappearing, the Pennsylvania state legislature and Republican Governor Tom Ridge agreed to boost pensions for most public workers by at least 25 percent (50 percent for the legislators themselves). At the time, those who were pushing for these increases argued that the stock market would continue to rise at the same pace forever, and that no additional tax money would be needed to cover these larger pensions.

This decision was met with howls of protest. Not by those of us who would be stuck with the bill if the stock market somehow failed to live up to the hype (who could have seen that coming?), but by the tiny minority of other public workers who were somehow left out of the deal. So, after "... a protest rally that drew thousands to the Capitol, lawmakers and Gov. Mark Schweiker granted them a cost-of-living increase at an estimated cost of $1.7 billion".

So what happened next? Well, for one thing, the stock market tanked. That certainly wasn't a good omen for us taxpayers, but the story got even worse. Normally, those government entities who would soon be writing these pension checks -- the school districts and the state government itself -- would be expected to begin paying additional money into the pension funds immediately, to cover the increased payments that they knew would be coming in the not-so-distant future. But that would have cause a huge amount of fiscal pain across the entire state, since the money would need to come from somewhere. So, as the Sunday installment of the series reports:

[I]n 2003, as the state government and hundreds of school districts were about to be hit with a big increase in their mandatory pension payments, the Legislature and [Governor Ed] Rendell struck a deal to postpone paying the lion's share for a decade.

That eased short-term budget pressures but has deprived the pension funds of money they could have invested during the recent market run-up.

Not much has been done since. A bill to require the state and school districts to increase pension payments in advance of 2012 passed the House this year but died in the Senate.
Let's translate all of this into plain and easy-to-understand terms. They were spineless enough to give all public employees a huge pension increase, but then lacked the backbone necessary to look the rest of us in the eye and ask for the money to pay for it. That's probably because they know where we would have told them to stick their pension increase if they had asked us.

The thing is, as bad and as misguided as this pension increase turned out to be, not squirreling the money away to pay for it is even worse. Instead of having those funds for a decade or more before the baby boomers retire -- a decade which could have been used to invest that money and grow it a bit before it would be needed -- they are now going to come to us in 2012 and ask us to pay the whole amount.

Right now, the taxpayers are ponying up less than $1 billion per year to fund these pensions, amounting to about $80 per person state-wide. In 2002, this figure will jump to more than $3 billion and will stay there for decades. It almost goes without saying that there is no magic bullet in government funding. The extra money needed to pay for these increases can only come by cutting services, raising taxes, or both.

One thing that apparently can not happen, however, is a reduction in the payments promised by these pensions. According to the Sunday article, "... the state constitution bars curtailing pension benefits for current or retired state employees and teachers...". Frankly, I can't find any specific language in the State Constitution which bars such a reduction, but it may be buried in the case law somewhere.

Indeed, constitutional protection of these pensions simply has to be a reality, based on this quote from the first article in theseries:
"Sooner or later they're going to have to bite the bullet," said Arthur H. Schwartz, president of the 16,000-member Pennsylvania Association of Retired State Employees. "If they want to, they can cut back, reduce government, reduce waste. Maybe we don't need 96,000 state employees. Maybe we don't need a lot of things."
Just the fact that there exists an organization known as the "Pennsylvania Association of Retired State Employees" tells you that these people have significant political clout. And the statement by their president clearly shows that they believe their funding stream to be all but untouchable.

Obviously, Mr. Schwartz and his members are convinced that the primary reason that the Commonwealth exists today is to pay retiree benefits. Everything else -- building roads, teaching school children, keeping prisons safe and secure, and even paying current state employees -- is secondary to that goal. Only the firmest belief in total constitutional protection could give Mr. Schwartz the balls necessary to say this kind of thing to the rest of us.

For years, Mr. Schwartz and his organization argue, we needed all of those government services. We needed a large state payroll, because we were were the ones who were getting those paychecks. We needed strong funding for the public schools, because many of us were teachers and also because our own children were the ones attending those schools at the time. We needed decent highways so that we could get to our vacation homes on the Jersey Shore. We needed police protection to keep those "city people" out of our middle class suburban townships.

But now that we've retired -- now that many of us have moved to Arizona and Florida -- well, the rest of you can go screw yourselves. You will just have to find the money and pay us; you don't need decent schools, you don't need decent roads, you don't need secure prisons, and you certainly don't need so many state workers now that we aren't filling those jobs anymore. The only thing you need to do is to honor your "obligation" to fund our pensions, even if they are far, far in excess of any retirement payments you poor bastards are ever likely to see. Pay up!

And note that we haven't even touched upon the most costly issue of them all, namely the health benefits that nearly all state retirees enjoy. These costs are already a big factor in the Port Authority's budget problems, and they will soon be a drag on the wallets of taxpayers state-wide.

Paying for the pension and health benefits of state retirees would be much more palatable if the rest of us enjoyed similar perks. But we don't. Private companies no longer offer defined-benefit pensions, which pay out a fixed amount every month for the rest of a retiree's lifetime. Cost-of-living increases in private pensions are all but unheard of. And a huge number of working Pennsylvanians -- those who aren't retired -- have no health insurance at all. It's very hard for most of us to understand why we should pay higher taxes and see a reduction in vital governmental services in order to fund such gold-plated benefits for people who no longer work for us.

What does the future hold here? Will 2012 bring with it a large rise in state and municipal taxes? A reduction is government services? A constitutional amendment allowing for a reduction in public pensions? Or will the state government kick this can even further down the street, ignoring the problem once again and placing an even larger burden on the next generation of taxpayers?

I don't have a crystal ball; I can't see into the future. But clearly, there are natural limits to some things. Tax rates can increase to the point where some people will demand an end to the constitutional protection of state pension benefits, and others will simply move out of state. Services can be reduced to the point where even formerly decent public school districts are no longer able to provide a decent education.

It may be important to remember that Pennsylvania is especially cursed by it's geography. Our largest cities sit very close to the state boundaries, making it easy for workers to keep their current jobs while escaping from the Commonwealth's tax rolls. Technology also makes it possible for many workers to live far away while working for Pennsylvania employers. There are limits here, and many of us have the means of escape. If sacrifices must be made, then our state and municipal retirees should be willing to join the rest of us in making them.

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