8/10/2019 2015 - The Year of Pension Reckoning? (January 2015)

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2015: The Year of Pension Reckoning?1

Jim Pawelczyk, PhD2

Board of School Directors, State College Area School District

State College, PA

January, 2015

Expect 2015 to restart the useless blame game over the Public School Employees Retirement System

(PSERS) pension debacle. The stage is set for another if only year. If only employers had contributed

more to the system. If only employees hadnt lobbied for overly generous, retroactive pension

increases. If only the 2008 financial collapse hadnt occurred.

Each statement has a shred of 20-20 hindsight. But its past time for blaming and high time to answer

this: Now that weve dug ourselves into this hole, how do we climb out?

Unfortunately, crafting a remedy has taken a back seat to the various pension reform proposals

percolating in Harrisburg. Most focus on changing the retirement system for new members, which has

marginal near-term impact on PSERS stated $40 billion unfunded liability. The legislature is failing

miserably to define an adequate finance plan for more than 495,000 current and former public school

servants.

Pundits rejoiced with therecent newsthat in 2014 PSERS investments exceeded the 7.5%forecasted

rate of return. But is there really cause for celebration when thepension contribution was legislatively

suppressed by 42% of the annual pension requirement,or more than $1.4 billion?

It gets worse. Areport published in November by the Pioneer Instituteused the long-term market value

of PSERS investments to estimate a 6% marketrate of return. By this more representative methodology,PSERS is about 40% funded. The true unfunded liability for PSERS probably exceeds $60 billion; more

than $12,000 per Pennsylvania household.

2015 will require the largest single year increase in pension contributions in the Commonwealths

history. The statesIndependent Fiscal Officeestimates that an additional $592 million will be needed

to make up for last years use of non-recurring revenue and to pay next years PSERS contribution. Even

so, that staggering sum wont match the requirement, forcing the PSERS funded ratio to itslowest level

in 30 years.

How high is your confidence level that Harrisburg can get the job done? As legislators bloviate, listen for

the four horsemen of the pension apocalypse:

1 An abbreviated version of this article was published in theCentre Daily Timeson January 5, 2015

2 The views expressed here are my own and do not necessarily reflect those of the State College Area School

District or the entire Board of School Directors.

http://www.psers.state.pa.us/content/news/press_release/2014-1006%20June%20Inv%20Perf%20FINAL%2010062014.pdfhttp://www.psers.state.pa.us/content/news/press_release/2014-1006%20June%20Inv%20Perf%20FINAL%2010062014.pdfhttp://www.psers.state.pa.us/content/news/press_release/2014-1006%20June%20Inv%20Perf%20FINAL%2010062014.pdfhttp://www.psers.state.pa.us/content/publications/financial/cafr/cafr14/2014%20Fin%20CAFR.pdfhttp://www.psers.state.pa.us/content/publications/financial/cafr/cafr14/2014%20Fin%20CAFR.pdfhttp://www.psers.state.pa.us/content/publications/financial/cafr/cafr14/2014%20Fin%20CAFR.pdfhttp://www.psers.state.pa.us/content/publications/financial/cafr/cafr14/2014%20Fin%20CAFR.pdfhttp://pioneerinstitute.org/news/study-public-pension-liabilities-are-undervalued-by-tens-of-billions-of-dollars/http://pioneerinstitute.org/news/study-public-pension-liabilities-are-undervalued-by-tens-of-billions-of-dollars/http://pioneerinstitute.org/news/study-public-pension-liabilities-are-undervalued-by-tens-of-billions-of-dollars/http://www.ifo.state.pa.us/Releases.cfmhttp://www.ifo.state.pa.us/Releases.cfmhttp://www.ifo.state.pa.us/Releases.cfmhttp://www.psers.state.pa.us/content/publications/budget/2014/Section12014.pdfhttp://www.psers.state.pa.us/content/publications/budget/2014/Section12014.pdfhttp://www.psers.state.pa.us/content/publications/budget/2014/Section12014.pdfhttp://www.centredaily.com/2015/01/05/4538315_their-view-pension-debacle-deserves.html?sp=/99/145/&rh=1http://www.centredaily.com/2015/01/05/4538315_their-view-pension-debacle-deserves.html?sp=/99/145/&rh=1http://www.centredaily.com/2015/01/05/4538315_their-view-pension-debacle-deserves.html?sp=/99/145/&rh=1http://www.centredaily.com/2015/01/05/4538315_their-view-pension-debacle-deserves.html?sp=/99/145/&rh=1http://www.psers.state.pa.us/content/publications/budget/2014/Section12014.pdfhttp://www.psers.state.pa.us/content/publications/budget/2014/Section12014.pdfhttp://www.ifo.state.pa.us/Releases.cfmhttp://pioneerinstitute.org/news/study-public-pension-liabilities-are-undervalued-by-tens-of-billions-of-dollars/http://www.psers.state.pa.us/content/publications/financial/cafr/cafr14/2014%20Fin%20CAFR.pdfhttp://www.psers.state.pa.us/content/publications/financial/cafr/cafr14/2014%20Fin%20CAFR.pdfhttp://www.psers.state.pa.us/content/news/press_release/2014-1006%20June%20Inv%20Perf%20FINAL%2010062014.pdf

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1. Deferral. Reamortizing the pension bill has been tried before. It always increases costs,

threatening future economic competitiveness as financial markets lose confidence in the

Commonwealth.

2. Borrowing. Pension obligation bonds are speculative and risky. Adetailed analysis published by

the Center for Retirement Research at Boston Collegefound that they are rarely, if ever,

profitable to the issuer. Act 120 of 2010made them illegal. Lets keep them that way.

3. Deception. Pretending that investments will earn 7.5% hides debt off the books and exposes

the system to great risk. The Netherlands, which operates one of the most stable pension

systems in the world,expects a realistic 4% return on pension investments.Shortfalls are

addressed within three years with lower pension payments or higher contributions. Meanwhile,

PSERS members expect taxpayers to guarantee their benefits, but those paying the bill lack

similar protection for their own, less generous, retirement accounts. Is that fair?

4. Misguidance. One-time revenue might balance a single budget, but it wont fix the underlying

problem.

In 2015, most school districts should uphold their pension responsibilities. The State College AreaSchool District will surpass a new milestone: pension contributions will exceed $1000 per student. The

District will use more than $1 million of pre-planned reservesto help offset an annual pension

contribution that will exceed $7.5 million. Careful preparation cant erase the bill, but it will help

manage the expenditure.

Harrisburgs New Years resolution should commit to both short-term pension funding and long-term

pension reform. Here are a minimal set of expectations:

Maintain or accelerate the pension contribution schedule defined byAct 120 of 2010. Were

only halfway up the hill.

Demand that state legislators make difficult decisions to balance pension expenses and revenue,

includingreducing future benefits for current employeesand creating new, recurring income

such as ashale gas severance tax.

Hold school boards to high standards of fiscal responsibility, developing the skills to prioritize

educational programs and the pragmatism to moderate property tax increases by reallocating

school district budgets to meet pension obligations.

In simple language, stop the blame game and the shell game. This crisis wont end until elected officials

fund pensions based on accrual of revenue rather than risk. Harrisburg and school boards are obligated

to pay the unfunded pension liability. Failing to act decisively will break the back of Pennsylvanias most

venerated resource, a thorough and efficient public education system.

More information on PSERS can be found athttp://www.psers.state.pa.us. A description of pension reform

proposals and analyses of their costs are available athttp://www.pasbo.org/pension.

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