By Peter L. DeCoursey
HARRISBURG (Sept. 24) – Budget Secretary Charles Zogby, heading the team which is reviewing pension reform efforts for Gov. Tom Corbett, says those efforts “might touch current employees” in terms of reduced benefits.
In an interview with Capitolwire, Zogby said: “A lot of the plans that have been proposed or put forward in the General Assembly, for instance, only deal with future employees. I think we’re looking beyond that and looking at [pension] reforms that might touch current employees as well.”
Those reforms are meant to supplement Senate Bill 1540, which would put new state employees on a 401-K style plan, a concept for which Corbett voiced potential support as a candidate for governor. But the governor wants to go further than that, as he has said since at least 2010.
Just as Zogby said in his interview, Corbett in 2010, while campaigning for governor, said he would consider reducing future-year benefits for current state employees, depending on a maze of legal, political, moral and other challenges to doing so.
But Senate GOP spokesman Erik Arneson said the administration will have to prove to them and eventually the courts that it is legal to reduce the future benefits of current state or school district employees.
And conservative pension analyst Rick Dreyfuss said no “budget savings” are likely since the state, even under the ramped-up schedule Corbett is following, mandated by law in 2010, is now only putting in about half of what it needs to fully fund its pension plan. So even further savings from current employees should result only in still-higher contributions to the state employees’ and teacher’s retirement plans, Dreyfuss contends.
Why is this issue heating up now? Because Corbett will include it in his budget proposal, Zogby said in testimony before a pension reform hearing last week, to argue that other things can be funded more if pension reforms beyond the Senate bill are enacted. That will be the public part of this process.
The private part is a continuing series of discussions within the governor’s office to see what can be done, legally and politically, about this issue as part of the budget talk. The fruits of their labor will be sown in the February budget proposal, and harvested, Corbett hopes, in June 2013.
Corbett says these talks have budget implications, especially looking at another $400 million or more they could add to next year’s budget. In the first two Corbett budgets, their $600 million total has tallied with the state cut in basic education spending.
Zogby explained: “To the extent we can deliver on [pension] reform, that is going to mean relief for not only the General Fund budget, but those savings will be shared by school districts across the state. Suffice it to say, the governor’s talked about it as the tapeworm that’s eating the budget. It’s very clear that pension funding, has been for the last couple of years, crowding out the rest of the General Fund.”
That is an attempt to sell the assembly on a simple trade: if you cut pensions, you can afford to spend more on basic public education or other things you like.
Even if the Legislature buys that argument, the administration has to show all sides it can negotiate the daunting legal maze to reducing the future benefits of current employees.
Arneson wrote in an e-mail: “We understand the critical need to make changes to Pennsylvania’s pension system for government employees, which is why Senate Bill 1540 was introduced. We anticipate that it will be difficult to make the simple, easy-to-understand change of moving new employees to a defined contribution plan that SB 1540 envisions.
“I don’t believe anyone disagrees that it’s impossible to retroactively change the accrued benefits of current employees.”
So what can be done about the future year benefits of current employees? Corbett’s team is working on various ideas, and none yet have made it to the governor in what is expected to be a final menu option presented to him.
• Changing the system for unvested employees, whose years of service have not yet qualified them for pension benefits, or reducing their annual rate of accrued benefit;
• Doing the same for employees who have not met a seniority threshold. Under this plan, benefits would be cut for those whose age or years of combined service was not at some number yet to be set, such as 70, or perhaps 65. Proposing cuts to folks in those groups, or perhaps at even lower seniority levels, is an invitation to hemorrhage key senior staff, the administration believes.
• Ending the system where retirees can claim a lump-sum payout and a pension upon retirement. This has been done for future employees already in the 2010 law.
Arneson wrote: “It also appears that current case law prohibits reductions in the future benefits of current employees, whether vested or not. If some argument can be made that this is not correct, we will listen to that argument.”
The Corbett team acknowledges Pennsylvania is tougher than many others in terms of its courts’ historically-exacting reading of breach of contract law. There is a debate among the lawyers examining Pennsylvania statutes on contracts, promises and pensions whether our Supreme Court would consider pre-vested employees already to have secured the promise of a pension.
That is why three states, according to the Wall Street Journal, have cut the benefits of existing employees, but Pennsylvania may not be able to do so.
And while no one in the administration will say it, I will: this is a Supreme Court that used a provision of the constitution intended to ensure they were not singled out for pay cuts, and used it to ensure that the judiciary, and only the judiciary, kept its 2005 pay raise. Getting them to consider cutting the benefits of current employees, when theirs are better than the rest of the state, but still they whine about pay and perks constantly, will be working for a living.
There is also a fairness argument here. The state is in this problem because it chose in budget after budget to under-fund the pension plan, while teachers and state employees made their contributions as legally required.
“Pennsylvanians who work in the schools and for the state didn’t cause these problems,” said David Broderic, spokesman for the Pennsylvania State Education Association, the commonwealth’s largest teachers union. “The administration is talking about dealing with the budget problems they’ve caused by attacking the retirement security of working people.
And there are lots of reasons not to attack the retirement security of working people,” Broderic said. “Some of these proposals may violate the constitution.”
Dreyfuss, the pension analyst for the Commonwealth Foundation, wrote in an email: “We need pension reform in our 3,200 plans throughout the state. Therefore, we should be considering statewide reforms beyond PA’s largest plans of PSERS and SERS.”
Senate Majority Leader Dominic Pileggi, R-Delaware, has said the Legislature has to first show it can do this for state employees, then its chances of passing a local government pension reform bill – such as the one Dreyfuss said he worked on with Sen. Pat Browne, R-Lehigh, in 2009 – would improve.
Dreyfuss also thinks policymakers have to give up on the idea that they can “get money back” from pensions they can spend on other areas.
He said the 2010 law found the actual amounts the state would have to contribute to make its pension fund viable were too high, so they artificially set lower increases, and spread out the increases over too long a period to deal with the demands the system will face when a flood of retirements come.
During Corbett’s term, the teacher’s retirement fund state contribution has gone up about 50 percent in two years and is scheduled to double next year to more than 16 percent. Each percentage point costs about $145 million for the teacher fund, about $50 million for the state employee fund. School districts bear about half the cost of the teacher increases.
The administration had hoped to start this discussion quietly with legislative leaders this fall. Since they are still assembling their proposal, that has been put off.
But this will be the major issue tied up with the budget next year, perhaps to the exclusion of most others.