The Pennsylvania House State Government Committee heard testimony this week on Senate Bill 1, legislation that would reform the state’s significantly underfunded pension system.
The proposal, sponsored by state Sen. Jake Corman, would tweak existing benefits for public-sector employees and dramatically reduce taxpayer obligations for the pensions of new hires in the state’s two large pension funds. This would save a projected $18 billion over 30 years.
Jon DeArment, president of Channellock, Inc., testified in support of pension reform.
“To provide the quality education our students deserve, we must address the elephant in the room: public sector pension costs,” said DeArment, who also serves on the Crawford Central School Board.
DeArment’s school district saw more than a threefold increase in pension costs over the last five years, a scenario of overpromising and underfunding he believes SB1 would address.
“The pension crisis is swamping our district’s budget, driving calls for higher taxes and cuts to programs and faculty, including outsourcing our technology department and substitute teacher services,” he said.
The defined contribution plans proposed under SB1 are similar to the retirement plans offered by DeArment’s tool company based in Meadville. He testified that these plans give providers predictable costs and retirees a secure future.
Pennsylvania is currently 49th in the nation in terms of pension plan funding, and SB1 would raise it to being in the top half of states.
The legislation would require all future employees in the state’s pension funds to be enrolled in a 401(k)-style retirement plan, while current employees would be extended the option of increasing their contributions to maintain existing benefit levels or stay at their current contribution rate and have their benefits return to the level they were before being enhanced several years ago.
The pension funds of the State Employees’ Retirement System and the Public School Employees’ Retirement System have an unfunded liability of more than $50 billion.
The Pew Charitable Trusts analyzed the reforms proposed by SB1 and compared them to other suggestions for pension reform. According to their findings, SB1 provided the state with higher cost certainty and lower expected rates, but found that retirement savings for workers could be raised above what SB1 proposes in an actuarially neutral manner.
Among their analyses presented Tuesday, Pew recommended improving reporting of performance and fees associated with the pension system, noting that this was an area in which the state already excelled.
“We view this as an opportunity for policymakers to help make Pennsylvania a model for others to emulate on investment reporting and transparency,” said Greg Mennis, director of Public Sector Retirement Systems for Pew.
Mennis raised concerns that the policy changes in SB1 would be challenged in court, however. This concern was echoed by the testimony of economist Monique Morrissey with the Economic Policy Institute.
Morrissey was also concerned with SB1’s failure to address the unfunded liability posed by the existing pensions.
“Though the principle of intergenerational fairness is sometimes invoked to justify measures that make all generations worse off, it is nevertheless irresponsible to saddle future generations with debts incurred by taxpayers who benefited indirectly from a failure to fully fund pension obligations,” she said.
Testimony continues Thursday.