Calkins Media: Treasurer McCord, think tank rip Corbett pension reform plan

February 27, 2013

By Mark Shade
Staff Writer

HARRISBURG — State Treasurer Rob McCord, a possible Democratic candidate for governor in 2014, joined forces with a left-leaning, pro-state employee think tank Tuesday in an attempt to rip apart Gov. Tom Corbett’s pension reform plan proposal.

The first-term Republican governor had asked lawmakers earlier to change the funding formula for the State Employees’ Retirement System and Public School Employees’ Retirement System to begin to close what Corbett says is a $41 billion gap.

Under the governor’s plan, state employees hired as of July 1, 2015, would be entered into a defined contribution plan similar to a 401(k) plan and be required to contribute at least 6.25 percent of their salary to their retirement plans.

Corbett’s plan would also reduce annual employer contribution limits from the mandated 4.5 percent to 2.25 percent in the 2013-14 fiscal year. That amount would increase 0.5 percent each year until it returns to 4.5 percent or is equal to the annual required contribution rate.

McCord and the Keystone Research Center said Corbett’s plan would worsen Pennsylvania’s pension problem.

“If pension reform just means giving the budget office a break in finding relief for how to balance this year’s budget, then we have before us a proposal that relates to ‘pension reform,’ ” McCord said. “If what we’re saying is we’re successfully addressing an alarmingly high level of unfunded pension liability, then it fails.”

The Keystone Research Center, whose board includes members of the AFL-CIO, PSEA, American Federation of Teachers, and the United Steelworkers, said Corbett’s pension restructuring plan would lower investment returns because fewer state employees would contribute.

That, it said, is a one-two punch for taxpayers.

“It increases the cost of keeping current pension promises and raises the costs of pensions going forward,” Stephen Herzenberg, the center’s executive director, said during a conference call with journalists. “It’s a lose-lose.”

With lower returns, the state and school districts would have to increase their contributions to meet existing pension obligations, said Herzenberg, who earned a PhD. in economics from MIT.

Neither McCord nor Herzenberg offered a plan of their own on how to solve the pension deficit problem.

Corbett has argued that, left unchecked, the growing fiscal demands of the state’s pension system will force him and future governors to seriously cut state-funded programs.

With his proposal, the governor has said the state would save $2 billion over five years.

Corbett’s budget office said the Keystone Research Center’s study is only looking at the defined contribution plan and is ignoring the rest of the governor’s proposal.

“To only look at that part of the plan is disingenuous,” budget press secretary Jay Pagni said. “The governor’s proposal is more encompassing.”

McCord said Corbett’s plan would do little to address the current problem.

“By shifting to a defined contribution plan, at the very least, you do nothing to reduce your unfunded liability but you do dramatically accelerate your rate at which you owe that unfunded liability,” McCord said. “This isn’t a harmless kicking the can down the road. What it is, basically, is a planned tax hike on anybody who is planning on living in Pennsylvania in 2019 and beyond.”

Alaska, Michigan and West Virginia have switched to defined contribution plans, but Herzenberg said studies have shown that change forced increases in unfunded pension liabilities.

According to the State Employees’ Retirement System, more than 117,000 retirees and beneficiaries receive, on average, $25,100 annually from the pension program. Its total fund asset is $25.3 billion.

At the end of 2012, the Public School Employees’ Retirement System had $51 billion in assets and 195,000 retirees receiving benefits. It is the 17th-largest state-sponsored pension fund in the country. In 2011, its investments generated a 20.4 percent rate of return and $9.2 billion in net income.

Corbett has asked lawmakers to help him find a solution for the pension problem. At an appearance earlier this month with 400 construction company representatives, the governor said not doing anything could prove to be dire.

Mark Shade: or 267-326-3129