December 7th, PSER’s reported the pension fund earned 1.29% for the 2016 plan year.
The combined pension deficit of PSER & SERS stands at roughly $70 billion and, according to representative McGinnis’ article last June in the Altoona Mirror, grows by $1 billion every 10 weeks. A billion here a billion there; have we become numb to what kind of money this is?
So what has led to this huge deficit?
- People are living well into their 80’s, many into their 90’s.
- Fewer people pay into the retirement system. State retirement formula enables full retirement eligibility as early as age 55 depending years of service. Pension funds are not built to sustain average life expectancies of 25 years or longer.
- Investment performance is the life blood of long term survivability to a pension plan. In 1981, the rate on a U.S. government 30 year treasury bond was around 16%. Today, that rate is right around 3% yet pension funds must earn 7.5% return on investments annually just to keep the plan at an acceptable funding level.
- Re-read the opening sentence of this commentary. PSER’s earned 1.29% this year and that’s not the first time the 7.5% bogey has been missed. Consensus among pension managers all across the nation is for lower, single digit returns in the coming years. With lower returns anticipated, dare we ask what’s the back-up plan in case we experience a market meltdown similar to ’08-’09?
- Representative McGinnis summed it up pretty well in his June 2016 article in the Altoona Mirror. “Legislators expropriated (took away from its owner) $15 billion in pension surplus for themselves and other public sector employees that belonged to the taxpayer in ’01 and ’02. Then, in ‘03 and ‘10 legislators voted to divert taxpayer dollars intended for pension funding to other line items”. Asking tax payers to pay higher taxes to cover the collusive bargaining scheme of some in the legislature would clearly send the wrong message to every tax payer.
What can be done to fix it? No amount of tax increase or lay-offs can begin to touch this massive deficit. In fact either would only serve to deepen the divide between government and the people they represent. Consider the following:
- The legislature must look to monetizing (sell) assets with organized labors’ full support. Every department / agency must be on the table to be thoughtfully, thoroughly and objectively evaluated. What is the present value of our state highways, liquor outlets and natural resources? What kind of cash flow could be generated on any asset(s) sold at interest and amortized over 30 – 40 years with all revenues directed to the pension deficit. Borrowing costs remain at historic lows. Private money attracts private investors which typically lead to increased employment and income tax revenues. Have feasibility studies been conducted looking into government / private sector partnerships?
- The legislature must reevaluate the practicality of current statutes and mandates across every department. Many are decades old with no flexibility for modification to meet the financial challenges of today. Specific to public education, boards and administrators are forced to operate with their hands essentially tied as much of what governs public education was entered into law 20, 30 or more years ago. It’s time Government undergoes a complete paradigm shift in how it governs.
- Organized labor and the legislature must agree to modify how the pension plan is built including who is eligible to receive a retirement benefit. Otherwise, current retirees could face reductions to income at some point in their lifetime with retirement benefits payable to future retirees delayed, modified or both. Absent significant and regular infusions of cash into the pension system, current mandates will force school boards and other government agencies to divert significant sums of annual tax revenue to meet required annual pension deficit payments rather than essential capital needs, employment positions or both. No one collectively bargained to be in this position yet here we are.
- Organized labor must recognize the reach this pension deficit has and do their part by bringing cost sharing arrangements for benefits into the 21st Frankly it’s unreasonable to pay little or nothing for benefits. It would be wise for labor to focus its priorities on the real threats jeopardizing long-term employment. Using public education as an example, my small school district forfeits roughly $500,000.00 annually in taxpayer funds to pay for cyber education under the guise its tuition free. Cyber education is here to stay but organized labor must push the legislature to adopt stricter standards that base funding on performance and cost effectiveness. Cyber education should be integrated into the public school system via online education the likes of what many colleges do. Organized labor must work to protect these massive, unnecessary funding losses.
No doubt the suggestions of this commentary are bold and may appear to some as unworkable, impossible or ill-conceived. I’d argue at minimum, they represent the thoughts of many both in the legislature and labor yet both fear the thought of openly debating them. Unless or until real, substantive changes occur with this literally broke pension system, school districts, municipalities and state agencies are likely to experience deeper funding cuts, more lay-offs which ultimately lead to community sustaining jobs lost, relocated or both.
This is a highly sensitive and complex subject. It directly impacts hundreds of thousands current and retired state employees. Personally, I have immediate family, friends and neighbors that either work for or are retired from just about every department of the state of Pa. These relationships, including their employment or retirement security matter to me. It served as the motivation to speak out, putting these thoughts, facts and suggestions to print. Everybody knows or is related to someone connected to state employment. This problem can only be solved through the collective will and commitment of the legislature and organized labor. It’s time they act.
These are the opinions of Randy L Miles Sr and not necessarily the views of Cambridge are for informational purposes only and not to be construed or acted upon as personal investment advice.