Skyrocketing public pension costs are the number one cause of property tax hikes and school cutbacks, and pose the greatest financial threat to taxpayers in a generation.
That’s the bad news. The good news is that fundamental reform is possible.
For taxpayers, the stakes are high. Due to past benefit enhancements and the recent recession, taxpayers are on the hook for $60 billion owed to the pension systems serving public school employees and state workers. That’s an unconscionable burden for taxpayers who are already struggling to set aside money for their own retirement.
A new report from the Pennsylvania Association of School Business Officials finds that seven in 10 Pennsylvania school districts say they plan to raise local property taxes. Rising pension payments are the single most common reason for the tax hikes.
For our schools, the damage being done by these out-of-control costs is staggering. By 2019, one out of three dollars sent to school districts will be diverted from classrooms to pay the pension liability.
One Bucks County school district recently voted to raise property taxes 3.76 percent. For the owner of a home with an average assessment, that’s an additional $121 a year.
One school board member said that for several years, tax increases in the district have been going to “cover pension increases and inflation. There’s nothing that’s gone to increase the well-being of programs and students. They go in the other direction. They’re cut.”
The governor has said the pension issue is not important. In reality, pensions aren’t just diverting resources intended for school children, they are rocking the commonwealth’s economic foundation. When Moody’s Investors Service downgraded Pennsylvania’s credit rating, it cited the state’s growing unfunded pension liabilities as a chief reason. This year alone, the commonwealth faces a $1 billion increase in our pension contribution.
Enough. It’s time to free taxpayers of the burden of having to pay for three retirements: theirs, state workers and public school employees.
We can do that by shifting the state pensions from “defined benefit” to “defined contribution” plans. The current defined benefit plans establish benefit levels first, and then require taxpayers to dig as deeply as necessary to cover those benefits as the health of the pension funds rises and falls with the economy. When employee and state contributions don’t cover the costs, taxpayers must pay the difference.
Defined contribution plans are similar to the 401-k retirement plans used by the vast majority of Pennsylvania citizens. With these, the contribution level is set first and benefits will not exceed what has been contributed by the employee, employer and fund investments. This reform would get taxpayers out of the risky pension business.
The state Senate has already acted on this, passing Senate Bill 1. The features of Senate Bill 1 include:
- All new state and public school employees will be enrolled in a mandatory, 401-k type Defined Contribution Plan, similar to those used by private sector workers.
- Members of the General Assembly, upon election or re-election, will be enrolled in the same Defined Contribution Plan as state and public school employees.
- Current employees’ previously earned benefits will not be changed.
- Current employees will then be able to choose between increasing their pension contribution or electing to lower their future benefits.
- There will be no changes to current retirees’ benefits.
With its projected $18.3 billion in savings, Senate Bill 1 provides six times more savings for the commonwealth and school districts than Gov. Wolf’s proposal. The governor, backed by government unions resistant to reform, wants the commonwealth to increase its pension contributions by borrowing $3 billion – debt which, like the pension costs, will be paid by taxpayers.
We must act now. Without reform, the situation will only get much worse for taxpayers and schools. Beginning in July, the annual employer contribution rate that must be paid by the state and school districts will jump to 25.84 percent of total payroll, up from 21.40 percent in 2014-15, and from the 2013-14 rate of 16.93 percent. The contribution will continue to climb over the next few years to a staggering 32.23 percent by 2019-20.
The rate was only 4.76 percent as recently as 2009-10.
State workers and public school employees deserve a stable, affordable pension plan. Senate Bill 1 provides that. The only obstacles to reform are the government union bosses and the legislators they support. In their war on taxpayers, I stand with the taxpayers.
CONTACT: Lisa A. Walter, 717-787-3110