2015: The Year of Pension Reckoning?

1
Jim Pawelczyk, PhD 2
Board of School Directors, State College Area School District
State College, PA
January, 2015
Expect 2015 to restart the useless blame game over the Public School Employees Retirement System
(PSERS) pension debacle. The stage is set for another if only year. If only employers had contributed
more to the system. If only employees hadnt lobbied for overly generous, retroactive pension
increases. If only the 2008 financial collapse hadnt occurred.
Each statement has a shred of 20-20 hindsight. But its past time for blaming and high time to answer
this: Now that weve dug ourselves into this hole, how do we climb out?
Unfortunately, crafting a remedy has taken a back seat to the various pension reform proposals
percolating in Harrisburg. Most focus on changing the retirement system for new members, which has
marginal near-term impact on PSERS stated $40 billion unfunded liability. The legislature is failing
miserably to define an adequate finance plan for more than 495,000 current and former public school
servants.
Pundits rejoiced with the recent news that in 2014 PSERS investments exceeded the 7.5% forecasted
rate of return. But is there really cause for celebration when the pension contribution was legislatively
suppressed by 42% of the annual pension requirement, or more than $1.4 billion?
It gets worse. A report published in November by the Pioneer Institute used the long-term market value
of PSERS investments to estimate a 6% market rate of return. By this more representative methodology,
PSERS is about 40% funded. The true unfunded liability for PSERS probably exceeds $60 billion; more
than $12,000 per Pennsylvania household.
2015 will require the largest single year increase in pension contributions in the Commonwealths
history. The states Independent Fiscal Office estimates that an additional $592 million will be needed
to make up for last years use of non-recurring revenue and to pay next years PSERS contribution. Even
so, that staggering sum wont match the requirement, forcing the PSERS funded ratio to its lowest level
in 30 years.
How high is your confidence level that Harrisburg can get the job done? As legislators bloviate, listen for
the four horsemen of the pension apocalypse:

An abbreviated version of this article was published in the Centre Daily Times on January 5, 2015
The views expressed here are my own and do not necessarily reflect those of the State College Area School
District or the entire Board of School Directors.

1. Deferral. Reamortizing the pension bill has been tried before. It always increases costs,
threatening future economic competitiveness as financial markets lose confidence in the
Commonwealth.
2. Borrowing. Pension obligation bonds are speculative and risky. A detailed analysis published by
the Center for Retirement Research at Boston College found that they are rarely, if ever,
profitable to the issuer. Act 120 of 2010 made them illegal. Lets keep them that way.
3. Deception. Pretending that investments will earn 7.5% hides debt off the books and exposes
the system to great risk. The Netherlands, which operates one of the most stable pension
systems in the world, expects a realistic 4% return on pension investments. Shortfalls are
addressed within three years with lower pension payments or higher contributions. Meanwhile,
PSERS members expect taxpayers to guarantee their benefits, but those paying the bill lack
similar protection for their own, less generous, retirement accounts. Is that fair?
4. Misguidance. One-time revenue might balance a single budget, but it wont fix the underlying
problem.
In 2015, most school districts should uphold their pension responsibilities. The State College Area
School District will surpass a new milestone: pension contributions will exceed $1000 per student. The
District will use more than $1 million of pre-planned reserves to help offset an annual pension
contribution that will exceed $7.5 million. Careful preparation cant erase the bill, but it will help
manage the expenditure.
Harrisburgs New Years resolution should commit to both short-term pension funding and long-term
pension reform. Here are a minimal set of expectations:

Maintain or accelerate the pension contribution schedule defined by Act 120 of 2010. Were
only halfway up the hill.
Demand that state legislators make difficult decisions to balance pension expenses and revenue,
including reducing future benefits for current employees and creating new, recurring income
such as a shale gas severance tax.
Hold school boards to high standards of fiscal responsibility, developing the skills to prioritize
educational programs and the pragmatism to moderate property tax increases by reallocating
school district budgets to meet pension obligations.

In simple language, stop the blame game and the shell game. This crisis wont end until elected officials
fund pensions based on accrual of revenue rather than risk. Harrisburg and school boards are obligated
to pay the unfunded pension liability. Failing to act decisively will break the back of Pennsylvanias most
venerated resource, a thorough and efficient public education system.
More information on PSERS can be found at http://www.psers.state.pa.us. A description of pension reform
proposals and analyses of their costs are available at http://www.pasbo.org/pension.