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State Employees' Pensions Might Carry Big Price Tag
By Charles Thompson, The Patriot-News
March 6, 2006
State employees got a major spike in their pension benefits a few years ago, but fiscal watchdogs fear an ugly hangover is coming.
Lawmakers in 2001 increased pension benefits for themselves, active state employees and teachers. Then-Gov. Tom Ridge signed off on it. By 2012, when the full weight of the pension change kicks in, taxpayers might have to toss in billions to keep the funds solvent.
At a budget hearing for the state's two major public employee pension systems last week, fund managers offered no easy escape.
"We cannot envision a scenario under which there would not be a significant employer rate increase in 2012," said Nicholas Maiale, chairman of the State Employee Retirement System's board, referring to the payroll surcharge that state government and school districts contribute to keep the systems solvent.
Lawmakers were reviewing Gov. Ed Rendell's 2006-07 budget proposal for SERS and the Public School Employees Retirement System.
Some critics warn the funds are on a road to disaster.
"Without significant changes in the design of both pension and retiree health care benefits plans, the taxpayers of Pennsylvania will likely be facing unaffordable costs," said Rick Dreyfuss, a former Hershey Co. benefits manager who reviewed the systems for the Harrisburg-based Commonwealth Foundation.
Dreyfuss has suggested that the funds be changed from a defined-benefit system, in which pensioners are assured a monthly payment based on their length of service and top salary, to a defined-contribution plan in which benefits depend much more on the success of investments.
Fund officials said such changes would apply only to new employees and have little effect.
The changes enacted in 2001 increased retirement benefits for 110,000 active state workers and 234,000 active teachers by 25 percent. Legislators could take a 50 percent boost in their own pension formula. Fund surpluses built up in the 1990s were expected to support the changes, but stock market returns dipped a few years ago. Short-term fixes have set up what looks to be a huge payment to come due in 2012.
PSERS projects that state and local taxes earmarked to support the fund will need to more than triple by 2012 from the 2006-07 tab of $763 million. School districts, which together with the state will pay 6.46 percent of their payroll to the school pension system in 2006-07, may see that figure increase to 22.5 percent within six years, or $2.6 billion.
The state employees' system uses 4 percent of its payroll costs to fund pension benefits. By 2012, that figure could grow to 23.5 percent, or a jump from $223 million next year, to about $1.3 billion.
Good investment returns in the interim could help. Both funds assume 8.5 percent annual returns.
Jeff Clay, PSERS executive director, noted its latest employer contribution projection for 2012 is down sharply from the 27.73 percent projected two years ago, primarily on the strength of recent double-digit investment returns.
SERS officials said their projections have not been updated to reflect that system's 14.9 percent investment gain from 2005.
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