Corbett: Pension overhaul targets property tax issue



HARRISBURG -- As Gov. Tom Corbett reasserts his case for changing the retirement benefits for future state and school workers, he has emphasized a connection more tangible to voters than that of state budget pressures: increases in local property taxes.

"Let me give you an example of not getting pensions," Mr. Corbett said last week in Lebanon County. "Number one, this is about property taxes, if we don't do something on pensions soon."

The next day, he announced that before signing the state budget he had vetoed a portion of funding for the General Assembly, in part because legislators had not delivered changes to the statewide pension systems.

Many Pennsylvania school districts name pension payments as a budgetary stressor. Indeed, one-third of the state's districts cited pension costs when they received state permission to raise property taxes in the upcoming school year beyond an allowed rate.

"Clearly, pensions are one of the most significant, if not the most significant, drivers of expenditures in school budgets, which in turn drives property taxes," said Jay Himes, executive director of the Pennsylvania Association of School Business Officials.

But the House Republican pension bill, which Mr. Corbett, also a Republican, supports and has urged legislators to pass, would provide school budgets with little near-term relief. Because the plan is limited to new hires, savings would materialize only over time.

In its first three years, the plan would produce no savings, according to projections by Cheiron, an actuarial firm consulting for the Public Employee Retirement Commission, which reviews proposals to change the pension systems. In the following five years, Public School Employees' Retirement System employer contributions, which are split between school districts and the state, would be reduced by less than $100 million per year from the levels set by current law. Employer payments to PSERS would remain on track to more than double over a 12-year period.

"The plan does not directly address property taxes in the short term, although it does lower costs and develop savings over a period of time," said Rep. Mike Tobash, R-Schuylkill, architect of the House plan. "It's the first step in the long-term fix of what our property tax payers are most certainly facing."

Over 30 years, the changes could save the state and school districts $9 billion, with another $2 billion in savings from the elimination of a health insurance premium assistance program in PSERS, according to the PERC actuarial note.

Democrats and labor unions, who have opposed the House Republican plan and other efforts to reduce benefits, say even the eventual savings are too small to affect property tax bills.

"It's a little hard for me to say these very modest savings that result in the farther-out years will have any significant impact on the school districts' choices in terms of whether or not they raise property taxes," said Miriam Fox, executive director for Democrats on the House Appropriations Committee.

The plan seeks to reduce cost and investment risk to employers by closing the traditional pensions of the State Employees' Retirement System and Public School Employees' Retirement System to new hires. These workers instead would enroll in a hybrid plan that would provide a limited defined-benefit pension, based on the first $50,000 in annual salary. Additional earnings would cause benefits to accrue to a 401(k)-style plan.

School districts and the state would realize savings as new hires enter the workforce "because their retirement benefits will be lower and less costly to the commonwealth," according to the Cheiron analysis. The firm noted the reduction in employer cost from limiting the defined-benefit portion would be "slow to emerge."

Aides to Mr. Corbett do not argue that the proposal would have a discernible effect on property taxes in the next few years. But they say it would put the state and its school districts in a more stable fiscal position in years to come. As the workforce shifts to new employees with a more limited guaranteed benefit, employers would bear an increasingly reduced share of investment risk.

"This is like a bleeding wound that needs a tourniquet," Charles Zogby, the budget secretary, said last week. "It does stop the bleeding and, I think, takes a major step forward in terms of shifting risk away from the commonwealth."

And they point out that Mr. Corbett's own pension proposal, offered in February 2013, paired changes to future benefits with new limits on the rate of increase of employer contributions.

"The plan the governor put out last year, it addressed not only the long-term structural issues that needed to be addressed but also the short-term spiraling costs," spokesman Jay Pagni said. "The governor hasn't changed his views on that. Both need to be done."

After Mr. Corbett's initial plan failed to move, in part because legislators feared its changes to the future benefits of current workers would provoke a legal challenge, he again asked this year for an overhaul that would be accompanied by reductions in the sharp increase scheduled for employer payments. His administration says it can pay for immediate reductions in employer payments through long-term overhauls.

But leaders of the House Republicans, who have taken the lead in attempting major pension legislation, said they would not support changing the payment plan set by a 2010 pensions law.

After strong investment returns had more than fully funded SERS and PSERS, legislators in 2001 increased pension benefits for state and school workers. But returns suffered with the downturn later that year, and legislators moved to cap employer contribution rates. Investments went on to plunge in the 2008 recession. Actuaries have estimated the unfunded liabilities of the two systems at $50 billion.

"Reducing payments into the plans is one of the main reasons that we got into this pension crisis to begin with," said Steve Miskin, a House GOP spokesman.

Mr. Corbett said last week he is considering ways to push for action on pensions.


Karen Langley: klangley@post-gazette.com or 717-787-2141 or on Twitter @karen_langley.

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