Pension pitfall: The Senate Dems’ plan fails to curb future costs

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Democratic lawmakers in Harrisburg have put together what they’re calling a “pension reform plan,” but the proposal doesn’t live up to its billing.

The plan would refinance some of the obligations to the pension funds of state and school district employees, but it won’t change the underlying elements that make the system unsustainable.

The primary feature of the proposal announced by Senate Democrats on Wednesday is refinancing $9 billion of the state’s $50 billion unfunded pension liability through a bond issue. The proceeds would be reinvested in the State Employees’ Retirement System and the Public School Employees’ Retirement System. Because of favorable interest rates, this would reduce long-term payments from the state and school districts by a combined $24 billion over the next two decades.

That may sound like a no-brainer, but financial experts throw a caution flag on the use of pension obligation bonds. A 2010 study by Boston College found that well-off governments can best afford to gamble on the bonds, but they far more often are utilized by financially stressed entities that can least afford the risk. Pennsylvania more closely fits the latter description.

The second feature is a change in the funding formula for charter schools. This would allow charters to continue receiving 100 percent of pension costs that are passed through school districts, but it would eliminate the additional 50 percent the charters get from the state. Even the Pennsylvania Coalition of Public Charter Schools supports getting rid of this unfair “double dip” that occurs under the law.

The fatal weakness of the Democratic proposal is its failure to offer remedies for controlling pension costs going forward. Reducing the unfunded pension debt only resolves the problem that was created in the past, like a family paying off its credit card balance. The state must also find a way to reduce future pension costs, like a family that cuts up the plastic and refuses to make new purchases that it can’t afford.

Pennsylvania needs a plan that does both, and the Democratic proposal falls too short.

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