Legislation to Pay Down Pension Debt Earns Support from IFO

From PA Chamber of Business & Industry

It’s been relatively quiet over the last several weeks on lawmakers’ plans to address Pennsylvania’s bloated and unsustainable public pension systems. However, earlier this month the state’s Independent Fiscal Office filed an actuarial note to a bill (H.B. 778) that would tackle the pension crisis in part by paying off the current unfunded liabilities of the State Employees Retirement System ($19.5 billion) and the Public School Employees’ Retirement System ($42.7 billion) within about 20 years.

The actuarial report projects increased costs in the short-term with the potential for “significant” long-term savings. It indicates that under H.B. 778, PSERS contributions would initially increase by 17 percent, and then by approximately 35 percent until the unfunded liability is satisfied. SERS initial contribution would be about $90 million lower for the first five years, after which they would be higher than the estimated contribution rates under current law until the SERS unfunded liability is satisfied. All told, these provisions could save as much as $18 billion.

The IFO notes in its report: “The projections show that the savings over the entire projection period are much more significant on a cash flow basis than when they are measured on a present value basis. This occurs because the bill shifts the timing of employer contributions to pay down the unfunded accrued liabilities, and the savings that occur at the back of the projection period are valued much lower when measured by current dollars.”

In its review of H.B. 778, Milliman – the actuarial firm used by the IFO – voiced support for the bill’s reduction of the amortization period (the length of time it will take to pay down the unfunded liability) because it would help to improve security, protection from adverse experience and intergenerational equity.

Lawmakers on both sides of the aisle offered some level of praise for the bill, with House Majority Leader Dave Reed, R-Indiana, saying, “I think John [Rep. John McGinnis, R-Blair, who sponsored the legislation] has done an excellent job of putting together half a proposal, on the accelerated payments, but, obviously, we’ve got to see the other half of his proposal of how we would make those additional payments up front.” In a Capitolwire story, House Democratic spokesman Bill Patton praised McGinnis for his focus in paying down the pension debt. “The 2010 law that it’s in place now [Act 120] has a schedule for paying the pension debt, but it could be done faster if larger chunks of taxpayer funds are redirected …. House Democrats are open to workable ideas that use sustainable revenue sources to pay off the pension debt.”