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Statement of Brent Mead Before the PA House State Government Affairs Committee
NTU State Government Affairs Manager Regarding Pension Reform:
April 30, 2012
By Brent Mead
Statement of Brent Mead
State Government Affairs Manager
National Taxpayers Union
Before the Pennsylvania House State Government Affairs Committee
Regarding Pension Reform
May 1, 2012
Chairman Metcalfe and Members of the Committee, my name is Brent Mead, and I am the State Government Affairs Manager for the National Taxpayers Union (NTU), the nation’s oldest and largest non-partisan advocate for overburdened taxpayers. I am honored to testify before you today on behalf of NTU’s 17,300 members in Pennsylvania, all of whom share a belief in limited government and low taxes.
I thank you for allowing NTU the opportunity to participate in this hearing on pension reform. Since NTU’s founding in 1969, our members and staff have learned firsthand that few issues can match the complexity or controversy of government employee compensation. It is at once a matter affecting the livelihoods of thousands of workers across the Commonwealth, the personnel policies of public and private entities at all levels, the state government’s long-term finances, and, of course, the well-being of taxpayers.
Before outlining what NTU believes should be the guiding principles for reform, it is vital to note several important trends. Pennsylvania’s largest and most generous public employee pension plans are severely underfunded and in need of serious reform. In Fiscal Years 2009-10, Pennsylvania taxpayers paid $843 million toward the Public School Employees Retirement System (PSERS) and the State Employees Retirement System (SERS). That number will jump to $6.1 billion by 2016-17, an increase of over 700 percent. For taxpayers, this represents a burden of almost $500 per person to meet obligations in the not-too-distant future. Furthermore, the actual funding ratio for the two plans is expected to dip to 60.1 percent for SERS and 50.9 percent for PSERS. Worse still, the plans assume unrealistic rates of return on investments of 8 percent for SERS and 7.5 percent for PSERS. If any Members of the Committee received similar rates of return over the past five years, I would be interested in meeting your investment advisor.
While the recent economic downturn exacerbated the strained finances of Pennsylvania’s pension systems, it is not the cause of the crisis. Economic difficulties simply exposed fundamental, structural flaws in the system. For too long Pennsylvania has promised overly-generous benefit packages to government workers that are not sustainable in the long run. The bill was going to come due eventually; recent events merely shifted the timetable.
Further complicating the funding picture are proactive efforts by the General Assembly in the past decade that made the situation worse. Starting in 2001-02, Pennsylvania increased the size of the benefits to employees, most notably by boosting the cost-of-living adjustment allowance to current retirees. Act 40 in 2003 deferred unaffordable costs into the future, with “the future” defined as 2012. Finally, Act 120 in 2010 again deferred payments onto future generations giving the illusion of plan solvency, without decreasing benefits or raising taxes. As you are well aware, the game is just about up.
While the state managed to use smoke and mirrors to hide its true obligations, local entities have had no such luxury. For example, according a report issued last month, Susquenita School District, which serves 1,782 students, will increase PSERS payments from $1 million this year to $3.3 million for the 2017-18 school year. This month, the Department of Education issued 197 exemptions from the school tax referendum requirement; 194 of those exemptions expressly called for higher taxes without voter approval to meet increased pension costs. By dollar amount, over half of the approved $159 million in exemptions will be earmarked for local pension contributions. Taxpayers already face higher burdens at the local level due to past policy decisions. Thus, without action this crisis will only deepen at both the state and local levels.
III. Principles for Reform
Government employee compensation and associated pension costs are among the most politically challenging issues states must deal with, but difficulty does not excuse inaction. Going forward, Pennsylvania should adhere to the following basic guidelines, to both avoid repeating mistakes and improve the future financial stability of the state’s major pension programs:
HB 2497 (Act 120) merely defers pension payments well into the future. By putting off payments, HB 2497 does not fix the plans’ underlying problems or save taxpayers money; it only makes the problem worse. In 14 years, taxpayers will have to pay substantially more to sustain the system due to HB 2497’s risky assumptions about plan returns. In short, HB 2947 will force the children and grandchildren of Pennsylvania’s current taxpayers to pay for fiscal irresponsibility they did not cause.
IV. Emphasis on select bills
With those goals in mind, I will briefly outline NTU’s thoughts on the immediate pending legislation.
Chairman Metcalfe and Members of the Committee, Pennsylvania’s taxpayers are grateful for your willingness to explore government retirement issues. NTU and its Members are likewise grateful for the forum you have provided for my remarks today. This will no doubt continue to be an important debate moving forward. I stand ready to answer any questions you may have.