Pennsylvania Governor Tom Corbett said he wants to move new public employees to a defined-contribution plan and scale back future benefits for current workers to address $41 billion in unfunded pension liabilities.
The change for state and school-district employees would save the state almost $2 billion over the next five years, he said. School districts would save more than $1 billion over the same period. A defined-contribution plan is similar to a 401(k).
“The entire system of state pensions has become a mountain of debt, and the avalanche could bury our economic growth, swallow up benefits for our elderly, education for our children and transportation for our economy,” Corbett told legislators today in Harrisburg. “Resolving our pension crisis will be the single most important thing we do for decades to come.”
Pennsylvania joins states dealing with a growing pension burden as their finances recover from the longest recession since the 1930s. In July, Moody’s Investors Service cut the state’s general-obligation debt rating to Aa2, its third-highest, citing rising pension obligations that will weigh on its economic recovery. Corbett, 63, a first-term Republican, said pension costs will consume 60 percent of all new revenue in the fiscal year beginning in July.
Ten states last year enacted significant pension changes, according to Luke Martel, senior policy specialist at the National Conference of State Legislatures in Denver.
“The severity of investment losses in the past two recessions, slow growth in the economy and the slow recovery of state revenues mean that average plan funding levels continue to disappoint,” he said in an e-mail.
A handful of states, such as Rhode Island, Florida, Iowa and Oregon, have instituted changes affecting current employees, said Keith Brainard, research director at the National Association of State Retirement Administrators. He said he expects more states to consider reducing the rate at which benefits are earned by that group.
“You don’t generate much savings in the near term by affecting only new hires,” he said.
In Pennsylvania, the State Employees’ Retirement System has 65 percent of assets needed to cover projected liabilities, and the Public School Employees’ Retirement System is 69 percent funded, according to a report from the state budget office. The plans cover 817,000 people.
“With some imagination and some cooperation, we can find a way to preserve our existing pensions and allow the next generation of state employees and teachers a chance to shape their futures,” Corbett said.
Nationwide, state pensions had a median funding ratio of about 72 percent in 2011, according to data compiled by Bloomberg.
Under Corbett’s plan, retirees and benefits already accrued by current workers wouldn’t be affected. The formula used to calculate future pension benefits would be reduced, although workers could increase their contributions to keep the higher so-called multiplier.
The wages used to determine pensions would be capped at the Social Security base, and final salary would be the average of the worker’s last five years.
The retirement-benefit changes must be approved by the legislature.
Many states are legally prevented from touching benefits of current employees, other than adjusting future cost-of-living increases, according to a report by the Center for Retirement Research at Boston College.
“Changing future benefits for current employees is extremely difficult,” wrote the authors, Alicia Munnell and Laura Quinby.
The yield premium for holders of 10-year general-obligation bonds issued in Pennsylvania is close to the most since September. An index of 10-year debt on Jan. 31 yielded 2.42 percent on average, or 47 basis points more than a gauge of top-rated state and local securities. That was the widest since Sept. 27. Its spread as of yesterday was 45 basis points. A basis point is 0.01 percentage point.