Reading Eagle: Corbett's pension plan would worsen crisis, state treasurer says

February 27, 2013

By David Mekeel
Reading Eagle 

Gov. Tom Corbett's plan to reform the state's two embattled public pension plans will just add to the problem, state Treasurer Rob McCord said Tuesday.

"It makes a big problem worse," he said during a conference call hosted by the Keystone Research Center.

As part of his budget address earlier this month, the Republican governor proposed several changes to the state's two pension programs, one of which is for state employees, the other for public school teachers. Among those changes are a shift to a 401(k)-style plan for new employees and new limits on how much employers must annually contribute to the plans.

McCord, a Democrat, said those actions might help the governor's budget in the short term, but the long-term impact will be costly for taxpayers.

If Corbett is re-elected, McCord said, the proposed changes would be responsible for increasing the two plans' unfunded liability - which currently tops $40 billion - by at least $5 billion by the time the governor's second term is over in 2019.

"It's basically a planned tax hike on anyone who's planning on living in Pennsylvania in 2019 and beyond," McCord said.

Among the problems with the plan is the expectation of lower returns on investment, said Dr. Stephen Herzenberg, an economist and executive director of the Keystone Research Center.

Herzenberg said moving new employees into a separate, 401(k)-style plan will mean less money is going into the old pension plan. At the same time, retiring employees enrolled in the old plan will be tapping into its funds, leaving even less money in the plan to invest.

The result, Herzenberg said, is that the unfunded liability in the old pensions systems will come due sooner, and the state will have to find a way to pay for it.

"It's a lose-lose proposition for taxpayers," he said.

McCord, calling the governor's plan "irresponsible leadership," said Corbett's proposed pension reforms amount to pushing the problem down the road.

"It's a 'Just let me get through the night' approach to budgeting," he said, adding that the plan does not solve the pension problem. "That liability does not go away."

Herzenberg agreed, saying the end result of Corbett's proposals will be money coming out of the pockets of Pennsylvanians.

"The governor's proposal will dig a deeper hole, with Pennsylvania taxpayers on the hook," he said.

Jay Pagni, spokesman for the governor's budget office, said McCord and Herzenberg's assessment is off base.

Pagni said they are looking at two specific parts of the pension reform plan in a vacuum, and the full picture tells a different story. One key aspect, he said, involves who takes on financial risk.

In the current system, state taxpayers are on the hook to make up any shortfalls in investment returns. In a 401(k)-style plan, that risk falls to the employees.

Pagni also said McCord and Herzenberg left out an integral part of the governor's plan: changes to benefits for current employees. Those changes could take many different forms, but are necessary to make the whole thing work, he said.

When all of the changes are taken into account, Pagni said, the governor's proposal would provide significant savings both in the short and long terms.

Contact David Mekeel: 610-371-5014 or