Dec 01, 2014

The Pension Time Bomb

By Peter Calcara, Vice President - Government Relations
time bomb imageAs Governor-elect Tom Wolf and the new General Assembly prepare to take their respective oaths of office in January, a recent report by the Independent Fiscal Office (IFO) sheds more light on Pennsylvania’s growing fiscal malaise. The Economic & Budget Outlook: Fiscal Years 2014-15 to 2019-20 is available at www.ifo.state.pa.us.

In short, the report finds that the state will face a shortfall of $1.85 billion in fiscal year 2015-2016, which includes $171 million for the current fiscal year and $1,679 million related to next year. A slow tax base erosion and normal expenditure growth are the primary drivers of the structural imbalance. Net revenues are projected to increase at an average rate of 2.7 percent annual, but are outpaced by expenditures, which are projected to grow at an annual average rate of 4.1 percent.

Pension funding is the primary cost driver in the budget, according to the IFO report. Here’s what the report says:

“Mandated employer contributions for state employee and school employee pension will consume a growing share of the General Fund appropriations through FY 2019-20. Payments to the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) are projected to increase from $1.7 billion, or 6 percent of appropriations, in FY 2014-15 to $3.3 billion, or nearly 10 percent of appropriations, by FY 2019-20.”

The chart below, which is on the IFO website, shows this trajectory is unsustainable. These numbers are out of a $28 billion budget. Keep in mind that these numbers come directly from PSERS and SERS, so they are credible.

Pension Contributions Graph

While the report does go on to say that annual growth begins to “moderate” after fiscal year 2016-2017, these payouts are still at record high levels for a decade or more. The PICPA, through our Fiscal Responsibility Task Force, has been calling for state pension reform since our first report in 2011, and echoed the call for reform again in 2013. For our third report, task force member Susan Howe recently blogged, “Because of the magnitude of the looming deficits in the funding of Pennsylvania’s public pensions at both the state and municipal levels, pensions will be one of only two topics highlighted in this report, which is planned for release in early 2015.”

Granted, there are demographic issues, taxation and revenue concerns, and other systemic cost drivers in the budget, but unless the pension funding crisis is addressed Pennsylvania cannot move ahead and be the economic engine that many in Harrisburg envision.

I urge all PICPA members to be engaged in the process because legislators will listen to you. Read IFO’s report and the PICPA report once it is released, and get involved. Pensions are a ticking time bomb. Will the Wolf administration, legislators, and the public respond before it’s too late?

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PICPA Staff Contributors
Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.
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