The Widening Gap in Pennsylvania Center on Regional Politics – January 18, 2012

$ 757 billion $ 2.31 trillion $627 billion $33 billion Pensions – $3.07 trillion 75 percent funded Widening Gap Update In 2010, states continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care. Retiree Health Benefits – $660 billion 5 percent funded Funded Unfunded Source: Pew Center on the States,

Widening Gap Update – Public Sector Pensions Thirty-four states had less than 80 percent of their pension promises funded in Source: Pew Center on the States,

A Growing Annual Bill The annual recommended contribution for states’ pension promises has grown 175 percent since Source: Pew Center on the States, 2012 Billions of dollars

Pennsylvania Pension Plans – 2011 Funding Levels The state’s two pension plans had a combined shortfall of $41 billion in 2011 and were only 68 percent funded compared to a $10.8 billion surplus and 115 percent funding ratio in Source: Pew Center on the States, 2013 PlanAssetsLiabilities Unfunded Liability Percent Funded Share of Total Shortfall State Employees' Retirement System $27,618$42,282$14, %36% Public School Employees' Retirement System $59,141$85,640$26, %64% Total $86,760$127,922$41, %. 100% All dollar figures in millions

Pennsylvania Pension Plans – Growing Total Commonwealth Employer Contributions As the unfunded liability grows, so does the commonwealth’s contribution. It is not until FY that the cost growth begins to taper down and level off. However, this does not account for another economic downturn that could further increase costs. Source: The Keystone Pension Report, 2012 Fiscal Year Total Commonwealth Contributions Dollar Increase Percent Increase $ $1,064$35550% $1,534$47044% $2,231$69745% $2,971$74033% $3,752$78126% $4,346$59416% $4,765$41910% $4,968$2034% $5,164$1964% All dollar figures in millions

Pennsylvania Pension Plans – SERS and PSERS Required and Actual Contributions Act 40 of 2003 allowed the state to avoid a fiscal shock of increasing employer contributions by recognizing gains more quickly and losses more slowly. The Act resulted in SERS and PSERS underfunding of more than $5.9 billion. *Data for SERS from SERS 2011 CAFR Source: The Keystone Pension Report, 2012 All dollar figures in millions SERS and PSERS Annually Required Contributions and Actual Contributions Fiscal YearSERS ARC Actual State Contribution Funding Shortfall PSERS ARC Acctual State Contribution Funding Shortfall $%$% $105.20$128.70$ %$409.30$228.80($180.50)-44.10% $319.20$172.60($146.60)-45.93%$655.20$254.50($400.70)-61.20% $548.70$224.00($324.70)-59.18%$861.10$382.80($478.30)-55.50% $617.30$242.90($374.40)-60.65%$989.90$451.10($538.80)-54.40% $584.20$244.70($339.50)-58.11%$983.70$360.60($623.10)-63.30% * $643.90$251.80($392.10)-60.89%$1,033.00$342.60($690.40)-66.80% $866.80$300.40($566.40)-65.34%$1,256.30$408.60($847.70)-67.50% TOTAL $3,685.30$1,565.10($2,120.20)-57.33%$6,188.50$2,429.00($3,759.50)-60.70%

State policy makers need to accomplish three main tasks: 1.Create a credible plan to reduce the funding gap over time in a fair way 2.Make sure the plan is sustainable and doesn’t put the state at risk of future funding challenges 3.Ensure that the compensation being offered help the state recruit and retain a talented public sector workforce Different states are pursuing very different solutions in an attempt to get to the same place: a fiscally-responsible, sustainable pension plan that can still help recruit and retain a talented workforce.

Pennsylvania City Pension Plans – Philadelphia and Pittsburgh The commonwealth’s two largest city pension plans are woefully under funded. Philadelphia levied a sales tax to fund the plans and Mayor Nutter has called for city workers to be enrolled in a hybrid plan. Pittsburgh’s plans were on the verge of a state take over before they passed an ordinance to levy a 37.5 percent parking tax and divert its revenue to the plans. Source: Pew Center on the States, 2013 All dollar figures in millions City of Philadelphia Pension Data YearAssetsLiabilities Unfunded Liability Percent FundedARC Actual Contribution Percent Contributed 2010$11,324$18,612$7, %$820$ % 2009$11,401$18,337$6, %$761$ % 2008$11,434$16,325$4, %$745$ % 2007$10,903$15,739$4, %$724$ % City of Pittsburgh Pension Data Year AssetsLiabilities Unfunded LiabilityPercent FundedARC Actual Contribution Percent Contributed 2010$393$1,012$ %$45$ % 2009$393$1,012$ %$45$ % 2008$339$990$ %$38$ % 2007$339$990$ %$38$ %

Lessons for Pennsylvania  Pennsylvania's pensions are on an unsustainable course and will run out of money if policy is not changed.  Once the state pays debt service, pensions, and federal entitlement obligations, there is not enough money left to pay for all remaining programs and services.  This funding crisis emerged over a decade as a result of contributions that fell short of sustainably funding the system, benefit increases that were not paid for, and expected investment returns that did not materialize.  Comprehensive reform is needed to both close the funding gap in a credible way and to offer a new plan going forward that will be sustainable, affordable, and secure and will help recruit and retain the talented public workers Pennsylvania needs.

Kil HuhDavid Draine Director, ResearchSenior Researcher (202) (202)

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