Propsed legislation that addresses one of the central issues in Pennsylvania's public school funding crisis would radically change the way state public employees, incuding teachers, receive pensions.
State Representative Warren Kampf (R-157) has introduced two bills that would take the burden of making up for stock, bond, securities, and other trading market losses off the backs of school districts. Teacher and other state employee pensions would then be directed by the employees themselves.
The proposed bill would change pensions from the current defined benefit system to a defined contribution system.
So, what does that mean for you, the taxpayer?
Under the current pension system, unionized state employees across the Commonwealth are guaranteed a certain amount in their pension payments every year. The state pays for pension benefits by investing for the employee in the stock and other markets. When the markets are up, the pension funds make money and retired state employee benefits are paid with the profits from the pension funds' portfolios. However-and this is a critical point to understand- if the markets are down and the pension funds are losing money, the retired state employees are still guaranteed to get the same pay out. The local school boards then must make up for the money lost in the market.
School districts and boards across the state have been forced to come up with millions and millions of dollars in the past few years to cover the gap left from tanking market markets. Under the fixed benefits scenario currently in place, retired public union employees still get the same pension payments but local school districts have to make up the difference. That has put a crushing financial burden on every local school district in the state.
What the proposed legislation would do
What the bills, as described in an announcement by Kampf's office, would do is guarantee the school districts would contribute a negotiated fixed amount to each employee's pension. But it also shifts the choice of where and how to invest pension money to the individual state employee.
That is called a fixed contribution system and it is similar to how a vast majority of private sector employers offer pension benefits. If you work for a private company and have a 401k you would, in most cases, get a certain amount of money from your employer to fund your 401k. You, the employee, then decide how you want to invest it.
A trade-off for unionized workers
The pay off for state workers under the proposed fixed contribution model is that they would have the freedom to direct how their pension contributions are invested. The potential then is for an even bigger pension payment during retirement, dpending on how well the employees' investment choices do.
Under the current fixed benefit system, pension payments during retirement are guaranteed by the state to be a certain amount every year, regardless of what the markets are doing. The benefit for the retired employees is that they always know exactly how much their pension benefits will pay them. The potential drawback for the retiree is that if the markets are doing well the retiree could have made more money.
The real drawback for school boards, and thus the taxpayer, is that when markets are tanking, it's up to the school districts to come up with the money to fill the gap between the fixed benefit that has been promised and the money lost in a sagging market.
School boards across the state have been begging for the proposed change.
As the stock and other financial markets continue to stay soft or decline, the amount individual school boards must come up with to fill the gap just keeps growing. The projections are grim. For instance, the T/E School Board has been grappling with a project shortfall of more than $16 million in just a few years under the current pension system. Other, larger districts like Upper Darby and Philadelphia are already grappling with that kind of budget shortfall this year, as a result of the fixed benefits pension payment requirements currently in place.
Click on the videos to see a news conference and a Q&A video Kampf's office posted of Rep. Kampf talking about his pension reform proposals.
Here's the full announcement Kampf's office issued Tuesday on the proposed bills.
HARRISBURG-- Rep. Warren Kampf (Montgomery/Chester) introduced two bills that would require future state and school district employees to enroll in an employee-directed defined contribution plan, similar to 401(k) plans prevalent in the private sector, rather than a defined benefit plan.
“This important legislation removes the burden from taxpayers for market fluctuations and historic mishandling of pension obligations for future employees,” Kampf said. “Further, it would offer existing employees the option and an incentive to freeze their benefits, which have in the past been protected by our courts, and switch to a defined contribution plan.”
House Bill 2453 addresses state employees, while House Bill 2454 addresses school district employees.
“The current defined benefit system is unsustainable,” Kampf said. “It is critical that we stop expanding a program that is crippling the finances of school districts across the state.”
At the end of the last fiscal year, Pennsylvania's pension funds for state employees and for school employees were underfunded by more than $30 billion.
“This issue, perhaps more than any other, will continue to have a negative impact on government and school budgets,” Kampf said. “By enrolling new employees in a defined contribution plan, and at least giving the option to existing employees, whose benefits are protected by the courts, we are moving in the right direction for the Pennsylvania taxpayers. This defined contribution system is fair to taxpayers, easier for governments and school districts to budget for, and gives control of retirement funds to enrollees in the system.”