Pennsylvania Pension Obligations: The Tax Man Cometh

By Rep. Fred Keller (R-85)

Another credit rating agency has downgraded the Commonwealth’s credit rating due to the failure of addressing Pennsylvania’s pension crisis.   Fitch Ratings joins Moody’s and Standard & Poor’s in downgrading Pennsylvania’s credit rating and cited unaddressed pension issues as its reason.

The release from Fitch Ratings says that “the Commonwealth’s long-term liability profile including unfunded pension liabilities is above average, and will likely continue growing given the current statutory schedule of persistent pension underfunding.”    The questions many taxpayers are asking: Why should I care and how does this affect me?

In fiscal year 2013-14, taxpayers paid $1.6 billion into the state pension system, or $294.16 for each of Pennsylvania’s 5,446,969 personal income taxpayers (PIT).   Obligations will rise to $2.15 billion in FY 2014-15, $396.04 per PIT taxpayer, and increase annually until reaching $5.69 billion or $1,045.65 per taxpayer, in FY 2034-35.    These payments must be made regardless of any changes to the system. Commonwealth taxpayers are constitutionally obligated to guarantee the currently underfunded pension system.  Enrolling only future hires to a 401(k)-style system will not alleviate the money owed to current employees and retirees, but will limit taxpayer exposure to future funding decisions and investment fluctuations.    The goal of the proposal is to transition into a system that does not make taxpayers the guarantor of a system with so many uncertainties.

Market returns below 7.5 percent will further exacerbate the underfunded liability, resulting in the need for increased taxpayer contributions.   Failure to address the pension crisis means further ratings reductions and higher interest rates.   Borrowing money to fund capital projects, school construction or debt service will become increasingly costly and the cost will be passed onto the taxpayer.   Increasing pension contributions will result in funding cuts to other state programs, such as welfare and education, in order to fund the pension system. The alternative to funding cuts is a minimum $4.09 billion tax increase.

Taxpayers are essentially paying for two retirement systems: their personal 401(k), and the Public Employees’ Pension System. Taxpayers are not guaranteed salary increases, cost-of-living increases, or step raises, but they are required to pay the bill when public pensions become underfunded due to inadequate market returns and careless decisions by politicians.

Putting our trust in Harrisburg got us into this mess. Do we really trust Harrisburg to keep the current system from being underfunded again, or should we entirely remove that decision from the hands of inept politicians?

Representative Fred Keller
85th District
Pennsylvania House of Representatives
Contact:   Ty McCauslin
(717) 772-9979
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