Report: Pennsylvania could save billions on pensions

Dec. 21--Gov. Tom Wolf, accompanied by the state treasurer and lawmakers, released a report Thursday recommending the state's two debt-ridden public pension systems change how they invest and manage money to potentially save taxpayers up to $10 billion over the next three decades.

The report was released as part of a bipartisan commission set up by a 2017 pension law. The law also set up new retirement plans for all new public school employees and most new state employees. Those retirement plans go into effect Jan. 1 for new state workers and July 1 for new school employees.

The report's recommendations and the new retirement plans do not affect the promised guaranteed pension benefits of current workers and retirees. Nor do they impact the roughly $72 billion in debt the pension plans are carrying for those same workers and retirees.

The commission's report, documented in thousands of pages of testimony, was not an attempt to "create a blame game" for how prior administrations and legislatures helped cause the debt problem by not fully paying the employers' share of workers' pension obligation, Wolf said at a news conference. The commission's goal, he said, was to look toward the future to save taxpayers money by changing how the systems operate and invest funds.

"We are moving forward and still have the unfunded pension liability," Wolf said, adding his administration will continue to annually budget enough money to cover a fiscal year's worth of old debt.

The state is now spending 10 percent of its annual budget on the pension debt, said Rep. Mike Tobash, R-Schuylkill, who led the commission. The commission's job, he said, was to streamline costs without compromising retirement benefits.

"It's forward thinking," Tobash said.

The report's main recommendation calls for the Legislature to pass a bill merging the investment offices of the smaller State Employee Retirement System with the larger Pennsylvania School Employees Retirement System.

There's no reason the systems, established a century ago, should be spending more than $23 million annually on staff and consultants to operate their own investment operations, the report said. One office could serve both functions given how the systems have similar investment portfolios and are shooting for the same 7.25 percent rate of return, the report said. Having one investment office can save taxpayers $9 million annually, the report said.

"The investment costs per dollar of assets under management for a $100 billion pension fund was 18 percent lower than a $50 billion pension ..." the report states.

How?

If the systems' investment functions were consolidated, the state would have more leverage and buying power in the investment market, Treasurer Joe Torsella, a Democrat, said.

"It's the economies of scale," he said after the news conference.

If the Legislature agrees to merge the investment functions, both systems would remain separate agencies with their own day-to-day managers and employees.

The commission did not think the Legislature would be willing to merge the systems' entire operations, Tobash said. So it settled for only the investment function, he said.

Other annual savings, totaling $116.3 million, could be found if the systems renegotiated or ended contracts with private investment companies and funds. That savings could come from lower fees with the firms or by switching investments from funds that are actively managed by traders to more passive funds that are tied to certain Wall Street benchmarks.

All savings -- $333.3 million annually over 30 years -- are based on the assumption the systems would hit their annual presumed 7.25 percent rate of return. If the systems' investments go above that benchmark, savings could be greater and vice versa if returns fell short.

The Legislature returns to session in January.

steve.esack@mcall.com

717-783-7305

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