Pay raise adds to benefits
By Debra Erdley and Brad Bumsted
Monday, October 24, 2005
The legislative pay raise that angered people across Pennsylvania carries hidden costs, a study scheduled for public release this week found.
In addition to money for the raises, taxpayers will have to kick in about $41,000 per lawmaker per year to cover retirement benefits.
The Commonwealth Foundation study, conducted by Rick Dreyfuss, who recently retired as benefits coordinator for Hershey Foods, comes on the heels of a legislative pension analysis by the Pittsburgh Tribune-Review. The Trib found that the Legislature's July 7 pay raise would boost the pension benefits of its top seven leaders by $9,000 to $20,000 a year should they retire after Dec. 31, 2006.
Dreyfuss used actuarial formulas, common in the pension world, to calculate the expected state contribution toward pensions and health care for retired lawmakers. He concluded the state would have to set aside more than half the new annual base salary of $81,050 for the next 10 years to fund the pension and health-care benefits due any lawmaker elected at age 40 who decides to retire at 50 and lives to be 85.
The legislative retirement plan, which lawmakers gave themselves four years ago, allows members of the General Assembly to retire at 50 with full pension benefits after three years in office. Those who have at least 10 years in office also qualify for full medical benefits until age 65 and state-funded Medigap insurance until death.
To fully fund the insurance benefit alone, the state would need to set aside $22,000 a year per lawmaker. The public's portion of the pension benefit would be $19,000 a year, Dreyfuss said.
"These are hidden costs," he said. "They aren't talked about a whole lot."
State Rep. Steven Nickol, R-York County, considered one of the General Assembly's most knowledgeable members on pension issues, agreed the salary boost for lawmakers on top of the 2001 boost in their pensions will increase costs, but said it won't have a "huge effect" in the overall state retirement system.
The increased pension costs for 253 members of the General Assembly are a small piece of the pension system that covers about 108,000 active state employees, Nickol said.
Extended health-care costs for retired lawmakers are harder to track down. They are not part of the benefit trust that oversees health-care benefits for other state employees; rather they are handled directly by the House and Senate in their annual operating budgets.
Although lawmakers might not be worried about pension costs and retirement health care, many employers in the private and public sectors are re-evaluating their approach to such benefits.
A recent study by the Employee Benefits Research Institute showed that the number of private employers providing pension plans that provide lifelong cash payments such as the Legislature's have plummeted during the past 25 years. In 1979, lifelong pension payments were offered by 62 percent of private companies. Only 13 percent provided them in 2004.
Retirement health insurance also is on the block.
Last week, General Motors announced a tentative plan to reduce its liability for retiree health-care costs by $15 billion. Closer to home, the Intergovernmental Cooperation Authority, Pittsburgh's state-appointed oversight board, told Mayor Tom Murphy last week it wants to change his proposed budget to shift health-care cost increases to employees.
"When you see the private sector struggling every day to renegotiate and make modifications to plans, this raises questions in my mind about stewardship," Dreyfuss said.
Others worry about the state's ability to pay when the growing retirement bills for lawmakers come due.
"They may be building an enormous deficit going forward," said former state Rep. John Kennedy, R-Camp Hill.
Kennedy, a small-business owner who served in the Legislature from 1980 to 1988, is believed to be the only lawmaker in recent history to turn down a state pension. He filed an unsuccessful court challenge to a 1986 legislative pay raise and recently launched declarationofaction.org, a Web site aimed at sparking reforms in state government.
Nickol, who argued against the pension boost four years ago, opted for a lower formula that will reduce the pension he eventually receives. He declined the new formula built on 3 percent of a lawmaker's average salary and took one using 2.5 percent -- the same rate used for other state employees.
Kennedy speculated that a reform-minded Legislature could require other lawmakers to follow that example.
"These are man-made laws," he said. "They can be changed."
Vice Chairman of Voter Education