Treasury Notes provides readers with statistical context, through graphical illustrations, for current state fiscal policy discussions and to facilitate a better understanding of the financial condition of the Commonwealth. The content in Treasury Notes is not intended to advocate any particular public policy position or legislative proposal.

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Part 1: Thoughts on Pennsylvania's Pension Problem

Pennsylvania’s pension challenges are currently the focus of much debate as the Legislature works to enact a new General Fund budget. In this edition of Treasury Notes, we provide some perspective and context – the relative amounts of money necessary to remedy past funding shortfalls; the sources and applications of a pension fund’s revenues; a summary of the reform changes included in Act 120 of 2010; and an update on the implementation of Act 120 reforms. In addition to our customary comparison of Pennsylvania with neighboring states, we offer a comparison of characteristics exhibited by pension systems of states whose plans are well funded. Finally, the power of investment returns over a long period of time is examined using a hypothetical infusion of funds to the pension systems.

Part 2: Commonwealth's Pension Problem

Few fiscal issues will more profoundly affect the economy of the Commonwealth than how we address the current shortfalls facing our statewide public pensions. State policy makers continue to struggle with ensuring these plans provide promised benefit levels while also reducing the taxpayers’ costs of offering a retirement plan. This issue of Treasury Notes continues the analysis featured in the last issue, which reviewed basic pension fund concepts and identified possible causes for current actuarial deficits at the State Employees’ Retirement System and Public School Employees’ Retirement System. Elements of both defined benefit plans and defined contribution plans are examined and compared. Rather than advocating for any particular type of plan, the intent is to highlight certain aspects of these plans that may have escaped attention.

Thoughts on the Causes of Pennsylvania’s Structural Deficit

Although there has been much talk of late about Pennsylvania’s structural budget deficit, the term can mean different things to different people. Accordingly, it is hoped this issue of Treasury Notes will at least help to identify the genesis of Pennsylvania’s existing structural deficit. Reductions in existing sources of taxes – without identifying compensating revenues – and changes in tax policies that fail to track changes in Pennsylvania’s economic base can result in growing revenue shortfalls. As the figures in this issue depict, reducing the Capital Stock and Franchise Tax and many businesses filing at personal income tax rates may be responsible for annual tax revenues coming in $1.9 billion lower than they otherwise would be.