HARRISBURG, Pa. — Simply passing legislation and calling it pension reform will backfire if it does not change the underlying actuarial math that underscores Pennsylvania's funding problem, an expert told a legislative panel on Thursday.
"We do not have pension reform by decree. It has to conform to actuarial principles," Richard Dreyfuss, an adjunct fellow with the free-market think tank Manhattan Institute for Policy Research, told members of the House state government subcommittee.
Dreyfuss
"Given this ever-increasing unfunded liability, it is far too late for incremental reforms or pseudo-reforms to suffice," said Dreyfuss, a Hummelstown, Pa., actuary who coordinated employee benefit packages over 21 years as a Hershey Foods executive.
The legislature is considering a plethora of pension-overhaul bills with three weeks remaining in its main session. In addition, Gov. Tom Wolf has proposed $3 billion in pension obligation bonds as part of his $30 billion budget for fiscal 2016. Dreyfuss opposes pension bonds, saying they further leverage the system and create incentives to improve benefits without really funding them.
SERS and PSERS are each funded at roughly 60%, though PSERS' level may be artificially high because of the averaging system it uses.
The House committee was holding its second hearing in three days on Senate Bill 1, which has already cleared the upper house.
The 410-page bill would put new employees into a 401(k)-style defined contribution plan while letting current employees stay in the traditional defined-benefit public pension plan and decide whether to contribute more to maintain current benefit levels or take a benefit reduction instead.
While calling the bill "a starting point" in dealing with the state's pension crisis, Dreyfuss called for additional plan design and policy changes. Any pension legislation, he said, should include the funding adjustments offered in by state Rep. John McGinnis, R-Logan Township. That bill, House Bill 900, would shorten the amortization period for SERS and PSERS from 30 years to 20. Dreyfuss also called for benchmarking public pension plans against private sector norms.
Earlier Thursday, several labor groups opposed the bill.
"Public employees should not have to pay for the mistakes made in Harrisburg and on Wall Street while taking even more money out of taxpayers' pockets," said Richard Bloomingdale, president of the Pennsylvania AFL-CIO, referring to the commonwealth's underfunding the past 10 years, and to market volatility. "Switching our employees to a 401(k)-style retirement plan would be fiscally irresponsible and unfair to workers who have spent years paying into the pension system."
Both sides acknowledged the possibility of court challenges to any pension bill that passes, given Pennsylvania Supreme Court case law and the recent Illinois Supreme Court ruling that struck down that state's pension changes. The latter resonated through the capital markets and resulted in Moody's Investors Service lowering Chicago's bonds to junk.
In Harrisburg, the risk of political gridlock between Wolf, a Democrat, and a strongly Republican legislature could weaken whatever bill finally passes.
"Anything passed will definitely be watered down," said Gary Lewis, a private-sector financial consultant and former mayoral candidate in Scranton. "You always run that risk, but the financial problem in Pennsylvania is so pervasive I can't think of anyone that would want to run for another two years if no deal is made."
Moody's Investors Service rates the commonwealth's general obligation bonds Aa3. Fitch Ratings and Standard & Poor's rate them AA-minus.
Pennsylvania hasn't fully funded its actuarially required contribution, or ARC, since 2004.
"For Pennsylvania to get in the good graces of the investment community, we need to see evidence that its pension problem is abating a little bit or at least not getting worse," said Paul Mansour, a managing director at Hartford, Conn., asset management firm Conning. "At this point I don't see any evidence that pension liabilities are going to be reduced.
"I would put them in the second tier of concern. Clearly Puerto Rico and Illinois are worse than that, in the first tier," he said. "Pennsylvania's like Connecticut, New Jersey and Kentucky's in there, too. At this point in the economic cycle it is concerning that these Mid-Atlantic states have neither recovered all of their lost jobs nor have rebuilt their fund balances back to safe levels."
Pennsylvania's localities are also struggling with pension liabilities. State Auditor General Eugene DePasquale, who chairs a Wolf-appointed task force on the matter, has labeled 562 municipalities as distressed with a combined liability of nearly $8 billion.
The task force report will come out within weeks, DePasquale told The Bond Buyer, as will a separate report examining the eligibility of double-pension benefit recipients in Scranton. The discovery of tapes in the Scranton investigation has forced a delay in that report.
Late Wednesday, Sen. John Eichelberger, R-Blair Township, filed a bill that would create defined contribution plans for all new public safety and other municipal employees. Under House Bill 755, current and retired employees would retain all existing rights and benefits.
