Gov. Tom Corbett's hybrid proposal to overhaul Pennsylvania's public employee pension system could pass despite opposition from both the left and the right, said one noted Keystone State actuary who is critical of the plan.
"It might. It's a good question people are asking on many levels," said Rick Dreyfuss, a senior fellow at the Commonwealth Foundation, a Harrisburg-based free-market think tank. "We have other issues at play, things like liquor privatization. It could be part of a grander scheme."
Pennsylvania faces an estimated $50 billion unfunded pension liability that has triggered downgrades and continued harsh glare from bond-rating agencies. The state could face further backlash from the rating agencies if lawmakers do not enact some kind of pension change in their current session, scheduled to end June 30.
Fitch downgraded Pennsylvania's general obligation bonds to AA from AA-plus in July 2013 after the state let pension overhaul slide. Fitch and Standard & Poor's, which also assigns an AA rating, have negative outlooks. Moody's Investors Service assigns its Aa2 rating and stable outlook.
State lawmakers are no strangers to "linkage," code for tying legislative initiatives in one bow. Attempts to link liquor and transportation bills last year failed in the session that ended June 30, 2013, although Corbett signed a $2.3 billion transportation bill during the fall session. Corbett's proposal to privatize the state's liquor-store system is still before the legislature.
The Republican governor last week endorsed a bill to replace Pennsylvania's two largest pension plans for state and school employees with a less-expensive hybrid system that would apply to most new employees starting in 2015. The system, which combines traditional defined-benefit plans with a 401(k)-style plan, would not affect current employees.
A separate hybrid proposal by state Rep. Mike Tobash, R-Schuylkill, would include a defined-benefit pension covering a portion of the salaries - up to $50,000, initially - and up to 25 years of service, and a 401(k) plan for other portions of the salary and service.
Dreyfuss, also an adjunct fellow at the right-leaning Manhattan Institute for Policy Research and a former Hershey Co. executive, opposes hybrid plans because he considers them prone to political manipulating, like defined-benefit plans.
He said "decoupling" plan design and funding allocations is bad strategy. "You need an integrated system with the funding responsibilities," he said.
Dreyfuss also objects to collaring, or restricting state payments into the system. "Contributing less to the ARC [actuarially required contribution] will raise big, red flags to the bond rating agencies and those of us who want the system funded," he said.
According to S&P, Pennsylvania has not fully contributed to its ARC since 2004. The state must make "a concerted effort to bring revenues and expenditures into alignment," rebuild cash reserves, and pass "meaningful pension reform," S&P analyst John Sugden warned in a late April report to investors.
The union-funded Keystone Research Center called the Corbett and Tobash plans "moving backwards." Executive director Stephen Herzenberg said in a commentary that they would make little progress in alleviating Pennsylvania's pension debt.
"In addition to the risk of a transition cost, by combining the Tobash plan with the governor's 2014 proposed collar reductions, the Corbett-Tobash variation would use additional benefit cuts like a new credit card, spending a substantial portion of the savings in the first four years and leaving the state with a similar amount of debt but ratcheted-down pension benefits."
