As the Pennsylvania Senate weighs a bill to change retirement benefits for future state and school workers, critics say the legislation is far from enough.
They say that while it will stem future costs, it doesn't grasp an existing $63 billion liability that's largely responsible for five general obligation bond rating downgrades over the past three years.
"True pension reform needs to include better funding of the pension systems, but that appears to be off the table," said Hummelstown, Pa., actuary Richard Dreyfuss, a senior fellow with the Commonwealth Foundation and an adjunct fellow with the Manhattan Institute for Policy Research, both free-market oriented think tanks.
The House of Representatives on Tuesday approved a so-called stacked hybrid plan under which new state employees would still receive the traditional defined-benefit plan for their first $50,000 of salary, after which a 401(k)-style defined-contribution plan would kick in at the higher pay.
Leaders of both major parties say the measure could save Pennsylvania roughly $5 billion over 30 years. Gov. Tom Wolf's press secretary, Jeffrey Sheridan, estimated the savings for the State Employees' Retirement System and the Public School Employees' Retirement System at $4.05 billion and $1 billion, respectively.
The Senate last December passed a pension bill calling for a so-called side-by-side hybrid, less generous on the traditional defined-benefit plan.
Wolf urged the Senate to approve the House version.
Like Dreyfuss, Villanova School of Business professor David Fiorenza remains skeptical.
"Implementing a 401(k) for new hires stops the leak but not the stream," said Fiorenza, a former chief financial officer of Radnor Township, Pa. "The unfunded liability is too large to stop with just one small solution of a 401(k), even though it is an attempt to help the state and even the pensions at the local level."
According to Fiorenza, an effective pension-system redesign could provide a blueprint for municipalities and school districts, many of which are struggling with their own underfunded pensions.
Pension debate continues against the backdrop of political friction between Democrat Wolf and a Republican-controlled legislature that triggered a nine-month impasse over the fiscal 2016 budget. Wolf in March allowed the $30 billion plan to become law without his signature, leaving Illinois the only state without a 2016 budget.
Moody's Investors Service rates Pennsylvania GOs Aa3 with a negative outlook. S&P Global Ratings assigns AA-minus and negative, while Fitch Ratings assigns AA-minus and stable.
The rating agencies spared Pennsylvania further downgrades in advance of its $991 million sale of unlimited tax GO bonds on June 1.
"Double-A minus is below average for states, although it's still a high rating," said Eric Kim, a director with Fitch Ratings. "We have built their challenges into the rating. The situation hasn't changed so there's no basis for a downgrade."
According to Kim, plan design per se is less of a factor in municipal credit.
"At the end of the day, what we look for in governments is how are they able and willing to meet their funding commitments." he said.
Optimists see common pension ground, however small, as a sign that political tensions in Pennsylvania are easing. They also cited a recently enacted law allowing wine sales at grocery stores, longer state liquor store hours and round-the-clock beverage service at casinos as maybe a prelude to possible privatization for that industry.
"Republicans are starting to receive some wins with more moves towards privatization of the state [liquor] store system," said Fiorenza. "However, the governor will push to get more tax increases if the actual spring and early summer general fund revenues continue to be lower than projections."
More gridlock could surround the $32.7 billion fiscal 2017 budget that Wolf presented lawmakers and is due June 30, though battle fatigue could shorten its length.
All the while, pension debt hovers.
"I'd like to say that I like the plan-design proposals but it looks as though we'll have a return of the defined-benefit plan and that's where the problems begin," said Dreyfuss. "We would be well served by a defined-contribution plan, but we just can't seem to get there."
A silver lining, said Dreyfuss, is that leaders on both sides at least acknowledge the need for improved funding. "It's creeping into the discussion more, time after time, not to say it has traction."
Democrats oppose the funding boost at the expense of programs. Republicans oppose tax hikes.
Pennsylvania is not alone.
Rating agencies last week pummeled Illinois, home to $113 billion of unfunded pension obligations, with another round of downgrades and in New Jersey, the state Supreme Court upheld Gov. Chris Christie's 2011 suspension to cost of living adjustments for retirees' pension benefits. Muni analysts, though, still consider New Jersey's problems severe.
Illinois casts an especially huge shadow.
"Most of the financial and bond industry folks are watching both Illinois and Pennsylvania," said Fiorenza.
Dreyfuss said he hears both sides of the Illinois comparisons throughout Pennsylvania.
"Some people will say we're not as bad as Illinois and we can take a deep breath," said Dreyfuss. "Others will say we're going down that same road, with an ever-growing unfunded liability."
Previous pension-change efforts in Pennsylvania have backfired. Four laws it passed from 2001 to 2010 under the guise of reform - State Rep. John McGinnis, R-Altoona, calls them the "Four Horsemen" -- have resulted in retiree sweeteners, annual cost-of-living adjustments, pushed-out debt, and legislated underfunding through "collars."
"Debt is the drug of choice for politicians, and like most illicit drugs it makes the user feel good in the short run," McGinnis wrote in his book, Future Forsaken: Pennscam and the Demise of the Commonwealth. "Also like illicit drug use, in the long run there will be severe consequences."
The commonwealth, though, has adhered to its 2010 funding plan for PERS and SERS. The contribution rate has risen from 27% of the actuarially required contribution in 2010 to full funding amounts at the beginning in fiscal 2017. The collars from the 2010 law are no longer in effect. Pennsylvania had not fully funded its ARC since 2004.
"To some extent that has come at the expense of structural balance in their budget," said Kim. "And restoring that structural balance, particularly in a period of economic expansion, is their key credit challenge."
The pension debate strikes a familiar chord for Dreyfuss. When he warned of a crisis in a 2006 Commonwealth Foundation
His report "would earn an F in any college research class," the Pennsylvania State Education Association
Since then, Dreyfuss said in a follow-up, the unfunded liability has spiked by 730%.
