Alan Schankel of Janney Capital Markets expects "robust" retail demand to compliment strong institutional demand on Illinois GOs
Janney Capital Markets managing director Alan Schankel calls the shorter amortization "a good approach."

A Pennsylvania lawmaker on Tuesday filed a bill to shorten the amortization period for the state's two major public pension plans from 30 years to 20, with level dollar funding.

The commonwealth's bond rating is at stake, Rep. John McGinnis, R-Logan Township, said in an interview after filing House Bill 900, one of several pension-related bills before the legislature. All three major bond rating agencies last year downgraded Pennsylvania, citing pension underfunding and overall budget imbalance.

Unlike other bills, said McGinnis, his grasps the actual funding problem, not just plan design.

"The credit rating agencies made it clear in their downgrades that it's the unfunded liability that they're concerned about," McGinnis said following his press conference in Harrisburg. "If House Bill 900 does not pass, no matter what we do on plan design, they'll downgrade us further; if we do pass it, we could get an upgrade, maybe a significant one."

Moody's Investors Service rates Pennsylvania's general obligation bonds Aa3, while Fitch Ratings and Standard & Poor's rate them AA-minus. The combined unfunded liability of Pennsylvania's two major pension funds, the State Employees' Retirement System and the Public School Employees' Retirement System, now totals more than $53 billion.

According to McGinnis, who represents Blair County in western Pennsylvania, the funding schedule his bill creates parallels recommendations last year by a special panel on public pension funding commissioned by the Society of Actuaries.

"Although I can't verify that this would fully fund pensions in 20 years, conceptually I believe it is a good approach to addressing Pennsylvania's funding shortfalls," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

The bill would also boost Pennsylvania's annual pension contribution by nearly $3 billion, to $6.9 billion from $4.2 billion, which McGinnis called "tough medicine," but necessary.

"Of course, arguments can be and will be made about where the $3 billion comes from -- increased revenues or decreased expense," Schankel added. "Generally, increasing contributions will help funding short term and moving to [a defined contribution plan] will improve funding longer term."

Republicans control both branches of the state legislature. Gov. Tom Wolf, a Democrat, proposed issuing $3 billion in pension bonds as part of his fiscal 2016 budget. Janney managing director Tom Kozlik last week issued a strongly-worded report critical of pension bonds.

McGinnis admitted he has an uphill fight in getting passage -- "less than 20% now" -- but said bipartisan support gives him reason for optimism.

"This bill goes across all ideological spectra," he told reporters.

Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow at the Manhattan Institute for Policy Research, said overstated assets, understated liabilities and poor funding practices create pension crises.

"A 20-year amortization is the appropriate benchmark," he said Tuesday. "There is no joy in amortizing costs over 20 years."

According to the Center for Retirement Research at Boston College, private-sector employers must value assets at close to market value, and amortize liabilities over seven years. "Fifteen, in some cases," Dreyfuss added.

The Senate finance committee on Monday, meanwhile, advanced a GOP-backed bill, Senate Bill 1, that would enroll new hires in a defined-contribution, or 401(k)-style plan. It would also let 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.

"This will take the taxpayers out of the risk business," said the bill's sponsor, Sen. Jake Corman, R-Bellefonte. Full floor votes are expected this week.

Democrats objected to lack of a public hearing, especially given that the bill consumed 410 pages. Sen. John Wozniak, D-Johnstown, likened the document to Leo Tolstoy's novel "War and Peace."

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