Pennsylvania, which is staring at a $47 billion unfunded liability, will probably be in line for a downgrade from the major rating agencies should it fail to overhaul its retirement system this session, Gov. Tom Corbett’s budget secretary said.
“It’s always a concern. The rating agencies see the fact that our finances are strained. They see that we only have $61,000 in our rainy-day fund,” Charles Zogby said in an interview Monday.
Illinois last week received general obligation downgrades from Fitch Ratings and Moody’s Investors Service, after which Gov. Pat Quinn called for a special session.
In July 2012, Moody's lowered Pennsylvania’s general obligation bond rating to Aa2 from Aa1. Fitch and Standard & Poor’s assign AA-plus and AA ratings, respectively.
Corbett is pushing for changes to retirement plans for state employees and teachers, with bills pending the Senate and House. Sen. Mike Brubaker, R-Warwick, and Rep. Chris Ross, R-East Marlborough, are the respective sponsors.
But with less than three weeks remaining in the session, state lawmakers must also contend with other legislative initiatives, including transportation funding and the privatization of liquor stores – often called the “big three.” The Senate has already passed a transportation bill, while the liquor bill has cleared the House.
“I’m not an oddsmaker, but I’ll repeat what I said earlier, the governor expects progress on these issues,” said Zogby.
“If you want to increase funds for other programs, you’ve got to get pension reform done,” Corbett told reporters on Monday. “The only other alternative for everyone fighting pension reform is to raise taxes.”
Zogby acknowledged that pensions are a tough sell, amid subject complexity and labor pushback. “It’s been a challenge, crowded agenda notwithstanding. But we were ready back in February. It’s not as if the members are just getting this,” he said.
“It’s a fairly complex subject,” Zogby added, saying he and staff members have held individual briefings with House and Senate members. “We’ve sat with members one by one. It’s difficult for people to get their heads around. But they understand that these obligations are crowding out the general fund.”
Zogby told the Senate Finance Committee on May 29 that unfettered, the combined unfunded liability for the State Employee Retirement System and the Public School Employees Retirement System could surge to $65 billion by 2018, and that pension costs alone could consume up to two-thirds of every new dollar in general-fund revenues.
“The Keystone State’s long history of deferring pension funding has gotten it into a colossal mess,” said the right-leaning Thomas B. Fordham Institute. “The bill collector is now knocking at the State House door. Will Gov. Corbett and the legislature turn the lights out and hide or greet him at the entrance?”
According to the Fordham Institute, legislative paralysis could have dire consequences on the School District of Philadelphia, where benefit costs could rise from $73 million in 2011 to about $350 million by 2020.
“The district has until now faced very modest retirement costs, but only because these were artificially depressed as a consequence of the legislature’s irresponsible history of deferring pension funding,” the institute said.
The district last Friday announced plans to lay off about 3,800 employees, or about 20% of its workforce, as of July 1.
Zogby himself comes from an education background.
“You see it starts to hit home,” said Zogby, who was education secretary under former governors Tom Ridge and Mark Schweiker and later was senior vice president of education and policy for online school curriculum developer and provider K12 Inc.
“Far more states are in difficulty than in good condition,” Zogby added. “Taxpayers are at risk for the markets not meeting the assumptions on defined benefits. There is a level of risk people are starting to see with defined benefits. Are these open-ended agreements appropriate? States are saying no.”