During Pennsylvania's twisted seven-month budget impasse, changes to the state public pension system have been mere bargaining-chip companion bills.
Lawmakers have it backwards, said state Rep. John McGinnis, R-Altoona.
"I think the budget is small potatoes compared with the pension liability problem. The budget's a minimal request," McGinnis, a retired Pennsylvania State University professor, radio talk-show host and the author of "Future Forsaken: Pennscam and the Demise of the Commonwealth," said in a lengthy interview.
As Democratic Gov. Tom Wolf and a Republican-controlled legislature try to close a fiscal 2016 spending plan – Wolf two weeks ago approved three-fourths of a proposed $30 billion budget to free up funds for school districts and social service agencies while holding out for increased basic education aid – weighty policy questions such as what to do about pensions and liquor-store privatization get the oh-by-the-way treatment.
"The $30.3 billion plan does not sufficiently address pension reform," Tom Kozlik, a managing director at PNC Capital Markets, said in a commentary.
Pennsylvania's unfunded pension liability is pushing $60 billion – grounds alone for a dedicated special session, some critics say. The massive debt has prompted downgrades and lowered rating outlooks from major bond-rating agencies.
According to McGinnis, plan-design changes alone, such as moving new hires to a defined-contribution 401(k)-style program, or a hybrid with a traditional defined-benefit setup, still leave the existing liability untouched and rating agencies ready to pounce once more.
"Oh yes, absolutely," said McGinnis. "There's no doubt we'll get downgraded again. I'm convinced of it."
All three major bond rating agencies downgraded Pennsylvania's general obligation bonds in 2014, citing the pension liability and to a lesser extent, chronic budget imbalance. Moody's Investors Service rates them Aa3, while Fitch Ratings and Standard & Poor's rate them AA-minus.
Moody's lowered its outlook on Pennsylvania GOs to negative in October. Fitch and S&P assign stable outlooks.
According to Kozlik, the excessive budget delay could also spell even more trouble.
"The delay is likely a signal that increased political and fiscal challenges for Pennsylvania and its related state and local government credits are likely for at least the near and medium term," he said, adding that a final compromise on a spending plan does not assure structural balance.
"[Wolf's] line-item veto relieves some short-term uncertainty, but overall offers no binding solution or significant positives for Pennsylvania local government credit," said Kozlik. "[It] does nothing to strengthen the near-term credit quality of the Pennsylvania state aid intercept program for school districts."
On Wednesday, the state Treasury extended a $2 billion line of credit to the commonwealth to prevent its general fund cash balance from falling to a nearly $1 billion negative balance.
Pennsylvania and budget imbalance have been synonymous for years. Ongoing expenditures exceed revenues by $2 billion, and according to Moody's, the number is closer to $3 billion, or 10% of the overall budget, when considering pension contribution shortfalls.
In "Future Forsaken," McGinnis spared no criticism of the state pension systems – the State Employees' Retirement System and the Public School Employees' Retirement System.
"They are devolving into Ponzi schemes because they are badly designed, badly managed and badly funded," he wrote.
According to documents provided by SERS, the system had $27.2 billion in assets as of Dec. 31, 2014, and paid $3 billion in benefits that year.
SERS spokeswoman Pamela Hile would not comment about McGinnis' remarks.
McGinnis, in his book, blends actuarial science and pension math with a breezy narrative that invokes Warren Buffett, Yogi Berra, Tennessee Williams, Upton Sinclair and Mad Magazine's fictitious Alfred E. Neuman.
He acknowledged the uphill climb in Harrisburg to fix state pensions. Many lawmakers, even more so in a pending election year with all House members and half the Senate up for re-election, consider the subject a third rail.
"We cannot expect humans, including and especially politicians, to ignore their personal interests any more than we can expect dogs to start using chopsticks at dinnertime – it's not just the nature of the creature," said McGinnis.
Because he's a fiscal conservative, McGinnis insists that Pennsylvania accelerate its pension payment schedule to catch up with the debt.
"The reality is that most elected officials don't want to vote for the tax increases to fund pension reform the right way," he said in the interview. "Republicans, Democrats, the House, the Senate and the governor, they all skip past pensions."
McGinnis dubbed four previous "pension reform" laws The Four Horsemen of the Pennsylvania Apocalypse.
The legislative acts under three governors – two Republicans and one Democrat – worsened the situation in myriad ways, he said. They are Act 9 of 2001, Act 38 of 2002, Act 40 of 2003 and Act 120 of 2010.
The results, he said, ranged from retroactive benefit sweeteners – double the amount for lawmakers and judiciary – to poor investment performance, faulty actuarial assumptions, the extension of the amortization period to 30 years and the imposition of collars, or deliberate underfunding.
McGinnis, seen as a gadfly within his own party, recalled how Republican leaders discouraged him from running a slide presentation at a pension-related press conference in the capitol media center.
"I did speak, but in the internal video feed, they ran test patterns instead of my comments," he said.
McGinnis warned that his so-called D-Day – depletion day, when all pension-fund assets run dry – could come within 15 years. Then, he said, all payments to retirees would have to be on a pay-as-you-go basis.
In July, Wolf vetoed a GOP-backed measure that would have transferred new state and public school employees into a 401(k)-style plan, but would have not affected current employees. "This legislation provides no immediate cost savings to taxpayers and does not maximize long-term savings for taxpayers," the governor said at the time.
Last month, with a budget plan hanging in the balance, the House soundly rejected a bill to place future state government and school employees into a hybrid system.
Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow at the Manhattan Institute for Policy Research, is a staunch pension-overhaul advocate, but saw many flaws with the bill lawmakers considered in December.
"I'm happy that they went nowhere," said Dreyfuss, a retired Hershey Foods executive. The pension liability would remain, he said, while the public could have faced tax increases of $1.4 billion to $1.6 billion annually.
Dreyfuss favors switching employees to 401(k)-style plans as long as other measures are in place to catch up with the existing liability.
"To me, defined benefit has to go. That doesn't mean defined contribution is a panacea, but as least it takes political manipulation out of the equation," he said. "As an actuary I have no problem with the concept of design benefit, but it gives the politicians too many levers to pull and you see things like underfunding, retroactive benefits and assumed rates of return that are too high. "
An actuarial note by the Public Employee Retirement Commission, which state law requires with all pension-related legislation, projected $910 million of present-value savings for PSERS under last month's ill-fated House bill.
That amount, however, projected roughly $1.8 billion of savings from a provision known as "cost-neutral option 4," which might not survive a court challenge on contract-impairment grounds. Opinions vary about the legality of that measure, which would neutralize an annuity option for current PSERS members.
McGinnis last year filed House Bill 900, which would eliminate Pennsylvania's public pension debt over 20 years instead of 30 with level dollar funding, about $7 billion annually. The bill is still sitting in committee. "After Nov. 30, it goes poof," he said.
He may amend that bill to reduce the first-year payment by about half, then gradually increase the payments by 2% to 3% over 20 years. "That first lift is the problem politically," he said. "Nobody wants to do it."
