Pennsylvania Gov. Tom Wolf signed a pension overhaul compromise bill that enables future state hires to choose between a traditional benefit plan and a hybrid that includes a 401(k)-style component.
The change will affect new employees beginning in 2019.
Wolf, a Democrat who works with a Republican-controlled legislature, joined bipartisan bipartisan leaders and General Assembly members on Monday to sign Senate Bill 1, which both chambers passed last week.
“Today is yet another demonstration that by working across party lines and branches of government, we can address important issues,” Wolf said at the capital rotunda in Harrisburg.
Pew Charitable Trusts said the move could save Pennsylvania $5 billion to $20 billion over 30 years, depending on investment performance. The bill also establishes an investment committee to target further cost reductions such as lowering fees to Wall Street.
According to Pew, Pennsylvania has the fifth highest fee levels across the 50 states.
Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, expects bond-rating agencies to look at the new bill favorably.
“I don't know if it will lead to upgrades because it won't affect this year's budget, next year's budget or the budget five years out, but it suggests that Pennsylvania's willing to address the problem and that's in the back of the raters' minds if not the front of it," he said.
Pennsylvania has received a series of downgrades the past three years, with Moody’s Investors Service, Fitch Ratings and S&P Global Ratings all citing pension funding problems and budgetary imbalance.
Moody’s rates Pennsylvania’s general obligation bonds Aa3 with a stable outlook. Fitch and S&P each assign AA-minus ratings with outlooks of stable and negative, respectively.
"While the bill represents a bipartisan effort to address the commonwealth's long-term liabilities, it does not address the state's acute budgetary stress," S&P wrote in a comment piece published Tuesday.
Supporters say it will also provide for risk sharing and cost predictability between state employees and taxpayers; increase the overall funding certainty of the retirement systems; and provides adequate retirement security for plan beneficiaries.
The Retirement Security Initiative, a lobbying group for public-sector plans, called the move "a huge win for the state's employees and taxpayers."
Opponents argue that the bill does nothing to curb spiraling debt, with some estimates pegging the unfunded pension liability at $76 billion.
By the time Pennsylvania realizes cost savings in around 2035, the debt will be way out of control, said retired state worker and pension-overhaul advocate Barry Shutt of Lower Paxton Township, Pa.
Shutt, who displays a pension liability clock that sits outside the cafeteria in the capitol building -- mimicking the clock on federal debt in New York's Times Square, called for immediate appropriations toward paying down the debt,
"They did step one, now they have to do step two, the funding," said Shutt.
According to Hummelstown, Pa., actuary Richard Dreyfuss, election-year politics dictated the compromise.
“I think the mood was, ‘Let’s just pass something and we’ll call it pension reform, ‘ ” said Dreyfuss, an adjunct fellow with the Manhattan Institute for Policy Research.
Dreyfuss favors full conversion to defined contribution.
The commonwealth’s two major pension funds are the State Employees' Retirement System and the Public School Employees’ Retirement System. They manage a combined $78 billion in assets.
Starting in 2019, new state workers can choose between a defined-contribution, 401(k)-style plan or one of two hybrids – a default side-by-side hybrid plan or an alternative side-by-side hybrid plan. Both merge a 401(k)-style with defined-benefit, or traditional guaranteed plan.