Pennsylvania pension reform

Pennsylvania Gov. Budget Proposal: Overhaul Pension Investment Strategy and Cut Fees, Managers

Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.

On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.

But Wolf is also proposing an overhaul of the systems’ investment strategy.

Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.

The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

Pennsylvania Republicans: State Pension Reform Is “No. 1 Issue” in 2015

Pennsylvania Gov. Tom Wolf, in stark contrast to his predecessor Tom Corbett, has been adamant that he is not on board with any sweeping changes to the state’s pension system – particularly the switch to a 401(k)-style system favored by many of the state’s Republican lawmakers.

But House Republicans re-iterated last week that pension reform remains their “No. 1 issue” going forward.

Video: Lawmaker Talks Pennsylvania Pensions, Reform Plan

In this video, Pennsylvania State Rep. Warren Kampf [R] talks at length about the state’s pension systems – including funding, budget implications, and reform — and how he would address these issues.

Feature Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

Video: New Pennsylvania Gov. Tom Wolf Talks About His Plans for Pension Funding, Reform

Pennsylvania Gov. Elect Tom Wolf will take office on January 20, and sooner than later he’ll be inundated with pushes from lawmakers to re-design the state pension plan.

What should the city’s public sector workers expect under Wolf’s watch?

In this video, he talks in-depth about his plans for the pension system.

Videos of Wolf’s plans for education funding and other major policy issues can be viewed here.

Video credit: LancasterOnline

Pennsylvania Gov. Wolf Open to Issuing Pension Obligation Bonds

New Pennsylvania Gov. Tom Wolf has already said he’ll be taking a hands-off, wait-and-see approach to pension reform.

He acknowledges that the system needs to improve its funding, but said he doesn’t think a switch to a 401(k)-type system is the correct way to approach reform.

A Wolf spokesperson, however, revealed this week that the Governor may be open to issuing pension obligation bonds to help pay down the state’s pension debt.

From the Daily Item:

As Gov.-elect Tom Wolf gets ready to wrestle a $2 billion budget deficit, some at the Capitol say the state should borrow money to relieve one of its biggest financial burdens — cash-strapped pensions.

Lawmakers on both sides of aisle have proposed using bonds to shore up the state’s retirement plans. Wolf is open to the idea, as well, said spokesman Jeff Sheridan, but is also willing to listen to alternatives.

It’s a concept that comes with risks — and controversy. Even advocates for the idea seem to embrace it only because no one has come up with a better one.

Annual costs tied to the state’s public employee pensions are expected to increase by more than $500 million in the coming fiscal year.

At least one lawmaker – Republican Rep. Glen Grell has proposed a plan for issuing bonds to fund the pension system.

But many other Republican lawmakers likely won’t be on board with the bond idea. A switch to a 401(k)-type system is still on the mind of many of those legislators.

Pennsylvania Lawmaker Pushes For Pension Reform Action Before New Governor Takes Office

Pennsylvania Gov-elect Tom Wolf, in stark contrast to his predecessor Tom Corbett, has been adamant that he is not on board with any sweeping changes to the state’s pension system.

But Wolf doesn’t take office until Jan. 20 – and some Republican lawmakers are still pushing for a quick passage of reform legislation before Wolf takes his seat.

Senator John H. Eichelberger Jr. [R] wrote in PennLive recently:

Gov.-Elect Tom Wolf has not yet set forth any legislative priorities, nor have his public statements provided any proposals to address the major concerns facing our state, including our greatest fiscal challenge — the pension crisis.

Given the magnitude of these problems, I urge the House and Senate leadership to reconvene both bodies immediately after the installation of new members and aggressively advance a pro-growth/good government agenda for the citizens of Pennsylvania.

The problems facing Pennsylvania are so pressing that waiting weeks more to address them is a disservice to the taxpayers.

The Legislature’s commitment eight years ago to not return for Sine Die session in the fall has been important for all the right reasons.

Sine Die sessions have been outlawed in many states because of their lack of accountability since outgoing members do not have to answer to the voters. An interregnum session in January poses no such concern.

The governor has no formal role in the legislative process and has no authority to act until after a bill, passed by a legislature representing the people, is sent to his desk for signature.

Waiting for Gov.-elect Wolf to take office before addressing the pressing needs of our state would be unnecessary and, some might argue, irresponsible.

Rep. Mike Tobash, R-Schuylkill introduced a bill in the previous session that would shift some employees into a 401(k)-style system.

But any sweeping pension reform proposals are unlikely to go anywhere under Tom Wolf, who says the state’s previous reforms need time to work.

Newspaper: Pennsylvania Pension Funding and Shale Tax Shouldn’t Be Linked

Last week, a Pennsylvania lawmaker proposed levying a shale tax of 3.5 percent on the state’s frackers. The revenues – estimated to be $400 million annually – would then go to paying down the Public School Employees’ Retirement System’s (PSERS) unfunded liabilities.

One Pennsylvania newspaper agrees that paying down pension liabilities should be a top priority. But it disagrees that a shale tax is the way to do it.

From the Pittsburgh Tribune Review editorial board:

The GOP-controlled state Legislature must make Pennsylvania’s biggest financial woe — $50-billion-plus in unfunded pension liabilities — its top 2015 priority. And it must do so without linking pension reform to Democrat Gov.-elect Tom Wolf’s proposed natural gas severance tax.

Incoming Senate Majority Leader Jake Corman, R-Centre, during a Pennsylvania Manufacturers Association forum at the Pennsylvania Society gathering in New York earlier this month, said he’s willing to consider the severance tax if Wolf will negotiate on pensions. Going beyond compromise, that sets up GOP lawmakers to capitulate to Wolf’s taxing agenda.

Allegheny Institute scholar Frank Gamrat reminds that the extraction tax would have to compensate for the state-mandated elimination of the impact fee, a levy that has brought counties and municipalities nearly $130 million over the last three years. And for the tax to yield the Wolf-estimated $1 billion-plus at current gas prices, “production would have to rise by more than 50 percent.” It’s a quite iffy proposition given current market trends.

A too-high severance tax “could have adverse consequences for Pennsylvania,” says Gamrat. GOP leaders must take heed when he urges that the Legislature not spend “a great deal of (its) time and political capital” on a severance tax and focus instead on “pension reform” to address “the principal cause of the commonwealth’s budget problem.”

The Public School Employees’ Retirement System was 63.8 percent funded as of June 30, 2014.

Two Pension Bills Sitting in Pennsylvania Legislature Likely to Resurface In 2015

Pennsylvania’s outgoing governor, Tom Corbett, made reforming the state’s pension system his top priority over the last year. But his plan – which would shift new hires into a “hybrid” plan with characteristics of a 401(k) – failed to enthuse most legislators.

Still, two pension bills are still sitting in the legislature, and they are likely to be brought up again in 2015. The first bill mirrors Corbett’s “hybrid idea”. As described by the Scranton Times-Tribune:

The hybrid plan, proposed by state Rep. Seth Grove, R-York, would maintain defined benefit plans for current employees and retirees and shift new hires into a plan that has features similar to 401(k) plans.

The proposal has several provisions to help municipalities reduce pension deficits, including guaranteeing a rate of investment return and allowing any excess earnings to be used to reduce the pension plan’s unfunded liabilities, said Rep. Grove.

[…]

The bill was introduced in the last legislative session, but never made it out of the Local Government Committee. Rep. Grove said he plans to reintroduce the bill in the next session.

The other bill takes a different approach. From the Times-Tribune:

The other bill focuses on reforming Act 111, which requires binding arbitration when a municipality is unable to reach a contract with its police or firefighters unions.

State Rep. Rob Kauffman, R-Chambersburg, introduced a bill last year that would, among other things, require an arbitrator to consider a municipality’s ability to pay when issuing an award. It did not make it out of committee, but is expected to be reintroduced this session, said Rick Schuettler, executive director of the Pennsylvania Municipal League, which supports the legislation.

Municipal officials statewide have long-complained that binding arbitration is stacked in favor of the unions, with arbitrators often issuing excessive awards.

How likely are these bills to gain any traction? The second one has the better chance, because incoming Gov. Tom Wolf is opposed to changing the pension system to a “hybrid” plan.

What Tom Wolf’s Win Means For Pennsylvania Pensions

Tom Wolf and Tom Corbett had two very different visions for Pennsylvania’s pension system. If newly-elected Governor Wolf attempts to reform the state’s retirement system, it will look very different than what Pennsylvania residents have experienced over the last few years under Corbett.

If Corbett had won, he would have pushed the legislature adopt a “hybrid” pension plan that incorporates qualities of a defined-benefit plan and a 401(k) plan.

Described by Institutional Investor:

In the 2013 legislative session, Corbett sought to pass pension reform as part of a package of three initiatives (the other two involved privatizing state liquor stores and a state transportation funding plan). Corbett’s pension plan would have enrolled future employees in a defined contribution plan and lowered future defined benefit payouts for current employees. Corbett’s office estimated that these changes would save the state $12 billion in employer contribution costs and $40 billion in plan costs over the next 30 years.

[…]

Corbett’s pension proposal did not pass the legislature. This June Representative Mike Tobash, a Republican, proposed a hybrid pension plan in which new employees would be enrolled in a combined defined benefit, defined contribution fund. This would start the state on the road to a DC system but lessen up-front costs by not shuttering the DB plan.

[…]

Almost immediately, Corbett came out and said he was in “full support” of Tobash’s plan. If reelected, Corbett says, he will call a special session of the General Assembly to tackle the pension problem. Opponents of the plan have taken to calling the plan the Corbett-Tobash pension plan.

But Tom Wolf doesn’t support the hybrid plan. What will the pension system under Wolf look like? He hasn’t offered much in the way of specifics, but he staunchly supports the state’s defined-benefit system. From Institutional Investor:

According to his campaign, Wolf “absolutely opposes changes to current employees’ pension plans, and he believes that a defined benefit retirement plan is the most effective tool for ensuring that our public workers have a financially secure retirement.” Wolf believes that to attract workers and create good private sector jobs, Pennsylvania must offer an attractive and competitive compensation package, which includes a defined benefit pension.

If elected, Wolf has said he will work with the legislature to find a solution to the pension-funding problem. But exactly what that solution might look like, with a governor so “absolutely opposed” to benefit cuts, remains to be seen. The General Assembly is likely to remain Republican, meaning the most probable scenario is a legislature favorable to benefit reform and a governor who is not. Unable to find a solution under four years of a pro-reform governor, a different approach maybe can work.

Pennsylvania’s pension systems are 63.9 percent funded, collectively. Pension liabilities have been the subject of several credit rating downgrades for the state.

Video: The Differences Between Tom Corbett And Tom Wolf On Pensions

News 8 recently interviewed both Pennsylvania gubernatorial candidates. Here’s the resulting segment — Corbett and Wolf talk about pension reform, benefit cuts and how they plan to address pension funding if elected.

A quick summary of where the candidates stand on pensions, from the Associated Press:

-Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

-Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

-Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

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