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The Politics Behind Pennsylvania’s Pension Wrangling

When Pension360 last reported on news out of Pennsylvania, its governor was refusing to sign the state’s budget by the July 1^st deadline unless lawmakers passed major pension reform.

The July 1^st deadline has come and gone, and no reform measures have emerged from the legislature. But Gov. Tom Corbett made his move yesterday—signing the budget but forcefully wielding his line item veto power. The strategy: cut vital spending from the budget in an attempt draw lawmakers away from their summer vacations and back to the capitol:

Overall, Corbett struck $65 million from the Legislature’s own appropriations and another $7.2 million in earmarks and other spending items picked by lawmakers, noting that the proposal sent to him last week increased the General Assembly’s own $320 million budget by 2 percent.

“They filled the budget with discretionary spending and then refused to deal with the biggest fiscal challenge facing Pennsylvania, our unsustainable public pension system,” Corbett told reporters.

Overall, the $29 billion budget Corbett signed Thursday does not increase state taxes while authorizing $871 million in new spending, largely for public schools, prisons, pension obligations, health care for the poor and social safety-net programs.

To plug the deficit, it relies on more than $2.5 billion in one-time stopgaps, the biggest use of stopgaps outside of the three years around the Great Recession.

The main appropriations bill passed without a single vote from a Democrat.

Lawmakers made no immediate indication of how they would respond to the line-item vetoes, or whether they would move up planned return dates of Aug. 4 for the House and Sept. 15 for the Senate.

There are two reasons Gov. Corbett is choosing to take a stand now. I’ve already mentioned the first one: lawmakers leave for the summer after the budget is passed and don’t return until as late as September 15. Corbett wants to get them back to the capitol to pass pension reform.

But the second reason is this: Gov. Corbett is facing an upcoming election—and he’s currently trailing in polls behind his Democratic challenger, Tom Wolf.

So if some of this feels like campaign theater, it’s because it probably is. In fact, the political calculus behind Corbett’s recent decisions is one of the more fascinating aspects of this story.

Consider that Corbett could have vetoed the budget entirely, a move that would certainly rile lawmakers and get them back from their summer vacations. But the move would have riled the electorate, too:

A full veto would affect many stakeholders, though most employees would get paid. It potentially could delay money for groups receiving millions of dollars from the state, particularly social services such as day care providers hit hard in 2009 during a 101-day budget impasse under ex-Gov. Ed Rendell.

Corbett wants to be seen as taking a stand to save the state’s finances, not sabotage them. Line item vetoes are a less reckless way of accomplishing that goal.

Political maneuvering aside, Corbett has a point. Pennsylvania’s pension system, as is true in many states, is a fiscal hazard that will only get worse as time goes on:

If lawmakers don’t find a solution to what Corbett calls a pension crisis, costs will steadily rise for taxpayers. Pennsylvania will raise payments into the state’s pension systems by $600 million in the new budget year. The state has $47 billion in unfunded liability in pension obligations.

If you asked Corbett about his line item vetoes, he would probably tell you that, in fact, deep cuts to social services spending will be the new norm if lawmakers can’t get pension costs under control.

Corbett’s actions are making him enemies with lawmakers on both sides of the aisle:

[Democrats accused] Corbett of lacking leadership skills and mishandling the state’s finances while pursuing school funding cuts that they say accelerated school property tax hikes.

“Tom Corbett made this mess,” House Minority Leader Frank Dermody, D-Allegheny, said. “He owns it.”

Republicans stressed that they had worked hard to pass a pension overhaul.

House Majority Leader Mike Turzai, R-Allegheny, said the leading pension bill was hatched by House Republicans, not Corbett, while the Senate’s four top Republicans suggested Corbett had been reckless.

“The state budget process is not a game to be played and vital government programs should never be placed in jeopardy,” they said in a statement.

Pension360 will keep you updated on this story as it plays out over the next few weeks.

Photo by Chesapeake Bay Program via Flickr CC

The GOP Is Floating A Pension Tweak to Fix the Highway Trust Fund – Is It A Good Plan?

We’re used to hearing news of pension wrangling coming from politicians on the state and local level–but today, we get some rare news of a pension debate happening in the United States House of Representatives.

First, some context: The Highway Trust Fund is going to run out of money sometime in August. It is funded by gas tax revenues, but that money has proved insufficient in the face of increased transportation spending.

Courtesy of the Department of Transportation

The Fund is a fairly important one: it is the source for federal spending on highways, roads, bridges and transit. So its insolvency, in short, is problematic. Democrats have previously proposed raising taxes to infuse the Fund with some extra cash. But Republicans have stood in staunch opposition to that method, and they’ve just recently come out with a plan of their own (and it involves pensions):

The proposal, which would be financed in several unusual ways, is expected to generate about $10 billion to keep the Highway Trust Fund from becoming insolvent on Aug. 1 and to pay for projects the fund does not cover. The committee will begin work on the bill Thursday.

The plan would be financed through a financial maneuver known as pension smoothing, which increases tax revenues by allowing companies to delay tax-deductible pension contributions, and by unspecified user fees. Money would also be transferred from a fund that is used to clean up leaky underground storage tanks.

In other words:

Essentially the GOP will allow private firms with retirement plans to contribute less to them next year. That will bolster firms’ profits and, therefore, increase tax collections. In other words Congress will violate its own standards, put into law to protect pensions with sensible accounting, for a short term revenue boost.

The plan would generate about $10 billion and would buy Congress more time to figure out a long-term fix to the HTF’s solvency woes. But it doesn’t come without its drawbacks, as Steve Malanga explains:

None of this is free, of course. Aside from the dangerous trend of allowing private firms to purposely underfund their pensions, the plan boosts federal revenues today at the cost of increasing the deficit over the long term.
Given this proposal, you would think that everything is just peachy with funding of private sector pensions in America. But The Pension Benefit Guaranty Corporation, which is responsible for insuring private pensions, just put out a report estimating it’s on an eight-year path to insolvency itself.
The nation’s laws dictating private sector pension standards were enacted to protect retirement plans. But Congress, in its endless quest for more revenues, can’t even live by the standards that it imposed on companies.

Mr. Malanga presents this chart:

Congress appears to be in a major conundrum–do they fund the HTF now at the expense of the future? Do they leave the Fund empty, and put many major infrastructure projects on hold? Or do they come up with another solution? The third option is simultaneously the most logical and the least likely. Stay tuned.

With Deadline Looming, Pennsylvania Gov. Refuses to Sign Budget Without Pension Reform

While most of the world was sleeping last week, lawmakers in Pennsylvania were scrambling to put the finishing touches on the state budget before the constitutionally-mandated midnight deadline. A little more than an hour before the clock struck 12, a budget was finally put on the desk of Pennsylvania Governor Tom Corbett. Only one problem: he won’t sign it. From the Philadelphia Enquirer:

Gov. Corbett refused late Monday to sign a $29.1 billion budget that the Republican-controlled legislature scrambled to deliver to him just 90 minutes before the midnight deadline.

The legislature approved a plan that includes some increased money for schools, and would not raise any taxes or impose new ones.

But Corbett, a Republican facing a tough reelection battle in the fall, signaled disappointment that the legislature was unable to deliver on one of his priorities: a measure that would change pension benefits for new employees.

“The budget I received tonight makes significant investments in our common priorities of education, jobs, and human services,” the governor said in a statement shortly before 11 p.m. “It does not address all the difficult choices that still need to be made. It leaves pensions, one of the largest expenses to the commonwealth and our school districts, on the table.”

He added: “I will continue to work with the legislature toward meaningful pension reform. I am withholding signing the budget passed by the General Assembly while I deliberate its impact on the people of Pennsylvania.”

It was unclear how long Corbett, who has often boasted of his record of delivering on-time budgets, would hold out. A protracted stalemate could affect the state’s ability to pay bills or workers.

The decision between funding pensions and funding the rest of the state is a difficult one. The ordeal has put Gov. Corbett in between a political rock and a hard place, and its unlikely he will come out of this process unscathed–at least in the electorate’s eyes:

Down by double digits in public opinion polls, Republican Gov. Tom Corbett has few good political choices when deciding by Friday whether to sign the state budget — except some high-risk options of taking on the Legislature, analysts say.

“None of them are great options for the governor in an election year,” said Christopher Borick, a professor and pollster at Muhlenberg College in Allentown. Corbett of Shaler trailed Democrat Tom Wolf of York by 22 points in a Franklin & Marshall poll last week on the November election.

And what are his options, exactly?

Corbett now could:

• Sign the budget;

• Let it become law without his signature on Friday, because a governor has 10 days to consider legislation before it automatically becomes law;

• Veto the entire bill;

• Veto some spending in the bill, including the Legislature’s funding.

Corbett could call a special session, which requires lawmakers to gavel into session, but he cannot compel them to consider pension reform if they return.

Over the years, special sessions have had mixed success, experts say. The governor sets the agenda. Topics have included gun control, crime, transportation and property tax reform.

Lawmakers can gavel out of special session and into regular session to consider anything they want.

“It seems like a no-win situation,” said Michael Federici, a political science professor at Mercyhurst University in Erie. “The closer you get to an election, the less willing Republicans will be to sign on” to pension reform.

Gov. Corbett needs to make a decision by Friday–if he doesn’t veto the bill, it will automatically become law.

Photo by Keith Ramsey via Flickr CC

Illinois Supreme Court Ruling Casts Bad Omen on State’s Pension Reform

While the rest of the country celebrated Fourth of July weekend, members of the Illinois pension sphere got to watch some fireworks of their own. A key Illinois Supreme Court case was decided over the weekend, and the decision does not bode well for the state’s landmark pension reform. (The full court opinion can be read at the bottom of this page.)

According to the 6-1 decision, the pension protection clause — which says that retirement benefits are a contractual agreement that “cannot be diminished or impaired” — applies to other retirement benefits, not just pensions. That overrode the state’s argument that its emergency powers, in dealing with its budget crisis, justified an increase in what retirees must pay for their health benefits.

The court rejected the state’s argument that health care benefits are not covered by the pension protection clause, finding that there is nothing in the state constitution to support that. The only question now is whether the reduction in the state’s health care subsidies constituted an impairment or diminishment of those benefits.

Although the ruling doesn’t directly apply to pensions, the writing seems to be on the wall.

“If the justices can read the pension clause of the constitution to protect health benefits, they certainly would use it to protect pension benefits,” former state Budget Director Steve Schnorf said.

“This bodes very, very ill” for the pension cuts the Legislature approved for state workers, and for a similar set of trims Mayor Rahm Emanuel wants for his workforce, he added.

Time after time, without finally resolving the issue, the court seemed to go out of its way to knock down any changes not agreed to by workers unions, and perhaps by each individual worker.

For instance, one argument defenders of the new pension law have offered is that unfunded pension liability now is so large — $100 billion in the state funds, and at least $32 billion in the city funds, for instance — that government has a right to order changes, using its so-called police powers, to set spending priorities. But, said the court, “In light of the constitutional debates, we have concluded that the (pension) provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

In other words, pony up.

And as far as Cost-of-Living Adjustments:

Another argument offered by reform proponents is that annual cost of living adjustments in pensions are not protected by the state constitution in the same way that a person’s original pension is. In other words, a worker who initially got, say, a $3,000-a-month pension is entitled to get it and no more in the future, regardless of inflation. COLAs are far and away the biggest element in the retirement-funding crisis.
But, ruled the court, “Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner. ”
So, the current 3 percent guaranteed annual COLA would appear to be here to stay.
Ironically, such an interpretation would apply both to the pension reform bill pushed by Gov. Pat Quinn that’s working its way up to the Supreme Court and to an alternative plan offered by his opponent Bruce Rauner. The GOP gubernatorial candidate proposes moving workers to a defined-contribution system that caps state funding.

Many believe lawmakers should now be scrambling to come up with a Plan B to reform pensions in a way allowed by the courts:

State and local lawmakers had better get working on a Plan B. Illinois needs alternatives to the state pension-reform law passed in December and to the Chicago pension-reform law passed in May. The options are limited — it may come down to a constitutional amendment — but the state’s best minds better get cracking.
It isn’t an exaggeration, even in the slightest, to say Illinois’ future depends on it.

There is now but one key question: Does a viable pension reform alternative exist? A bill pushed by Senate President John Cullerton, considered an alternative by many, is now almost certainly off the table. That bill gave workers a choice between full pension benefits or subsidized health care — choose pension benefits and health care would be cut. Given Thursday’s ruling, that now seems highly dubious.
One possibility would be to amend the constitution to modify the pension protection clause — not eliminating it but weakening it some. However, this is a lengthy process and may still not protect the state legally if it reduces benefits already promised.

Read the court’s entire opinion here:

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Photo by Mr.TinDC via Flickr CC

Reform Watch: Australia To Raise Retirement Age to 70

The world is now watching Australia as the country readies itself for a bold shift in pension policy: raising the retirement age to 70, which would be the highest retirement age in the developed world.

Australia’s workers had previously been able to retire at 65. The five year increase will be phased in over many years, and will take full effect in 2035. The plan was announced by Australian Treasurer Joe Hockey:

Hockey is part of the Liberal-National coalition that won power in September, pledging to end what he called the nation’s Age of Entitlement and repair a budget deficit forecast to reach $49.9 billion AUS this fiscal year. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing the retirement age higher to head off a gray disaster caused by a growing army of pensioners and a declining pool of taxpayers.

The ratio of working-age Australians to those over 65 in the world’s 12th-largest economy is expected to decline to 3-1 by 2050 from 5-1 in 2010. In Japan it’s already below 3-1 and in Germany it’s close to that level, according to the International Labor Organization.

“While Australia may be the first to raise the age to 70, it won’t be the last,” said Steve Shepherd of international employment agency Randstad Group in Melbourne. “The world will be watching this.”

Australia’s 2.4 million state-retirement-age pensioners draw about $40 billion AUS a year, making it the largest government spending program. That’s forecast to rise 6.2 per cent a year over the next decade, according to an independent review commissioned by Prime Minister Tony Abbott. The program provides the main source of income for 65 per cent of retired Australians.

Failure to rein in the program would put a greater onus on younger workers to fund it through increased contributions and taxes. Raising the pension age may also mean more competition for those just starting in the workforce. Unemployment among those aged 15-24 reached a 12-year high of 13.1 per cent in May, more than double the national average of 5.8 per cent.

It’s also interesting to note the results of a recent study on retirement age:

Research shows many people struggle to work until they are 60, let alone 70. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows that the average retirement age from 2003 to 2011 for men was 62.6 years old and for women it was just under 60. While that is rising, it is still well below the current retirement age of 65.

And the HILDA data shows, for men, nearly half of all retirements are involuntary with most due to poor health. Women are more likely to retire on their own terms but still 43 per cent retire due to reasons such as ill health, losing their job or having to care for others.

The rest of the world will be happy to sit on the sidelines and watch this fascinating policy shift play out.

Finding Common Ground In Pension Reform: Lessons from the Washington State Pension System

“In the wake of the economic recession, public pension plans have emerged as an increasingly salient and contested public policy issue. The debate over public pensions is driven in large part by the fact that many public retirement systems are significantly under-funded. For example, numerous estimates peg the national shortfall in public pension assets relative to liabilities at several trillion dollars.

Given the pervasiveness of funding shortfalls, there have been proposals to shift public-sector pensions from defined benefit (DB) plans towards defined contribution (DC) plans which are, by definition, fully-funded. However, this approach is not without controversy, as it shifts the future risk associated with investment returns earned on pension assets away from taxpayers and towards employees and raises questions about employee preferences for different types of pension plans and how reform might affect retirement security and workforce composition. In addition, moving towards a DC-type pension system does nothing, by itself, to address existing shortfalls.” Read the complete report here.

Photo by Gates Foundation via Flickr CC License

Illinois judge halts reforms until constitutionality determined

When Illinois lawmakers passed their landmark pension reform law in December, they marked their calendars for June 1, 2014.

That’s the date the law was supposed to go into effect, but lawmakers, unions and most citizens knew better—a myriad of legal challenges would surely push back the implementation of the reforms and pave the law’s path to the state Supreme Court.

Today, an Illinois judge confirmed that sentiment when he ordered a temporary restraining order on the law that will prevent it from taking effect on June 1. The ruling ensures that the law won’t go into effect until the legal battles over the law’s constitutionality are resolved.

The decision is a major victory for the group whose challenge catalyzed today’s judgment: We Are One Illinois, a coalition of retiree groups and unions.

From the Chicago Tribune:

The groups argued the law is unconstitutional because it scales back benefits and raises retirement ages. Under the Illinois Constitution, public employee pensions are a “contractual relationship” with benefits that cannot be “diminished or impaired.”

“This is an important first step in our efforts to overturn this unfair, unconstitutional law and to protect retirement security for working and retired Illinois families,” said Michael T. Carrigan, president of the Illinois AFL-CIO, the point man for the union coalition.

Judge John Belz recognized the retirees and others in the pension systems could suffer “irreparable harm” if the law is allowed to go forward while the constitutionality issues is still being fought out in the courts, according to his order. The case is expected to wind up in the Illinois Supreme Court.

The decision won’t affect Illinois’ budget; lawmakers anticipated the legal challenges against the reform law, and didn’t incorporate its projected effect into the budgets for fiscal year 2013 or fiscal year 2014, which begins July 1.

Photo Credit: SalFalko via Flickr Creative Commons License

Report: Kentucky reforms benefit most workers—but hurt some, too

It’s early yet, but a new analysis of Kentucky’s recent pension overhaul says that the reforms are working—at least for some.

The study, released by the Urban Institute today, shows that the state’s reform measures will result in more benefits for most workers, although the most experienced workers in Kentucky’s system are not likely to benefit at all.

From the Courier-Journal:

Researchers concluded that the shift will provide at least as much lifetime benefit to 55 percent of vested employees and that most workers with up to 24 years of service will fare better compared to the traditional plan.

But, the report notes, most workers with more than 25 years of service, or those hired later in life, would benefit more from the traditional plan. And employees with 30 years or more will receive about $180,000 less under the change, it said.

The reform measures, signed into law last year, switch public employees from a defined-benefit plan to a hybrid cash-balance plan.

A recap of the new plan:

The state’s traditional retirement plan determined pension benefits based on an employee’s salary. The cash balance approach guarantees a 4 percent return while basing additional benefits on investment performance at Kentucky Retirement Systems. But the change only applies to employees hired after Jan. 1.

Proponents argue that it will help spread out investment risks between government and workers and save the state money during economic downturns.

Draine said the report shows 90 percent of the benefits went to only a quarter of employees under the old system, while that number drops to 66 percent with the reforms.

But critics contend that it makes retirement income less predictable for public employees.

Kentucky is also required under the law to make its full Actuarially Required Contribution, which it frequently skipped out on over the past decade. That comes at a cost of about $100 million annually, which was paid for by eliminating COLAs and increasing the state’s personal income tax.

As of 2011, Kentucky’s retirement system has the 7^th highest unfunded pension liability in the country. The Kentucky Employees Retirement System is only 50.5% funded.

Photo Credit: OZinOH via Flickr Creative Commons License

Judge: Challenges to Rhode Island pension overhaul will move forward

Rhode Island’s 2011 pension overhaul—considered to be the most sweeping pension reform law in the country—has had its fair share of legal challenges.

A number of public sector unions and retiree groups currently have suits pending against the law, and their arguments, as with similar cases in other state, center on provisions in the state constitution that protect pensions as contracts.

Rhode Island was hoping that those arguments wouldn’t hold water and requested to have the cases thrown out. But Superior Court Associate Justice Sarah Taft-Carter ruled today that the unions’ arguments are too strong to simply dismiss.

From the Washington Times:

Unions and retirees have argued that their pension benefits constituted an implied contract, while the state disputes that. Taft-Carter notes in her decision that unlike some other states, Rhode Island’s constitution and law do not explicitly state that public employees have a contractual right to their pension benefits.

But she writes that other factors support it being a contract, such as the fact that workers have served the public for a required number of years and contributed a required percentage of their salaries to the pension system in return for pension benefits.

“A valid contract exists between plaintiffs and the state, entitling plaintiffs to their pension benefits,” she wrote.

Taft-Carter notes that her standard for reviewing the state’s motion to dismiss was not whether the lawsuit is likely to succeed, but rather to assume the allegations are true, and examine the facts in a light favorable to the unions and retirees.

Rhode Island Gov. Lincoln Chafee and Treasurer Gina Raimondo said in a joint statement that they expected the judge’s decision and are now preparing for trial.

Photo Credit: Governor Chafee via Flickr Creative Commons License

Rhode Island pension reform could be scaled back with settlement proposal

Rhode Island has been entangled in legal battles since the state signed its sweeping pension reform bill into law in 2011. But a new proposal may bring an end to the legal challenges mounted against the law once and for all, and in the process soften some of the law’s strongest provisions.

The 2011 law, titled the Rhode Island Retirement Security Act, aimed to curb the state’s pension costs by $4 billion over 20 years. It did so by raising retirement ages for most workers, suspending COLAs for retirees, and shifting workers into a new 401(k)-type retirement plan.

The settlement would keep in place most of the 2011 law. But it would also bring some key changes, as outlined by the New Haven Register:

The settlement would give cost-of-living increases to retired government workers sooner than the current law would allow. It calls for a one-time 2 percent cost-of-living pension increase once the settlement is enacted by lawmakers. Additional increases would come in 2017, and every four years thereafter until the pension fund is 80 percent funded.

The existing law calls for limited increases every five years until the 80 percent funding level is reached. The fund is now about 60 percent funded.

The settlement would also call on public workers to contribute slightly more toward their own retirement benefits.

The proposed changed would cost Rhode Island $13 million and the state’s towns and cities $11 million, and would raise the state’s unfunded liabilities from $4.8 billion to $5 billion.

The proposal must now pass through a series of votes by union members, a judge in the state Superior Court, the systems retirees and finally by state lawmakers.

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