tom corbett pensions

Pennsylvania Gov. Tom Corbett has spent the first week of August touring the state as part of his re-election campaign, and he’s using the opportunity to hammer home Pennsylvania’s need to lower the costs of its retirement system, and tout his policy ideas on the subject.

One idea that Corbett has frequently proposed is shifting some state workers from their defined-benefit plans into 401(k)-style plans. Nearly every state burdened with pension obligations has considered this policy option. Many have even implemented it. From PennLive:

Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan, our pal Deb Erdley at The Tribune-Review reports.

Corbett’s repeated harping on the pension issue has gotten him, to some extent, what he wanted back in June: a debate. Even if state lawmakers remain on vacation, many experts have been weighing in on the issue.

Richard Johnson, director of the Washington-based Urban Institute’s Program on Retirement Policy, makes this note on the switch from DB to DC:

“These defined-benefit plans work very well if you’re going to stay for 30-35 years, but they require a pretty large employee contribution, and they don’t work very well for the shorter-term worker,” Johnson tells the newspaper.

Stephen Herzenberg of the Keystone Research Center points to the experiences of other states as an argument against switching to a 401(k)-style plan:

In fact, when Florida created this choice, its traditional pension was overfunded. In a decade-plus since, the investment returns of Florida’s traditional pension have been 10 percent higher than the return on individual accounts. Over the 30 years that typical retirement contributions grow, this difference would become a one-third gap in savings available for retirement.

Alaska and Michigan did shift all new hires into 401(k)-style plans but the switch did not, in fact, work. Pension debt in both states grew.

Rhode Island did save some money but only because of deep cuts in traditional pensions, including for current retirees. The state then wasted some savings on a “hybrid plan” for new employees that included 401(k)-type accounts with low returns and high fees.

Guaranteed pensions need sound management and can get in trouble if politicians fail to make required contributions. But long term, there’s no beating the high returns of professional managers and the low costs of pooled pension assets. That’s why Pennsylvania’s current pension design is the best deal, long term, for taxpayers and retirees.

Nathan A. Benefield, Vice President of Policy Analysis at the Commonwealth Foundation, took issue with that critique:

Herzenberg claims that reforms moving state workers to a 401(k)-style retirement plan in other states have “failed” because their traditional, non-401(k) pension funds lost value during the most recent recession. Huh?

Every state¹s pension fund lost value when the stock market fell, including Pennsylvania’s, which went from being fully funded to today having more than $50 billion (and growing) in unfunded liabilities. That’s about $10,000 per household in the state.

Now here’s the rub. States like Michigan and Alaska would have lost more from their pension funds had they not started to convert new employees into a 401(k). In fact, without reform, Michigan’s unfunded liability would be upwards of $4.3 billion more.

Thankfully, because lawmakers in the Wolverine state acted early, they saved taxpayers those additional costs. Pennsylvania would have also had substantial savings had we followed Michigan’s lead.

Corbett has tried desperately to make pension reform a campaign issue. It has worked. He’s gotten the media, thought leaders and everyday citizens talking about Pennsylvania’s retirement system and the policy options to address the issues Corbett foresees.

That’s healthy for the state—but make no mistake, it’s probably just as healthy for Corbett’s election chances.

Screen shot 2014-08-08 at 10.35.12 AM — Credit: Wikipedia

He’s been gaining ground on challenger Tom Wolf in recent weeks.

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

Tag: tom corbett pensions

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