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Pennsylvania Pension Reform Not Likely As Election Draws Closer

The election for Pennsylvania governor draws closer, but pension reform seems farther away than ever.

Gov. Tom Corbett has made pension reform his campaign cry. But he remains down in the polls as the urgency to pass pension reform dwindles around him—both from inside and outside the capitol. ABC 27 reports:

A typical late-August day and all is quiet at the Capitol.

But this silence is not golden for a governor who has criss-crossed the state begging/cajoling/shaming/pleading with lawmakers to give him pension reform.

“We have a bill out there right now that I want the legislature to come back and finish,” Governor Tom Corbett said a week after the legislative exodus in early July.

The governor has poster boards calling pensions a $50 billion problem that will burden future generations of Pennsylvanians.

There is disagreement among lawmakers on how to fix pensions and disagreement as to whether there’s even a problem.

“The word crisis is being used for ideological reasons, not any mathematical reasons,” insists Senator Rob Teplitz (D-Dauphin).

Teplitz, and most Democrats, believe the problem was created by the state failing, for years, to pay what it owed toward pensions and now it’s time to pay the consequences and pay up.

“It does feel more painful,” Teplitz said. “But just like any family that delays making its credit card payment, sooner or later you gotta make that payment.”

There’s no urgency among lawmakers because there’s not urgency among voters, said one pollster. Education funding is on the mind of the electorate, not pension reform. From the Philadelphia Daily News:

[Pollster Terry] Madonna said that for voters the pension-funding increase is “not something they relate to,” while Pennsylvania school districts raise local property taxes, lay off staff and curtail programs.

Other high-level observers agree that voters aren’t as engaged on pension issues. From ABC 27:

“It’s something that the public still hasn’t been able to get its arms around,” said Lowman Henry, a conservative commentator with the Lincoln Institute. “As a result, you’re not seeing that type of collective pressure on lawmakers that is going to push them to make what are very difficult decisions in an election year.”

The latest poll shows Corbett trailing his Democratic challenger, Tom Wolf, by 25 points. Wolf currently holds 49 percent of the vote, while Corbett holds 24 percent. Twenty-five percent of voters remain undecided.

Auditors Asking Questions About “Illegal” Pension Benefits at Pennsylvania Fund

Pennsylvania’s top auditor claims that the city of Carbondale boosted pension benefits for certain top cops close to retirement, an action that–due to the nature of the benefit increases–violated state law.

In Pennsylvania, pension benefits can only equal up to 50 percent of a worker’s final year salary. But the city offered to sweeten benefits for four city police officers, who are now earning benefits equal to 65 percent of their final salary.

The auditor says those benefits are a clear breach of state law, but the city says it avoided breaking the law by using a loophole of sorts. From the Times-Tribune:

Last year, Mayor Justin Taylor and city solicitor Frank Ruggiero said the higher benefits were legal because the 15 percent extra for the three officers and 10 percent additional for the disabled officer come from the city’s annual budget rather than the police pension fund. Mr. Taylor said the city would save almost $550,000 during the next four years by replacing the officers with lower-paid full- and part-time officers.

The additional benefits are costing the city an extra $2,326 a month, the auditor general says, or $27,912 a year.

Mr. Taylor said city officials still think they’re right and don’t plan to stop making the payments. The city is weighing its options and might appeal the findings because of a fundamental disagreement over the nature of the payments, which are retirement incentives not pension payments, the mayor said.

“We’ve been disagreeing from day one,” he said.

Auditors informed the city of their concerns back in February. The auditors say the city told them they would respond in 10 days. But the city never called them back.

Now, auditors are threatening punishment. Specifically, they are prepared to withhold all state contributions to the pension fund.

Susan Woods, a spokeswoman for the auditor general, said it may not come to that, but auditors are prepared to take action.

“It hasn’t risen to that level,” she told the Time-Tribune. “If they continue to do this, we do have the ability to withhold.”

Auditors took issue with other areas of the city’s handling of pensions, as well. From the Times-Tribune:

The auditor general also criticized other areas in the city’s pension funds:

The city’s provision of cost-of-living increases in pension benefits for firefighters who retired as of Jan. 1, 1993. These firefighters receive a 2.5 percent raise in benefits on the third anniversary of their retirement and every year after that, but the auditor general says the maximum pension should be only 50 percent of the highest salary of an active firefighter.

This criticism was actually a repeat of criticism in an earlier audit.

City officials told auditors they were unable to change the provision through bargaining with the firefighters’ union.

The city’s failure to calculate and contribute the interest on its late 2011 minimum pension payments and did not pay its 2012 and 2013 payments. In response to the criticism, the city contributed more than $666,000 to cover the payments and interest.

The Pennsylvania Commonwealth Court ruled in 2001 that cities must abide by the benefit limits imposed by state law.

With Lawmakers In Recess and Elections On Horizon, Pennsylvania’s Pension Debate is Heating Up

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.

Pennsylvania Weighs Risks, Rewards of Pension Obligation Bonds

Pension reform has been the talk of Pennsylvania politics these last few months, and the reasons are equally political and practical: if retirement costs keep rising, the state’s fiscal handcuffs will keep tightening—and they are already uncomfortably snug. That leads eventually to budget-cutting maneuvers, many of which are sure to be politically unpalatable.

But a recent analysis from the actuaries for the state’s Public Employee Retirement Commission presents a policy tool to save the state money. The tool: pension obligation bonds (POBs), the controversial bonds that carry big risks and big rewards for the states that issue them.

The actuarial analysis stated that the state could save $24.5 billion over the next 30 years if they issued just $9 billion in POBs. The state’s PSERS system could reduce costs by $19.8 billion with POBs, according to the analysis.

Pennsylvania Recieves Third Consecutive Credit Downgrade, and Its Pension System Is The Culprit

Just a few weeks ago, Pension360 covered the story of Pennsylvania’s pension tussle; in short, the state’s governor wanted lawmakers to address pension reform before they left on their vacations. Well, lawmakers are now on vacation and pension reform is gathering dust. The state’s credit rating is now paying the price.

From Reuters:

Moody’s Investors Service downgraded its rating on Pennsylvania debt to Aa3 from Aa2 on Monday, the third consecutive year that a new state budget has prompted a credit cut.
Moody’s cited underperforming revenues and the continued use of one-time measures in its latest downgrade. After wrestling with lawmakers over public pensions and cutting millions of dollars through line-item vetoes, Pennsylvania Governor Tom Corbett didn’t sign the 2015 budget until more than a week after the start of the new fiscal year on July 1.
The state has about $50 billion of unfunded long-term pension liabilities. About 63 cents of every new dollar of state revenue goes to pay pension costs, Corbett, a Republican, has said.
In order to close a deficit of about $1.5 billion without raising taxes, the state’s Republican-run legislature passed a spending plan that included one-time transfers of money from dedicated funds, such as one that helps volunteer fire companies purchase equipment.
Growing pension liabilities, coupled with modest economic growth, will limit Pennsylvania’s ability to regain structural balance in the near term, Moody’s said.

But the state can’t say it wasn’t warned; in fact, Moody’s, Fitch and S&P all warned Pennsylvania that they would be forced to downgrade its credit rating if the state produced an inadequate budget. A big part of what defined “adequacy”, in the eyes of the agencies, was doing something about the state’s dangerously unhealthy pension system.

Moody’s noted two key trends in its warning, released back in late April:

* High combined debt position driven by growing unfunded pension liabilities, and a history of significantly underfunding pension contributions that will be reversed slowly over the next four years
* Rapidly growing pension contributions will absorb much of the commonwealth’s financial flexibility over the next four years challenging its ability to return to structural balance or make meaningful contributions to the depleted budget stabilization fund

Moody’s, in its latest report, left the door open for upgrading the state’s rating. On the other hand, it also left the door open to downgrade it further. From Watchdog.org:

The rating could improve, Moody’s said, if the state reduced its long-term liabilities, including its unfunded pension liability. The rating could also rise if Pennsylvania replenished its reserves and revenues came in above projections, Moody’s indicated.
In turn, the rating could drop more if revenues come in worse than expected, if long-term liabilities grow and if further declines pressure liquidity, Moody’s said.
Moody’s gave Pennsylvania a stable outlook, saying that while Pennsylvania’s economy will grow more slowly than the United States on average, it has stabilized. Moody’s also cited a “recent history of improved governance, reflected in timely budget adoption and proactive financial management.”

Pennsylvania now has the third-worst credit rating among all 50 states. Illinois and New Jersey are the only states that carry lower ratings.

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