Pension bill could get a vote next week, but it ignores funding issues

By Eric Boehm | PA Independent

House Republicans, urged on by Gov. Tom Corbett, hope to move forward next week with a plan to overhaul the state pension systems.

But what isn’t contained in their proposal could prove to be more important to the state’s long-term fiscal health.

Republican leaders hope to pull together enough votes for a bill, sponsored by state Rep. Mike Tobash, R-Schuylkill, to reduce pension benefits for future hires to achieve an estimated $11 billion in long-term savings for the state’s two pension funds, which are facing a combined debt of about $50 billion over the next three decades.

Corbett added some fuel to the fire this week by suggesting he would refuse to sign a state budget until the Legislature also passed the pension bill — even if it means forcing lawmakers to miss the June 30 budget deadline.

“We need to get this done right, rather than quickly,” Corbett said at a Tuesday news conference.

It’s a bit of a strong move from Corbett, who has made on-time budgets an important goal for his administration and a centerpiece of his re-election campaign.

Then again, he made similar statements last year — regarding not only pensions but also liquor privatization and transportation funding — before backing off on signing a budget that included none of those things.

But if Corbett is serious about getting things done “right,” he’ll want to take a closer look at the pension bill he’s pressing to get passed.

Critics on both sides of the aisle have zeroed in on a major shortcoming of the House’s pension bill — the fact it does nothing to address the state’s $50 billion in unfunded pension debt and fails to ensure Pennsylvania will meet its annual pension funding obligations in the future.

State Rep. Glenn Grell, R-Cumberland, said he was still a “no” vote on the Tobash bill as of Wednesday afternoon.

Grell has been shopping his own plan to help pay down the unfunded liability – he wants to borrow as much as $9 billion to pay off a chunk of the unfunded liability, but that proposal hasn’t won much support from the governor’s office or House GOP leaders – and says he wants to see a more comprehensive approach to pension reform that tackles both plan design and funding.

Those are, essentially, the two main parts of any public pension system.

Plan design is the formula that determines who pays how much and who gets what benefits after so many years — essentially, it determines the costs and benefits in the system.

Funding means how the state will pay for its share of the pension systems’ costs with tax dollars.

Tobash’s bill is focused almost exclusively on plan design. By changing the benefits structure for future employees, it does change long-term costs in the system to make them more manageable.

But costs and funding are not the same and should not be confused. Reducing future costs is not the same as increasing current and future funding.

Short-changing the public pension system is largely to blame for the current crisis in the first place, as Pennsylvania has not made the necessary contributions to its pension plans in more than a decade.

In the latest budget year, for example, the state paid $1.5 billion to the two pension funds. It should have paid at least $3.6 billion to keep the pension debt from growing larger.

While Republican lawmakers and Corbett focus on the plan design portion, they might be missing the more important half of the equation: how the state will fund the pensions.

Meanwhile, Democrats stand unanimously opposed to the effort because they oppose the reduced benefits for future workers, which, they say, would hurt retirement security. But they also want to see the state pay its bills and meet the promises made to current workers, something the Tobash bill does not ensure by sidestepping the issue of how to fund the pensions.

“We need to focus on paying down the pension debt — not on making the long-term situation worse just to score political points or free up revenue for an election-year budget,” said state Rep. Joe Markosek, D-Allegheny, minority chairman of the House Appropriations Committee. “The only way to reduce the debt is to make the payments.”

It’s that systemic underfunding of the pension plans that has caught the attention of credit rating agencies in the past few years. All three major ratings agencies have recently threatened to downgrade Pennsylvania unless funding reforms are made.

The ratings agencies are not worried about plan design. They are worried about funding, says Rick Dreyfuss, a retired actuary and pension expert for the Manhattan Institute, a fiscally conservative think tank.

“Growth in long-term liabilities, increase in fixed cost pressures, or additional deferral of pension costs,” were three things listed in April by Moody’s as potential triggers that could lower Pennsylvania’s credit rating.

“There is this huge imbalance between what we have promised and what we are paying,” Dreyfuss said. “(The rating agencies) are raising red flags because they are frustrated that we keep ignoring that problem.”

Even among those who want to see the state face fiscal reality and stop deferring pension costs, there is no real consensus on how to do it.

Grell wants to borrow money on the bond market to pay off some of the debt. Democrats want to raise taxes, particularly taxes on gas drilling companies. And some fiscal conservatives who remain on the fence about Tobash’s plan want to see spending cuts elsewhere so current revenue can be applied to the pension debt.

Throughout the spring, as they were working to build support for the pension overhaul legislation, Tobash and Corbett’s team have acknowledged the need for funding reforms. But they do not see the two sides of the issue as fundamentally connected.

Again this week, Corbett acknowledged the bill he’s pushing is really only a first step.

“I found that I can’t worry about everything,” Corbett said this week. “We presented a plan a year and a half ago that went far. There was no willingness in the Legislature to deal with that.”

Grell says the state’s history of not paying the ARC — the annually required contribution — is what really worries him and the discussion should be focused on making those payments in the future.

“I’m afraid we might do something bad because we’re focused on just getting something done,” he said Wednesday.

Boehm is a reporter for PA Independent and can be reached at Eric@PAIndependent.com. Follow @PAIndependent on Twitter for more.