PA pension reform could involve lots of borrowing

Pension reform will rise again in Pennsylvania next month.

A renewed effort to overhaul the retirement system for state workers and public school employees will focus on putting new hires into a new pension system while authorizing Pennsylvania to borrow billions on the bond market to staunch the rising unfunded liability threatening to swamp the state budget.

An unfunded liability is the gap between a pension funds' assets and liabilities. Combined, Pennsylvania's two pension funds have an unfunded liability of about $45 billion.

Within a few years, that liability will grow to more than $65 billion, based on the pension funds' current expectations.

State Rep. Glenn Grell, R-Cumberland, will introduce a pair of bills that he said will form a "comprehensive approach" to the state's pension problem.

His proposal would move all future hires into a new defined benefit system, a move intended to cut costs in the long-term. In the short-term, he wants to authorize the state to borrow up to $9 billion over the next three years to help pay down a portion of the $45 billion unfunded pension liability.

"This is similar to how we recently addressed the Commonwealth's unemployment compensation debt to the federal government," Grell wrote in a memo to fellow lawmakers, in reference to the state borrowing $3 billion in 2011 to pay down a debt in the unemployment system.

Of course, the debt in the pension system is far higher, and the borrowing would be too.

Last Monday, House Majority Leader Mike Turzai staked out his position on pension reform during a speaking appearance at the monthly Pennsylvania Press Club luncheon.

He said there should be a new defined contribution plan for state employees hired after the reforms are passed. Defined contribution plans are similar to the 401(k) retirement options that have become so common in the private sector.

"It's not a question of if, but when, the public sector keeps up and recognizes that the taxpayers cannot foot the bill," Turzai said.

His position on the issue seems to mirror that of state Senate Republican leaders, a sign that progress may be possible though the issue remains a tricky one.

During the spring, Senate GOP leaders opposed part of Gov. Tom Corbett's plan that would have reduced future benefits for current employees. They were worried that such a change to existing contracts would trigger a lawsuit – and public sector unions promised there would be one – jeopardizing any potential budget savings.

Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi, R-Chester, said the view from the Senate remains the same.

"Once you move all future employees into a 401(k)-type plan, you've contained the problem," he wrote in an email last week. "That provides some greater ability to consider options such as pension bonds and collars to help address the short-term cost spike."

That's where Grell's plan comes in, with its proposed $9 billion pension bond.

Such arrangements can be tricky too – Philadelphia borrowed $1.3 billion in 1999 to address pension debt, but soon relapsed on making payments, leaving the city with a high pension liability and bond debt on top of it.

Because governments have misused pension obligation bonds in the past, Moody's has warned against their use.

Democrats have been nearly unanimously opposed to overhauling the public pension systems this year. They view the reforms passed in 2010 – which created a new, lower-benefit class for employees hired after that date – as putting the state on the right path and they are unwilling to support further changes.

Labor groups are already preparing to push back against the effort, too.

On Thursday, a report released by the Institute for America's Future, a labor-oriented think tank, said groups like the Pew Charitable Trust were using the pension crisis to undermine retirement security for public sector workers.

Pennsylvania was one of several states being "targeted" by Pew and The Arnold Foundation, according to authors of the report.

They said states facing large pension debt had brought the problem on themselves.

"Many of these shortfalls have been exasperated by the fact that states have not been meeting their obligations to fund pensions," said David Sirota, a liberal commentator who authored the report.

Though the report is meant to urge states to hold off on pension reform efforts, there is truth behind the group's telling of pension history. Pennsylvania increased benefits for current workers and retirees in 2001 and 2002, and then voted in 2003 to put off paying for those benefits until 2013.

The problem was compounded by the market crash in 2008, creating the unfunded liability issue today.

Boehm can be reached at EBoehm@Watchdog.org and follow @PaIndependent on Twitter for more.