By Eric Boehm | PA Independent
HARRISBURG — The Corbett administration is not too keen about the prospect of borrowing billions to help pay off Pennsylvania’s unfunded pension liability.
That borrowing would be a key part of a pension overhaul plan introduced this week by state Rep. Glen Grell, R-Cumberland. His proposal would allow the state to borrow up to $9 billion from the bond market to make an immediate dent in the $47 billion in unfunded pension liabilities owed to retirees, while also creating a new category of benefits for future hires to save money in the long-run.
But borrowing that much money would add about $500 million to Pennsylvania’s annual debt service costs, which already total more than $1 billion per year.
That’s enough to give the administration reservations about the idea.
“Everybody has the recognition that we have to do something sooner rather than later,” said Jay Pagni, Gov. Tom Corbett’s new press secretary. “But we have to address not only the short-term issues with the public pensions but putting together something that will be sustainable and will address the long-term issues of the unfunded liability.”
Earlier in the year, Corbett’s team was pushing for a plan that reduced future, unearned, benefits for existing employees as part of an effort to reduce long-term pension costs. That has found little favor with lawmakers, who fear reprisals from public sector labor unions and do not want to land the state in a lawsuit that could take years to resolve.
Grell’s plan would allow existing employees to opt-in to the new benefit structure, eliminating the threat of a lawsuit over breach of contract.
Pennsylvania’s two pension funds — the State Employees Retirement System and the Public School Employees Retirement System — have a combined $47 billion-plus unfunded liability. That’s expected to grow to as much as $65 billion within a few years, so even borrowing $9 billion will solve only a portion of the problem.
But Grell is selling his plan as being similar to how the state handled a $3 billion debt in its unemployment trust fund. To repay a loan from the federal government, Pennsylvania borrowed $3 billion at lower interest rates and is slowly repaying, saving money in the process.
“By issuing bonds at the current low rates and shoring up the pension systems now, the systems’ unfunded liability would be reduced by $15 billion over the next 30 years, with the Commonwealth taking responsibility for the debt service,” Grell said in a press release Monday.
He also predicted the borrowing would send a strong signal to the bond-rating agencies that Pennsylvania is serious about meeting its long-term obligations.
But at least one ratings agency has warned against using bonds to pay off pension debt.
“If pension bonds merely shifted an issuer’s long term obligations from one similar form to another, in this case from an unfunded pension liability to bonded debt, they would tend to have a neutral credit impact,” experts at Moody’s wrote in a report earlier this year. “However, issuance of pension bonds changes the nature of the liability and typically creates additional risks.”
You have to look no further than Pennsylvania’s largest city to see the consequences of those risks.
In 1999, the city of Philadelphia borrowed $1.3 billion to address its unfunded pension liability. But the city soon began underfunding its pensions again, leaving it with a large unfunded liability and bond debt to boot.
Still, borrowing to meet pension costs is a concept being used elsewhere. Last year, the state of Illinois borrowed $11 billion as part of a pension overhaul plan.
But that’s not the only obstacle facing Grell’s pension proposal. Groups on both the right and the left have criticized other parts of the plan.
Stephen Herzenberg, economist and executive director at the Keystone Research Center, a left-leaning think tank, said he fully supports the plan to borrow $9 billion, but said he had “deep reservations about the transition to a cash balance pension plan for new employees.”
He predicted the new plan would cause mid-career and older workers to leave the public system, causing more turn-over of experienced employees.
On the right, Rick Dreyfuss said Grell’s proposal does not go far enough when it comes to changing benefit structures to make public employee retirement plans more predictable and sustainable.
Dreyfuss, a pension analyst for the Manhattan Institute, a conservative think tank, favors a move to 401(k)-style pension plans for each employee. Grell’s proposal would change the type of plan used by the state, but it would remain a so-called “defined benefit” plan with all the same pitfalls as the existing system.
“It’s a magnet for bad public policy, because they can promise these good long-term benefits and then proceed to underfund the plans,” he said. “There is a host of ways these plans can be misused.”
The type of plan proposed by Grell, known as a “cash balance plan”, differs in some ways from the traditional defined-benefit plans used today, incorporating elements of a 401(k)-style plan.
According to the U.S. Department of Labor, it still counts as a defined-benefit plan and still contains a “promised benefit.”
Labor unions, probably the biggest political element in the pension debate, also are unconvinced about Grell’s ideas.
“There are still many unanswered questions behind these little-vetted cash-balance plans,” said Rick Bloomingdale, president of the Pennsylvania AFL-CIO. “We will continue to review the details of the Grell plan and urge the Legislature to move in a direction that’s responsible for taxpayers, public employees, and retirees. So far, none of the bills introduced on this issue meet those qualifications.”
If Grell’s proposal is the outline for pension reform in Pennsylvania, it’s still got a ways to go.
Boehm is a reporter for PA Independent and can be reached at Eric@PAIndependent.com. Follow @PAIndependent on Twitter for more.