Senate Bill 1 – this is really the best we can do?

Senate Bill 1 – this is really the best we can do?

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By Chris Comisac

Well, folks, Pennsylvania is going to get some more “pension reform.”

I know, the House of Representatives has yet to vote on Senate Bill 1, the latest lacking legislation held up by lawmakers as “reform,” but this is happening.

So what does that mean?

As someone recently said to me, with us “accomplishing pension reform,” we can move on to doing pension reform.

The actuarial note analyzing the legislation indicates there will be no pension system savings, and the risk-shifting within SB1 only matters should the systems incur significant investment shortfalls a couple decades from now. Those shortfalls, should they occur two to three decades from now, will still add more debt to our debt-ridden systems, it just won’t be quite as much added debt – the “historic” savings we’re told SB1 would deliver would come at a significant cost.

It’s pretty clear passing anything with the title “pension reform” has become the goal, not passing something that’s worth passing.

I’m reminded of about two years ago, when I wrote a column in which I argued – with regard to both property taxes and public pensions – doing something isn’t always better than doing nothing.

Carefully reviewing the analysis of this session’s version of “pension reform,” it appears as though lawmakers have found a way to do both: look like they’re doing something while doing nothing.

If this is the “politics of the possible,” we have hit another new low in the Pennsylvania State Capitol.

The comparison between current law and SB1 for both the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) shows little-to-no difference regarding the impacts on employer contribution rates, pension funding ratios and the unfunded accrued liability going forward during the next three decades.

So if accomplishing that is the best we can do, then why vote SB1 in the first place?

We’re told by SB1 proponents it’s because the legislation is “transformative,” that it puts the pension systems on the path to future fiscal health because it reduces pension risk for state taxpayers.

It’s not exactly that, but the analysis of SB1 by actuarial firm Milliman notes a future shift in risk (although at least 30 percent of the state government workforce is exempted from this risk shift): “Over time, the bill also reduces future risk exposure because it transfers a portion of retirement benefits to a DC [defined contribution] plan in which the member assumes investment and longevity risks. The provisions of the bill apply only to new members, and the full reduction in risk exposure will be phased-in over several decades as new employees are hired, become vested and ultimately retire.”

But SB1 still maintains a defined benefit plan that is subject to the political and financial winds that blew up PSERS’ and SERS’ unfunded liability to a combined $76 billion. So while exposing state taxpayers to slightly less risk, there’s still plenty of risk for which current and future Pennsylvanians will be financially responsible (not to mention the $76 billion, and growing, debt already on the books).

It’s true that state taxpayers would continue to be exposed to risk even if the current defined benefit plans were closed, and even if they were fully funded today (they’re obviously not).

Because of the way defined benefit plans work (even after they’re closed), underfunding can occur if the systems’ investment returns come up short, the systems fail to meet the other assumptions built into the costs of the defined benefit plans or lawmakers decide they don’t wish to pay the contributions they need to pay. We’ve seen all three happen in Pennsylvania annually during the better part of the last two decades.

None of that occurs with a defined contribution plan.

So if the risk of a DB plan falling short is the top concern as we’re told by SB1 proponents, why choose a less-than-half-measure like Senate Bill 1 that continues the DB plan, albeit a slightly smaller DB plan?

If the upfront costs of SB1 – and there are greater costs associated with the bill’s changes (including the yet-to-be-discussed roughly $50 million cost to the pension systems to implement the incredibly complex three-tiered benefit plan proposal) – are worth the potential of only partial risk shifting in 20 to 30 years, then why not do the whole enchilada?

Pull the Band-Aid off in one quick rip, instead of what amounts to a slow, painful, centimeter-by-centimeter removal – with all of that pain borne and endured by Pennsylvania taxpayers – that doesn’t end up removing the Band-Aid; in Michigan (where their pension problems are smaller than ours), that state’s failed hybrid pension plan was recently referred to as “a Band-Aid on a bullet wound” by one of that state’s lawmakers.

Just put every new employee – no exemptions – into a standalone DC plan.

I know, I know – “We can’t get the votes for that” is the refrain from some legislative leaders who, if given their druthers, would drop SB1 in a second for something that accomplishes a real change, even if that change also comes two to three decades down the road.

In addition to making needed funding reforms – such as shorter amortization periods for both DB plans, as recommended by the actuary that produced the SB1 analysis – to reduce the risk of an underfunded DB plan, a standalone DC plan for everyone would eventually simplify the retirement systems as well as completely eliminate the risk borne by taxpayers, once the only active plan for SERS and PSERS is the DC plan (which would take several decades to occur).

That would be good public policy.

Obviously it’s important to get the votes to send legislation to a governor that’s willing to sign it, but when did that become the definition of good public policy?

If you’re willing to make no impact on employer contributions or the unfunded liability during the next two decades anyway – which describes SB1 – then why not keep pushing a few more years for legislation that puts SB1 to shame on risk transfer?

Sometimes you have to try – and, yes, fail once in a while – to accomplish your goals. Legislative Republicans would do well to remember the Fiscal Year 2015-16 state budget, if they’ve forgotten that lesson, or maybe Act 120 of 2010, the last “pension reform” which was supposed to fix the things lawmakers are once again trying to fix (and the current “fix” doesn’t look much different, actuarially speaking, than Act 120).

There’s been a lot of failure to accomplish the goal of pension reform the last several years – as evidenced by the continued growth of the pension systems’ unfunded liability – but most of those failures involved bills that were better (some only marginally so) than SB1.

Adopting SB1 would simply be another failure a future General Assembly will have to address.

Chris Comisac is Capitolwire Bureau Chief.