Pa. pension overhaul will become law, but the problem isn’t over

In an uncharacteristically bipartisan effort, the legislature passed a bill Thursday to significantly change the structure of its badly indebted state employee and public school employee pension systems. It’s slated to be signed into law Monday.

The measure moves Pennsylvania off its traditional, fully state-funded pensions, and onto a stacked plan of various hybrid options that work more like 401(k)s.

Lawmakers are calling the move historic. But many others are concerned that this is just a way of avoiding the larger problem: actually paying off the debt.

One of those concerned people is Barry Shutt.

Several times a week, Shutt carves a few hours out of his schedule to sit outside the Capitol cafeteria on a folding chair next to his homemade digital clock. Day and night, that clock ticks steadily upward, tracking the commonwealth’s unfunded pension liability. 

Right now, the number is in the neighborhood of $70 billion. It’s projected to take at least three decades to pay off, and that’s if the commonwealth manages to keep making its hefty required payments every year.

Shutt, a retired state worker, said his main goal is to convince lawmakers to figure out a long-term plan to pay off that debt faster, so it doesn’t overwhelm the commonwealth 30 or more years down the line.

“I’m simply a grandfather who’s concerned about the future of his three grandchildren,” he explained.

Shutt’s not alone. Various legislators, independent actuaries, and other activists have raised similar concerns that investment returns aren’t hitting projections, the debt’s growing too fast, and the current means of paying it off — like high costs to schools, for instance — are too heavy of a burden for the cash-strapped state.

Even vocal supporters of the newly-passed pension plan, like Republican Senate Majority Leader Jake Corman, readily acknowledge it doesn’t meaningfully impact the debt.

“We’re still going to make the payments, and we’re still going to have difficult budgets,” he said. “Both here [in state government], and at the school district level.”

What the plan does do, however, is transfer some taxpayer risk.

Under the traditional pension plans, the state was on the hook to pay out fixed sums to state employees. That obligation didn’t go away when the economy weakened, so market downturns — like the one in 2008 — could, and did, wreak havoc on the pension fund.

When investment returns are bad, the state must turn to other revenue sources to pay for its employees’ retirements. That’s the main reason why public schools’ mandated pension payments — and as a result, property taxes — are so high.

Corman said moving toward 401(k)-style plans forces the pension-holders to shoulder more of that burden.

“[Under the old pension plan], if we continue to fall short on our investments, these pension costs are going to continue to skyrocket,” he said. “By doing this bill today, we’ve now reduced the risk of having those pension costs skyrocket even further.”

Many GOP lawmakers have pushed to shift to a strictly 401(k)-style plan — a more extreme change. The newly-passed bill represents a compromise: it gives workers the option to join a 401(k), but it also provides two hybrid options, which still give retirees defined benefits based on the number of years they work while folding in a market-based component.

The result, according to the state’s Independent Fiscal Office, is a system that would still push up taxes during a recession, but not as much as it does now.

House Republican Leader Dave Reed noted in his floor remarks, it’s not exactly the plan he would have chosen. But it’s one that got enough support to pass after several consecutive years of attempts.

It’s also gotten some good reviews from Pew Charitable Trusts. Greg Mennis, who heads the organization’s public sector retirement systems project, called it one of the most comprehensive overhauls any state has done.

He also said, though, that the commonwealth is starting out from a particularly dire position.

“Between 2000 and 2015, Pennsylvania saw a swing from a $20 billion surplus to a nearly $70 billion deficit in their state-sponsored pension systems,” he said. “That’s the biggest loss that we’ve seen in any state across the country.”

Pew’s analyses typically support shifts to 401(k)-style pension plans that reduce benefits, a tendency that often draws the ire of unions and Democrats.

But Pew’s praise for the bill, as well as the compromise that got it passed, was enough for many lawmakers to chalk it up as a major win.

“Think about the last time Pennsylvania was actually ahead of the curve, as opposed to far behind the curve,” Reed said. “We’d like to find more opportunities within the budget process to be ahead of the curve, and hopefully this will be the start to moving in that direction.”

“143 — 143 votes — I mean that’s veto-proof,” added GOP House Speaker Mike Turzai. “I mean that’s historic. Really amazing.”

Negotiations primarily went on among party leaders, behind closed doors. That meant when the bill finally got to the floor, it sailed through with minimal resistance.

There were still some holdouts. House Minority Appropriations Chair, Democrat Joe Markosek, was a notable one.

“I have been on record almost daily talking about what we should not do with this pension,” he said. “And you know, I’ve basically kept my word on that.”

Markosek said his criteria for a successful bill are threefold: it would have to fund the system on an appropriate level, not raise additional costs, and not significantly reduce benefits for state workers and teachers.

In an email, he said the bill that passed isn’t really reform, because it doesn’t pay down the debt any faster. Plus, it does reduce benefits, and the IFO has projected marginal cost increases over the next 15 years.

Markosek did say, though, that the new agreement is better than previous attempts. Plus, it maintains the state’s current annual funding level, which Markosek thinks is acceptable.

“The real key is that we have to fund the liability,” he said. “We have to fund the system.”

Even the bill’s supporters tend to agree, this isn’t a final fix for pensions. Reed called it “the first leg of a long journey,” and the general consensus is that at some point, something will have to be done to reduce the debt and associated costs.

Barry Shutt, the pension clock owner, said that’s not particularly reassuring. 

“The thing that worries me is that next year, all they’ll say is ‘we took care of pensions last year, so we don’t have to talk about it,'” he said. “And then we won’t do anything about the debt.”

For the foreseeable future, Shutt said he has no plans to retire from his role as unofficial debt tracker. 

“Nah,” he said. “I’m just going to watch my clock rise.”