In an election cycle that is widely expected to be a romp for the Republican Party and in a state that, in recent years, has started to turn more red, gubernatorial candidate Tom Wolf is looking as if he might be good news for Democrats. Wolf, a Democrat, has been polling ahead of Republican incumbent Tom Corbett.
During his four years as governor, Corbett has failed to get key reforms though the legislature — among them, changes to the state’s $78 billion public pension system. Whoever wins the governor’s mansion on November 4 is likely going to have to tackle pension reform in January. In this, the third in a three-part series on pensions and the 2014 election, Institutional Investor examines the Pennsylvania race through the lens of the struggle over pension reform.
Pennsylvania is not the only gubernatorial race taking place this election cycle in which pensions are playing a critical role. The governor’s race in Rhode Island, the subject of an earlier three-part series at InstitutionalInvestor.com, and that in Illinois both have important implications for troubled public pension plans. What makes Pennsylvania unique is the uneven nature of the race — the latest polls have Wolf ahead by 20 or more points — and what the two candidates propose to do about pensions.
As of June 2014, according to a report by ratings agency Standard & Poor’s using fiscal year 2013 numbers, Pennsylvania had a pension funding ratio of 63.9 percent, an underfunded accrued liability of $47 billion and pension debt of $14.2 billion. Although Pennsylvania’s funding ratio is not the worst in the country — Illinois holds that honor with a funding rate of 40.4 percent, and the territory of Puerto Rico’s system is only 8.4 percent funded — its pension coffers are still worryingly low, and the debt level is significant. In July ratings agency Moody’s Investors Service lowered Pennsylvania’s bond rating from Aa2 to Aa3, citing pension concerns. Proponents of pension reform argue that the deficit and pension costs are eating into money that could be used elsewhere and causing higher taxes.
In the 2013 legislative session, Corbett sought to pass pension reform as part of a package of three initiatives (the other two involved privatizing state liquor stores and a state transportation funding plan). Corbett’s pension plan would have enrolled future employees in a defined contribution plan and lowered future defined benefit payouts for current employees. Corbett’s office estimated that these changes would save the state $12 billion in employer contribution costs and $40 billion in plan costs over the next 30 years.
Critics of Corbett’s 2013 proposal argued that the plan undid work of the 2010 legislature, which had shifted the burden of pension debt to employees, not the government. Stephen Herzenberg, executive director of the left-leaning Harrisburg, Pennsylvania–based Keystone Research Center, said in a statement at the time that Corbett’s proposal would “increase state and school district debt for current pensions and drive up future costs for current pensions. The last thing policymakers should do now is dig an even deeper hole.” As with other proposed shifts to a 401(k) system, such as a reform measure currently on the ballot in Phoenix, which Institutional Investor reported on in Part Two of this series, the change would result in greater debt up front in order to reduce costs over the long term.
Corbett’s pension proposal did not pass the legislature. This June Representative Mike Tobash, a Republican, proposed a hybrid pension plan in which new employees would be enrolled in a combined defined benefit, defined contribution fund. This would start the state on the road to a DC system but lessen up-front costs by not shuttering the DB plan. “Pension reform to me is a reasonable, sustainable, realistic benefit,” Tobash said during a July town hall meeting to explain his plan. Pension reform is “changing the benefits that we are promising people moving forward. If we can change those benefits to something that is not make-believe pension policy, we can start to work our way out of this hole.”
Almost immediately, Corbett came out and said he was in “full support” of Tobash’s plan. If reelected, Corbett says, he will call a special session of the General Assembly to tackle the pension problem. Opponents of the plan have taken to calling the plan the Corbett-Tobash pension plan.
Wolf has a different view. According to his campaign, Wolf “absolutely opposes changes to current employees’ pension plans, and he believes that a defined benefit retirement plan is the most effective tool for ensuring that our public workers have a financially secure retirement.” Wolf believes that to attract workers and create good private sector jobs, Pennsylvania must offer an attractive and competitive compensation package, which includes a defined benefit pension.
If elected, Wolf has said he will work with the legislature to find a solution to the pension-funding problem. But exactly what that solution might look like, with a governor so “absolutely opposed” to benefit cuts, remains to be seen. The General Assembly is likely to remain Republican, meaning the most probable scenario is a legislature favorable to benefit reform and a governor who is not. Unable to find a solution under four years of a pro-reform governor, a different approach maybe can work.
