Pennsylvania governor signs major pension reform bill

Pennsylvania is making major changes to its pensions for public employees by offering them a partially privatized plan. Governor Tom Wolf signed the bill into law today, saying it’s going protect the taxpayer in a major way. Via Pensions&Investments:

At the signing, Mr. Wolf said that Senate Bill 1 “reduces Wall Street fees” and “shifts unnecessary risk away from the taxpayer.” He added that the new law “could save … over $10 billion to Pennsylvanian taxpayers.”

“Let’s be clear: This plan addresses our liability in the only real and responsible way possible, by changing the structure of pension benefits,” said Mr. Wolf. “The fact is, we cannot accelerate the shrinking of our liability on the backs of our current employees, and this bill recognizes this in a real, concrete way.”

The details are this: state workers who are not police and firefighters have the option to put half of their money into a 401(k)-style plan, while the rest would still be covered by the state. Workers hired in 2019 can opt to have all their money put in the 401(k)-style plan. This includes state legislators, judges, teachers, and state workers.

It’s a pretty big shift in policy positions for Wolf. The Democrat told Institutional Investor during the 2014 gubernatorial race he was completely against pension changes.

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.

Wolf had similar comments in 2015 when he vetoed pension reform legislation.

“I understand the need for pension reform, but this legislation provides no immediate cost savings to taxpayers and does not maximize long-term savings for taxpayers. We need pension reform that works. There are provisions within this legislation, which as part of a comprehensive pension proposal I could support; however, Senate Bill 1 does not address the problems facing our pension system comprehensively and fairly.”

One reason why Wolf may have had a change of heart is how much money the state is throwing into the system. Pennsylvania contributed $4B in 2016 to the pension system after only putting in $1B in 2001. A part of that has to do with increases in the the unfunded liability which is apparently around $75B, according to Moody’s Analytics Director Dan White. White writes in The Inquirer the tough work is yet to come because the state has to figure out how to pay for that unfunded liability. It should happen through government cuts, but it will be interesting to see if the legislature and governor have the stomach for such a radical idea.

The other interesting thing is how quiet unions have been on pension reform. PennLive’s Charles Thompson suggested it was because they didn’t think the fight was worth it.

There appear to be two major reasons for this mass stand-down by organized labor, according to sources familiar with the discussions:

1. The unions feel the plan before the General Assembly now – while not necessarily helpful to the state’s current budget problems – is “less hurtful” to state workers and school teachers than past proposals.

And the prospect of doing better, from a union standpoint, is non-existent in this political generation, with its historic Republican majorities in both the House and Senate where the unions are very much playing defense.

2. There is a hope that this bill, by representing another show of cooperative government between Democrat Gov. Tom Wolf and the Legislature, will help disarm a tricky issue for Wolf’s 2018 re-election effort.

No unions are supporting Senate Bill 1, to be sure.

But, in the words of AFSCME District Council 13 Executive Director David Fillman, “we’re not throwing bombs at it.”

It sounds like the unions just admitted defeat because they knew it was an issue which needed to be fixed. They probably would have been angrier if it had been full privatization (like the law should have been) but when you’re dealing with so many unfunded liabilities and expenses, something had to be done to weaken government control. It’s not perfect, but it’s good to see Pennsylvania take this step in partial privatization. Hopefully they’ll consider full privatization in the future.