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McCaleb: Pennsylvania pension reform ‘better than doing nothing’

By   /   June 14, 2017  /   No Comments

Illinois is home to the worst-funded public pension systems in the United States.

A little more than 400 miles to the east, Pennsylvania has the fifth-worst-funded state pension systems in the country.

As in Illinois, Pennsylvania has a divided government, though in reverse. A Democrat is in the governor’s mansion in the Keystone State and Republicans have comfortable majorities in both legislative chambers.

As in Illinois, Pennsylvania has been struggling for years to rein in its out-of-control pension costs and slow its ever-increasing unfunded liability.

Unlike in Illinois, Pennsylvania took a big step this week toward accomplishing both.

Democratic Gov. Tom Wolf on Monday signed Republican-backed legislation that, among other things, raises state employees’ minimum retirement age to 62 and the age to receive maximum benefits from 65 to 67. It also limits newly hired state employees to a hybrid pension system that includes both a traditional defined benefit plan but also a defined contribution plan similar to a 401(k). New and current employees have the option of going all-in on the 401(k)-style plan and forgoing the risky pension plan.

“It’s a step forward. We haven’t solved the crisis, but the momentum is moving in the right direction,” Elizabeth Stelle, director of Policy Analysis for the Commonwealth Foundation, a nonprofit think tank based in Harrisburg, Pa., said. “We still have a long way to go, but were moving in the right direction.”

The plan isn’t perfect because it does little to close the state’s $71 billion unfunded pension liability, and it still partially includes a defined pension benefit for new employees. Stelle said keeping the partial-defined benefit as part of a hybrid system was necessary to get the support of Wolf, who vetoed pension reform legislation three years ago.

“True pension reform removes politics from the pension system,” Stelle said, “which means removing lawmakers from having the ability to underfund the systems,” something that’s happened in Pennsylvania, Illinois and dozens of other states for decades.

The only way to remove politics from the pension system is for governments to get out of the pension business altogether. Short of that and a plan to pay down the state’s $71 billion in pension debt, Pennsylvania’s reform effort is a pretty good model for states like Illinois to at least consider. The Pew Research Center, a nonpartisan research group that has been studying failing pension systems across the country, said it is the best adopted by any state to date.

“The proposal scores well on the three factors we consider: full funding, risk mitigation, and retirement security,” Pew wrote in its analysis of the legislation. “It would mitigate more risk than any state that has enacted pension reform while maintaining or improving retirement security for workers, and … constitute a major turn-around among states.”

Pennsylvania’s fiscal problems, while significant, pale in comparison to Illinois’.

Illinois’ pensions are underfunded by a margin twice that of its counterpart to the east. And while Pennsylvania faces a budget deficit nearing $3 billion, Illinois’ is more than $6 billion. Illinois also has a backlog of bills totaling more than $14 billion.

In short, Illinois is in dire need of all kinds of fiscal reform – not the least of which is pension reform.

During the legislative session that concluded May 31, Illinois lawmakers sadly failed to act on the kind of pension reform the state needs.

State Sen. Dale Righter, R-Mattoon, filed a reform measure that would place all new hires into a 401(k) system. It’s modeled after a plan already in place in the Illinois State University Retirement System, which now has 21,000 enrollees who opted out of the state’s failing pensions. It would go beyond Pennsylvania’s reform – and be better for Illinois – because it would end defined benefit plans for all new hires. Of course, it went nowhere in Illinois’ Democrat-controlled General Assembly.

The state Senate did pass an alternative pension reform measure that would create a hybrid-type plan for new employees similar to Pennsylvania’s, but it so far has stalled in the House. This alternative plan also likely would be ruled unconstitutional because it diminishes benefits of current employees, something the Illinois Supreme Court already has shot down.

While Pennsylvania and other U.S. states address their fiscal problems, Illinois refuses to do so.

Pennsylvania’s pension reform is “definitely something to consider when you’re in a state with a divided government and you have a massive pension liability like in Illinois,” Stelle said. “It’s not perfect, but it’s better than doing nothing.”

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