A Fundamentally Un-serious Plan for Pension Reform

March 25, 2015:

Governor Tom Wolf has a plan for fixing Pennsylvania’s pension mess, but it is a bad plan. Wolf’s proposal is to use extra revenues generated by the "modernization" of the state liquor stores to pay the principal and interest for a $3 billion pension obligation bond (POB).

The first problem with the Governor’s plan is that there is a $40 million shortfall between the Governor’s revenue projections and the PLBC’s revenue projections. In testimony before the House Appropriations Committee, PLCB Chairman Tim Holden attributed the difference to the PLCB’s more conservative accounting practices.

The second, more serious, problem with Wolf’s proposal is the use of POB’s. What is a POB?

Let’s say that you owed a credit card company $10,000. Instead of paying the principal and interest to the credit card company, you decided to take out a loan from your bank to pay off the credit card debt. However, you don’t pay off the credit card debt directly. Instead, you invest the loan in the stock market and use the return on that investment to cover the credit card loan. Relying on the extra revenue from the PLCB sales to cover the payments Under Wolf’s plan would be like you, or I selling stuff on e-Bay to cover the loan payment.

Not a financially responsible plan.

When cities and municipalities have embarked down the POB road, it typically ends badly for taxpayers (and pensioners).

The final problem with Wolf’s plan is that it does nothing to address future liabilities. New employees will go into the same pension system, and current employees will accrue benefits at the same unsustainable rate.

It is worth noting that the Senate Republicans are taking a much different approach to the pension problem. Rather than just kicking the can and taking on more debt, they are proposing moving new employees into a 401k-type system and reducing future benefits for current employees. The Senate proposal will be wildly unpopular with the state employees’ and teachers’ unions. However, it is ultimately in taxpayers’ best interest and the Senators should be applauded for their proposal.