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A Tale of Two Realities

Earlier this week, Moody’s upgraded Pennsylvania’s financial outlook from “negative” to “stable.”

The improvement stems from the Legislature and the Governor avoiding each other just long enough to get a budget passed.

No one in the Capitol is rejoicing, however. The looming public pensions crisis serves as a constant reminder that the Commonwealth’s credit ratings can fall at any moment.

Sadly, not every lawmaker in the General Assembly understands how precarious and downright dangerous this crisis is. Some lawmakers maintain their ignorance purposefully, while others simply don’t understand the math. Members of both parties, in collusion with public-sector unions and special interest groups, are all that stand in the way of genuine reform—reform that could potentially lift the Commonwealth’s financial outlook from “stable” to “positive.”

In an op-ed published last month in the Philadelphia Inquirer, actuary and business consultant Richard C. Dreyfuss provided a frank and compelling summation of the problem:

“Our $63 billion combined unfunded liability for the Public School Employee’s Retirement System (PSERS) and the State Employees’ Retirement System (SERS) is the result of underfunding, poor investment returns, and benefit enhancements. It’s measured in today’s dollars and based on a number of assumptions, including an optimistic annual investment return of 7.5 percent.”

He also provided a relatively straightforward, common-sense solution:

“Pension reform will truly be underway when all new [public employees] participate in a stand-alone, defined-contribution plan and we commit to paying off our pension debt over 20 years.”

Simple right? Well…not to House Speaker Mike Turzai.

In an op-ed published earlier this month in the Pittsburgh Post-Gazette, Turzai laid out his reasons for supporting a watered down solution known as the “stacked hybrid bill.” He says the bill would maintain “elements of the current defined benefit system, while instituting the first 401(k) system in state history.”

“Unlike other ‘reform’ proposals, the stacked hybrid approach doesn’t include arbitrage gambles, funding reductions or gimmicky quick fixes. We fully meet our funding obligations to the retirement systems.”

The hybrid plan does not “fully meet” funding obligations. Even if we switched the entire system from a defined-benefit to a defined-contribution retirement plan, that merely stops the bleeding; it won’t do anything to address the massive unfunded liability that has already accumulated. The stacked hybrid plan being promoted by state House leaders doesn’t even stop the bleeding because it maintains a defined benefit component.

This attempt at reform is, itself, a gimmick. Keeping any elements of the defined-benefit plan virtually guarantees that the unfunded liabilities will not only go unencumbered; they will continue to build.

Political courage may be in short supply these days, but numbers don’t lie. Pennsylvania taxpayers need their representatives to protect them from the “fiscal cliff” Turzai and his fellow lawmakers should know is coming.

The only solution is to stop pretending this Band-Aid of a bill is the tourniquet that will stop the bleeding and finally pass meaningful reform. The General Assembly and Governor Wolf must stop ignoring reality and pretending that half-measure reforms will stop the problem.