WILKES-BARRE — Despite a shortfall of nearly $74 billion in state and municipal pension and benefit funds, government officials chronically skip the two real reform choices — cut benefits and/or increase contributions — and opt for a different one.
“The third choice is called magic,” business and actuarial consultant Richard Dreyfuss told a crowd Wednesday at a luncheon arranged by the Pennsylvania Economy League. “And we have magic in capital letters here in the Commonwealth of Pennsylvania.”
Dreyfuss is self-employed but is also a senior fellow at The Commonwealth Foundation and a fellow at the Manhattan Institute, two think tanks that generally favor more conservative, free-market policies. Speaking at the Genetti’s Hotel and Convention Center in Wilkes-Barre, Dreyfuss outlined the problems and his suggested solutions for a dilemma he said is politically sensitive but fiscally vital to fix.
“I have yet to see a bumper sticker that says ‘Elect me and I will fund the unfunded liability,’ ” Dreyfuss quipped.
In his view, the problem is three-pronged:
• Poor bench-marking: Pennsylvania compares public pension plans to other public plans, ignoring trends in the private sector. “If you ask what is affordable, they say ‘As long as we’re doing better than Pittsburgh we’re fine,’ ” Dreyfuss said. “And if you talk to Pittsburgh, they say as long as they are doing better than Detroit.”
• Poor liability management: State pension fund projections assume a return on investment of 7.5 percent — down from 8 percent a few years ago. But Dreyfuss cited multiple studies across four years that kept showing returns are more likely to range between 5.69 percent and 6.5 percent.
• Pensions and politics: Maintaining or improving benefits has high political payback while reforming plans has political fallout, Dreyfuss said. Therefore, if a pension fund develops a surplus, it is used to increase benefits rather than to offset future costs. If it runs a deficit, politicians tend to kick the problem down the road rather than reform the system or pay the money necessary to fully fund it.
Dreyfuss said true reform requires contributions that are predictable, affordable — 4 to 7 percent of payroll — and that keep funds fully paid up. He added that politicians always agree with the first two but say they can’t do the third because the fund liabilities are too steep, usually blaming a prior administration.
While Dreyfuss said traditional defined-benefit plans are not the problem — political mismanagement of them is — his proposed reforms include switching to a defined contribution plan such as IRAs with the employer paying a match of 4 to 7 percent of payroll.
Dreyfus would also prohibit pension obligation notes, which delay paying the bill while driving costs higher with interest, and adopting reforms consistent with government and private actuarial standards.
But it has to be comprehensive, all-in-one reform.
“Generally, it is too late for incremental reform,” he said. “If you are a member in these plans, you wouldn’t want to see it made unsustainable. If you’re a taxpayer, why would you want to see this passed down to the next generation?”