COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES STATE GOVERNMENT COMMITTEE HEARING STATE CAPITOL HARRISBURG, PA RYAN OFFICE BUILDING ROOM 2 05 TUESDAY, MARCH 24, 2 015 9:01 A.M. PRESENTATION ON PENSION REFORM BEFORE: HONORABLE DARYL METCALFE, MAJORITY CHAIRMAN HONORABLE CRIS DUSH HONORABLE KRISTIN HILL HONORABLE RICHARD IRVIN HONORABLE FRED KELLER HONORABLE JERRY KNOWLES HONORABLE BRETT MILLER HONORABLE BRAD ROAE HONORABLE RICK SACCONE HONORABLE THOMAS SANKEY HONORABLE DAN TRUITT HONORABLE JUDITH WARD HONORABLE JEFF WHEELAND HONORABLE MARK COHEN, DEMOCRATIC CHAIRMAN HONORABLE LESLIE ACOSTA HONORABLE VANESSA BROWN HONORABLE MARY JO DALEY HONORABLE PAMELA DELISSIO HONORABLE STEPHEN MCCARTER HONORABLE MICHAEL O ’BRIEN HONORABLE EDDIE DAY PASHINSKI HONORABLE BRIAN SIMS HONORABLE RONALD WATERS Pennsylvania House of Representatives Commonwealth of Pennsylvania 2 COMMITTEE STAFF PRESENT: SUSAN BOYLE MAJORITY EXECUTIVE DIRECTOR AMY HOCKENBERRY MAJORITY RESEARCH ANALYST KAREN PENICA MAJORITY RESEARCH ANALYST PAM NEUGARD MAJORITY ADMINISTRATIVE ASSISTANT MATT HURLBURT DEMOCRATIC RESEARCH ANALYST KATHY SEIDL DEMOCRATIC RESEARCH ANALYST LINDA HUNTINGTON DEMOCRATIC LEGISLATIVE ASSISTANT 3 I N D E X TESTIFIERS ~k k k NAME PAGE RICK DREYFUSS BUSINESS CONSULTANT & ACTUARY, SENIOR FELLOW, THE COMMONWEALTH FOUNDATION, ADJUNCT FELLOW, THE MANHATTAN INSTITUTE............ 8 SUSAN D. DIEHL, CPC, QPA, ERPA PRESIDENT OF PENSERV PLAN SERVICES, INC........... 21 SCOTT PORTER PRINCIPAL OF MILLIMAN ACTUARIES....................34 MIKE CROSSEY PRESIDENT OF PSEA.................................. 4 6 RICH HILLER SENIOR VICE PRESIDENT, GOVERNMENT SERVICES, TIAA-CREF...........................................60 JOHN SCHU, CFP, AIF, CLT SENIOR VICE PRESIDENT BRANCH DEVELOPMENT, LINCOLN INVESTMENT PLANNING........................ 7 3 JOSH B. MCGEE, PH.D. VICE PRESIDENT OF PUBLIC ACCOUNTABILITY, LAURA & JOHN ARNOLD FOUNDATION, and SENIOR FELLOW AT THE MANHATTAN INSTITUTE.......... 86 JOE NICHOLS SENIOR DIRECTOR FOR FTI CONSULTING............... 101 GARY A. WAGNER, PH.D. PROFESSOR OF ECONOMICS, OLD DOMINION UNIVERSITY........................... 113 SUBMITTED WRITTEN TESTIMONY ~k ~k ~k (See submitted written testimony and handouts online.) 1 P R O C E E D I N G S 2 ~k ~k ~k 3 MAJORITY CHAIRMAN METCALFE: Good morning. The 4 hearing of the House State Government Committee is called 5 to order. And before we take our attendance, if I could 6 ask everybody to please rise and ask my good friend 7 Representative Rick Saccone to lead us in the Pledge. 8 9 (The Pledge of Allegiance was recited.) 10 11 MAJORITY CHAIRMAN METCALFE: Some have their own 12 way of singing the National Anthem and Rick has his own way 13 of saying the Pledge. Thank you, Rick. Thanks for leading 14 us, Representative Saccone. 15 If I could ask our Member Secretary 16 Representative Knowles to call the roll, please, for our 17 hearing. 18 REPRESENTATIVE KNOWLES: Thank you, Mr. Chairman. 19 20 (Roll was taken.) 21 22 REPRESENTATIVE KNOWLES: We have a quorum, 23 Mr. Chair. 24 MAJORITY CHAIRMAN METCALFE: Thank you, 25 Representative Knowles. 5 1 If everybody could make sure your mikes are off 2 if you’re not going to be using them. We had some feedback 3 coming through there, just to make it better for our 4 testifiers this morning if you would. 5 Just a few comments here before we get started 6 with the hearing, as Chairman of the House State Government 7 Committee, one of my objectives as being Chairman was to 8 ensure we did have hearings, that they are conducted in a 9 way that respected the time of our guests, our testifiers, 10 and our Members, and that’s what we will work to do once 11 again this morning is to respect that time that everyone 12 has that is so valuable as we go through this hearing today 13 that we expect to extend until about 11:30. So we will be 14 working to ensure that we start on time for the testimony 15 and on time for each testifier and then the hearing on 16 time. 17 So if any Members need to come and go throughout 18 the morning, you should be able to pretty much get back in 19 time to hear whoever was your hoping to get back for if 20 that is the case while there are appointments mingled in. 21 And for our testifiers, w e ’re hoping to 22 accommodate your schedules for your time that you’ve given 23 up to be with us today so that you can leave when it’s 24 appropriate and be here back in time for your testimony if 25 you have to go before you actually testify. 6 1 I would also ask the Members to respect the 2 testifiers today in a way that they're here to provide 3 testimony and provide their expertise to us, not to be 4 debated with. We can debate amongst ourselves at the next 5 opportunity when we start to actually consider the 6 legislation we expect to consider this session with respect 7 to pension reform. That will be the time for debate. 8 Today is a time to gather information, so please utilize 9 the time of the testifier to gather the information that 10 actually you think might help your debate as we move 11 forward. So we want to show our testifiers the respect 12 they deserve. They're our guests and should be treated as 13 such. 14 So with that said, today's hearing is going to be 15 on the issue of pensions. It's a very broad issue, of 16 course, with two very large pension systems here in 17 Pennsylvania that face combined unfunded liabilities in the 18 $50 billion plus range. I've done some work with the 19 Republican Members and other Members of our caucus and 20 we've actually worked on trying to define and find 21 consensus on how you define the problem of the pensions 22 here in Pennsylvania. 23 And amongst a number of us we came to a consensus 24 on the following definition of the problem with 25 Pennsylvania's pensions: Pennsylvania State pension system 7 1 faces a combined unfunded liability of approximately $50 2 billion. The problem is that the governmental-defined 3 benefit pension structure is subjected to short-term 4 political manipulation rather than economic considerations 5 of long-term sustainability. Increased pension benefits, 6 shorter vesting periods, and decreased employer 7 contribution rates have produced a liability that 8 contributed to the Commonwealth's most recent credit 9 downgrading. 10 The defined benefit pension structure is 11 fundamentally unsustainable. For this reason, the vast 12 majority of employers in the private sector have moved away 13 from the DB system. Underperformance of defined benefit 14 investments requires that the employer identify alternative 15 revenue sources to fulfill pension obligations. The 16 Constitution of Pennsylvania requires the Commonwealth 17 produce a balanced budget each year. Taxing future 18 generations of Pennsylvanians to fulfill immediate pension 19 obligations violates this principle. 20 And with that said, I'd like to invite our first 21 testifier to the microphone. That would be Mr. Rick 22 Dreyfuss. He’s a Business Consultant and Actuary, Senior 23 Fellow with the Commonwealth Foundation, and Adjunct Fellow 24 with the Manhattan Institute. 25 Mr. Dreyfuss, w e ’re ready when you are, sir. 8 1 MR. DREYFUSS: Okay. Thank you, and good 2 morning. 3 Perspective Chairs, thank you for the invitation 4 to testify before you today on this very encompassing topic 5 of public pensions. I ’m a retired Business Consultant and 6 Actuary, and for over 20 years I was the Human Resource 7 Executive for the Hershey Company, so I have broad 8 experience in both private and public sector pension 9 issues. And in my post-Hershey times I ’ve spent 10 considerable time as a consulting resource looking at 11 public pension issues and have written extensively on this 12 for both the Commonwealth Foundation and the Manhattan 13 Institute. 14 My testimony today is comprised of 16 slides that 15 you have and I ’m going to take about a six- or seven-minute 16 overview of them and highlight certain areas. If there are 17 any questions that you have outside the scope of this 18 meeting, I ’d be happy to meet or discuss these individually 19 with you as appropriate. 20 On my second slide, if I had one slide to 21 summarize everything, I would say that the fundamental 22 problem is that we are trying to change a political 23 institution, which is why public pension reform is indeed 24 so hard. And the reality is that the current public 25 pension system simply is not sustainable in the long run, 9 1 and that’s the reality and that’s the challenge before this 2 Committee and policymakers in general. 3 On my third slide, if we were to ask why is this 4 such an insurmountable problem and why is this so 5 difficult, I break it down into three categories. One is 6 poor benchmarking. Most of the comparisons that you hear 7 are against other public pension systems, many of which are 8 in equally poor States. I would suggest you need to look 9 at the Pennsylvania private sector in terms of their best- 10 demonstrated practices and moving to defined contribution 11 plans at a cost of 4 to 7 percent of payroll. 12 I would also say that the second driver is poor 13 liability management, and this is where we were using 14 economic assumptions of over 7.5 percent to project long­ 15 term costs, and that is going to be a stretch by any 16 measure by my standard.