Journey of a thousand miles

Centuries ago the Chinese philosopher Lao Tuz observed that “The journey of a thousand miles begins with one step.” The same can be said for the modest pension reform law signed this week by Governor Tom Wolf. Proponents call the law “transformative,” others say it will do little or nothing to address the public pension crisis. This is a rare instance where both are correct.

To understand this seeming contradiction you need to know the history of how major change occurs in Penn’s Woods. Bold, sweeping reforms rarely — if ever — happen. Pennsylvania has had politically divided government for decades. The governor’s office and the legislature have frequently swung like a pendulum between the two parties and, while occasionally one party has controlled both branches, neither has ever been able to enact a major shift in public policy.

But big change does happen; it just does so in baby steps. For example, every region of Pennsylvania now has casinos filled with slot machines and table gaming. That did not happen overnight, nor did it happen in one legislative step. Legalized gaming began under the guise of saving the state’s horse racing industry by allowing slot machines at race tracks. That was expanded to include stand-alone casinos, and more of them. A few years later table games were legalized. Video gaming is now on the horizon.

The same incremental approach is happening with liquor privatization. Despite having support over the years of governors and legislative leaders, ending the state’s liquor monopoly has been stymied by powerful labor unions. With public pressure mounting for more and more convenient points of sale the state’s liquor laws have been loosened to allow for the limited sale of beer and wine at some grocery and convenience stores.

In the coming years, look for liquor to be added to the list of products available in places other than state run stores. Ultimately — because both market forces and public opinion will demand it — the state’s liquor store monopoly will come to an end. There will be a number of additional legislative steps before full reform is achieved, but eventually it will.

That brings us back to the current pension reform bill. Everyone agrees there is a problem. It would be hard to ignore. Various estimates place the underfunding of the state’s public employees’ pension systems in the $70 billion range — or about two times our annual general fund budget.

There is a political divide over the ultimate solution to that problem. Labor unions and Governor Wolf simply want tax payers to fund the shortfall. Republicans, who control the legislature, would prefer to end the current defined benefits pension system and transition public employees in a defined contributions (think 401k) plan now utilized by virtually all private businesses.

Two years ago the Republicans pushed their version of pension reform through the legislature only to see it vetoed by Governor Wolf. The latest effort at reform involves setting up a hybrid system, offering future state employees the option of joining the current defined benefits system; or a program that will be part of the traditional system, but with a 401k component; or a full defined contribution choice.

Those who argue this reform will do nothing to address the current shortfall are correct, it does not. In fact, the deficit will grow considerably in the years before the new law takes effect. And, when it does nobody knows how many future employees will opt for something other than the traditional pension program meaning the impact down the road could be negligible.

So why then is this bill being hailed as “transformative reform?” It is transformative because for the first time it changes the ground rules of the debate. Never before has a private pension option been given to Pennsylvania public employees. And, the governor’s signing of the legislation is a defining pivot point in the debate that will be held going forward.

Although supportive of the new law, Nathan Benefield of the Commonwealth Foundation was quick to point out that this is only the “first step down a new path toward fiscal responsibility.” Legislators and the governor cannot sit back and say they have fixed the problem, only that they have taken that first step in a thousand mile journey to real reform.