HARRISBURG -- The state's Senate Democrats will introduce a plan today to refinance $9 billion in unfunded pension liability through a pension obligation bond, according to several sources familiar with the plan.
Democrats introducing such a proposal is a marked shift -- until now, party leaders had mainly advocated for the state to stick to pension overhauls passed in 2010 under Act 120 without making any additional changes.
Gov. Tom Corbett has consistently said the state's pension obligations are unsustainable and has made a major overhaul of the system a key legislative priority -- one he has so far failed to accomplish.
The state's unfunded liability for the retirement systems serving state and public school workers is estimated at more than $45 billion.
Democrats are the minority party in both the state House and Senate, and it's not clear if their proposal would gain support with Mr. Corbett or legislative Republicans. In the past, Mr. Corbett's budget secretary, Charles Zogby, has not signaled much enthusiasm for pension obligation bonds.
Senate Minority Leader Jay Costa, D-Forest Hills, said his caucus hasn't shared the specifics of the plan yet with the administration or Senate Republicans, though he has shared some of its broader themes.
A major element of the proposal -- reducing the unfunded liability through a pension obligation bond -- has some similarities with a proposal last year by Rep. Glen Grell, R-Cumberland, though his plan was not an official House Republican proposal.
Critically, the idea appears to have some labor union support.
"It seems like a pretty reasonable approach," said Rick Bloomingdale, president of the Pennsylvania AFL-CIO, though he cautioned, "The devil's always in the details."
Dave Fillman, president of Council 13 of the American Federation of State, County and Municipal Employees, said, "This is a very good start, let's put it that way."
"From what we've seen, it's certainly better than what Gov. Corbett has offered," said David Broderic, a spokesman for the Pennsylvania State Education Association.
Sen. John Blake, a Scranton-area Democrat, said the plan lowers long-term debt, does not change the state's obligation to current employees or retirees, maintains the current defined benefit pension structure and provides short-term savings critical to this year's budget.
Mr. Blake, the ranking Democrat on the Senate Finance Committee, said the proposal is a "prudent use of debt" as it refinances existing debt and does not incur new debt.
By refinancing $9 billion in debt and directly reinvesting the proceeds in the State Employees' Retirement System and Public School Employees' Retirement System, long-term payments could be reduced by $24 billion, Mr. Blake said.
Cate Long, an expert on bond markets, cautioned that pension obligation bonds are not a cure-all for pension woes.
"It doesn't eliminate the bill," said Ms. Long, a contributor to financial news provider Reuters.
A 2006 report from bond legal firm Orrick, Herrington & Sutcliffe LLP noted that pension obligation bonds can be popular with governments as they are sometimes "better than the alternatives," such as paying more money into a pension fund, asking employees to pay more into a pension fund, reducing benefits or simply hoping for better investment returns.
That same report also noted, however, a downside of such bonds -- they replace a more potentially flexible obligation "with a more immutable bond obligation" -- meaning bondholders must be paid.
A proposal by Mr. Corbett last year would have changed benefits for current workers, which many labor leaders and legislators said was a nonstarter and pledged to take any such plan to court. His proposal also would have moved new hires into a 401(k)-style plan. Neither the House nor Senate voted on the plan last year.
More recently, Mr. Corbett's administration has signaled it is considering a hybrid plan that would combine a traditional defined benefit style plan up to a certain dollar amount and a 401(k)-style plan beyond that.
A spokesman for Mr. Corbett declined to comment Tuesday night.
A spokesman for Senate Republicans could not be reached.
Kate Giammarise: 1-717-787-4254 or email@example.com or on Twitter @KateGiammarise. Karen Langley contributed.