HARRISBURG -- Senate Democrats say their new pension refinancing plan would ease Pennsylvania's unwieldy retirement obligations through favorable interest rates and a set payment schedule.
Leaders of the Senate's minority caucus proposed Wednesday that the state issue $9 billion in bonds in three annual installments beginning in 2015. The borrowed cash would be deposited directly into the statewide pension plans, the State Employees' Retirement System and the Public School Employees' Retirement System, to pay down their unfunded liabilities, now estimated by actuaries at a combined $50 billion.
At the same time, the Democrats would take the annual increases in the payments the state owes the systems -- already limited by overhauls approved in 2010 -- and further suppress them, though by less than Gov. Tom Corbett has proposed in his pension plan.
Assuming the state issues bonds at a 5 percent interest rate, and the pension funds meet a target rate of return of 7.5 percent, the proposal would save $15.8 billion in employer contributions to PSERS and $7.3 billion in employer contributions to SERS by 2047, according to calculations provided by Senate Democrats.
"This is not new debt," said Sen. John Blake, D-Lackawanna, the ranking Democrat on the Finance Committee. "This is refinancing an existing obligation."
The plan seems unlikely to win the support of the governor or legislative Republicans.
Jay Pagni, a spokesman for Mr. Corbett, said the plan would augment an already significant pension payment with a locked-in payment to bondholders. And a spokesman for Senate Republicans, who hold the majority, said more than refinancing would be needed.
"Pension obligation bonds are essentially a bet that the rate of return on the bond proceeds will be greater than the cost of borrowing," said Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi, R-Delaware. "Some states have done this successfully, others have been unsuccessful. It might make some sense to discuss including pension obligation bonds as part of a comprehensive pension reform package. However, such bonds are not a substitute for real, comprehensive reform."
In the House, a spokesman for the Republican majority expressed little enthusiasm for what he had heard of the plan.
"For some time, they and their colleagues have been insisting there's no problem," said spokesman Steve Miskin. "It's good that they're acknowledging the problem. But it's their typical response -- borrow and tax, borrow and tax."
One House Republican, Rep. Glen Grell, R-Cumberland, a caucus point person for pensions, has also proposed borrowing to reduce the unfunded liabilities and commit the state to payments, although his plan also calls for voluntary concessions by current workers and a new plan in which future hires would share risk with taxpayers.
"They make many of the exact same points I make. It's not new debt, it's money we already owe," Mr. Grell said, adding: "It's a very, I think, significant step forward in this discussion. Borrowing alone -- I've never said that is the total solution, but it's always been sort of a linchpin of my plan."
The plan appears to have at least some labor union support. Rick Bloomingdale, president of the Pennsylvania AFL-CIO, said the proposal is a solution that tries to solve the unfunded liability, rather than by cutting workers' benefits.
John Sugden, senior director in Standard & Poor's U.S. Public Finance Department, said pension obligation bonds, in general, serve to change the form of a state's liabilities, rather than eliminate them.
"It's really just substituting one liability, what we consider a soft liability with pensions, for a hard liability, which is debt and has a more rigid payment schedule," he said. "So it really doesn't necessarily rid you of your liability, it just changes the form of your liability from a pension liability to a debt liability."
In a report published in October, Standard & Poor's stated it believes Pennsylvania's liabilities for pensions and other post-employment benefits "will be a very significant source of pressure for the state in the foreseeable future."
Estimates project the unfunded liability for SERS at approximately $17.8 billion and PSERS at about $32.6 billion.
Neither system takes positions on legislative proposals, and spokeswomen for both declined to comment on specifics of the plan.
SERS over the past year has been asked to model how various cash infusions would impact employer contribution rates and the overall health of the system, said spokeswoman Pamela Hile.
In general, and depending on the assumptions -- such as last year's investment returns and any changes to the employer payment schedule -- "a $3 billion infusion to SERS appears that it could reduce the total amount employers would need to pay in contributions to our system over 30 years by anywhere from $6 billion to $8 billion," she said.
Jeff Clay, executive director of PSERS, gave a rough estimate for a generic example of two $3 billion pension obligation bonds, two years apart, during a February budget hearing. Over a 30-year period, it would create estimated savings of $16.6 billion, estimated bond costs would be $11.7 billion, and the net savings would be estimated at $4.9 billion.
A 2010 report from the Center for Retirement Research at Boston College noted pension obligation bonds, or POBs, "allow governments to avoid increasing taxes in bad times and could reduce pension costs, but they do pose considerable risks."
Among those risks: the success of such bonds "depends on the premise that pension returns are on average more than the cost of financing the debt. However, these assumptions may not turn out to be correct, as the recent financial crisis has shown. Even over 15 to 20 years, the duration of most POB debt, interest costs can exceed asset returns."
After the recent financial crisis, most POBs issued since 1992 are in the red, the report states.
"POBs have the potential to be useful tools in the hands of the right governments at the right time. Issuing a POB may allow well-heeled governments to gamble on the spread between interest rate costs and asset returns or to avoid raising taxes during a recession. Unfortunately, most often POB issuers are financially stressed and in a poor position to shoulder the investment risk. As such, most POBs appear to be issued by the wrong governments at the wrong time," it cautions.
Such bonds have been used by a number of states, but most heavily by Illinois and California, according to the report.
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