Bonds could save Pennsylvania's pension problem, but come with a risk

HARRISBURG -- As Pennsylvania politicians continue to grapple with rising retirement costs, they can add to their consideration a new analysis suggesting pension obligation bonds could save the state money but would carry risk.

Actuaries for the Public Employee Retirement Commission, which analyzes proposals to change the retirement systems for state and public school workers, found that infusing the systems with $9 billion from pension obligation bonds could reduce employer contributions $24.5 billion over 30 years.

The analysis does not account for the cost of the bonds, and the actuarial consulting firm, Cheiron, notes: “While the special funding provides a savings to the Systems, there is the potential for there to be a net cost to the Commonwealth.”

The governor’s budget office offered one analysis, from Public Financial Management, Inc., that projected borrowing $9 billion would require the state to pay $10.4 billion in interest over 30 years.

State and school district payments are scheduled to rise sharply in coming years, and policymakers face the prospect of searching for significant new revenues or exacerbating the estimated $50 billion unfunded liabilities of the retirement systems for state and public school workers.

Gov. Tom Corbett, who is touring the state to promote another pension plan, has said he does not support borrowing to pay down the state’s pension liabilities, and House Republican leadership has not embraced the approach.

But Senate Democrats back refinancing the pension debt with $9 billion in bonds, and Tom Wolf, the Democratic candidate for governor, says he would explore funding mechanisms like pension obligation bonds. Mr. Wolf’s campaign said he favors following the payment schedule set in 2010.

In addition to issuing pension obligation bonds, the plan from Rep. Glen Grell, who co-chaired a House Republican task force on pensions, would suppress employer contributions beyond the limits in current law. It would reduce the future costs of the State Employees’ Retirement System and Public School Employees’ Retirement System by enrolling new workers in a cash-balance plan, in which a member would receive a benefit equal to worker and employer contributions, plus guaranteed interest, in their account.

When the change to a cash-balance plan is included, the PERC actuaries projected that over 30 years the plan would reduce costs by $19.8 billion for PSERS and $10.7 billion for SERS.

With years of state under-funding in part to blame for low-funded ratios of the systems, PERC executive director James McAneny noted that issuing bonds would force employers to contribute.

“It’s a fixed debt, and you have to pay it,” he said.

But a look at pension bonds, he said, shows “the track record is not very good.” 

Rep. Mike Tobash, the architect of a pension plan with the backing of House Republican leadership and Mr. Corbett, echoed that point: “I’ve got grave concerns about entering into pension obligation bonds, especially at this level.”

Senate Minority Leader Jay Costa, D-Forest Hills, noted that the bulk of the savings from Mr. Grell’s plan result from the bond funding.

“We think that’s the appropriate route to go, along those lines,” he said. “The savings that come from changes to the benefit plan -- a significant reduction in benefit plan -- is small compared to the savings the pension obligation bond provides.”