Pennsylvania lawmakers are bandying about a familiar proposal aimed at closing a yawing hole in the state’s public employee pension system: selling $9 billion in pension obligation bonds. Several Democratic lawmakers are enthusiastically backing the proposal, which one analysis claims could help cap employer contributions over the next thirty years. Pennsylvania Republicans, led by Governor Tom Corbett, are touting another analysis that points out the downsides. The Pittsburgh Post-Gazette has the dueling numbers:
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.
Pension obligation bonds are best understood as a speculative gamble. The state would be borrowing against future tax revenue and then plowing the proceeds into high-yielding investments, betting that the returns on these risky assets will repay the bonds, as well as provide extra money to cover the pension shortfall.They’re not exactly a new innovation, and they’re not necessarily deadly in theory, especially if equity markets are buoyant and leaders at the same time make a serious effort to rein in pension liabilities. Unfortunately, in practice too many states and municipalities have treated the bonds like get out of jail free cards, and have continued larding on pension benefits without raising taxes, as if they weren’t already deep in the hole. The result is the kind of mess Stockton and San Bernardino found themselves in as markets tanked.We have to side with Governor Corbett on this one: It would be better if Pennsylvania could show some restraint and self-discipline rather than gambling that things will work out for the best.