PA Pension Panel Floats Idea of Controversial Bond

Sep 10, 2012 debt wilson.MP3

If you owed 40 billion dollars on a constitutionally protected contract, you might appear to be grasping at straws, too.  That’s what it sounded like to some in attendance as the chairman of the Pennsylvania Public Employee Retirement Commission, Anthony Salomone, brought up the pension obligation bond. 

It’s a way to borrow money, in hope of a higher rate of return, which could then be stuffed into the $40 billion dollar hole in the fund that pays for state employee retirement benefits.

Richard Dreyfuss, a researcher with the conservative think tank, the Commonwealth Foundation, says it’s a bad idea.

“Would you, in today’s world, take out another mortgage on your house at three percent and invest in the stock market?” he asked, rhetorically, after Salomone brought it up.  “And if that question gives you pause, and it probably should, that’s the basic point I would make.”

Dreyfuss added that, even if the bond is a net gain for the state, it’s foolhardy to trust politicians with found money and expect them not to be tempted to put it toward what’s politically popular.

“It plays out, almost in every city, that they improve benefits,” said Dreyfuss.  “Because the two become decoupled.  People don’t associate the bond with the funding status.”

For now, it’s a moot point – the Legislature made such pension obligation bonds illegal in 2010.  But at the hearing, Salomone said he wasn’t ready to dismiss the bond move altogether – despite his agreement with Dreyfuss that, yes, such moves haven’t worked well in the past.

The panel is trying to draft recommendations for the governor on how to fully fund the state’s public pension systems.  Salomone said it should be judging possible recommendations with an eye toward avoiding the fiscal cliff that’s predicted – the state’s pension payments are projected to rise from roughly $1 billion to $4 billion by 2016. 

“How we can lower these immediate – and when I say within the next decade or 12 years – these extremely high funding obligations,” is the central question, Salomone said. 

Wednesday’s hearing is the first in a series scheduled through mid-October.  The Corbett Administration plans to have a pension reform proposal included in next year’s budget.