Pension Problem Festers Amid Pennsylvania's Budget Conflict

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Regardless of how or when Pennsylvania settles its increasingly messy budget impasse, pension underfunding will probably continue, according to one actuarial expert.

"There remains no political will to properly fund these pension systems anywhere close to the proper standards," said Richard Dreyfuss of Hummelstown, Pa., an adjunct fellow with the Manhattan Institute for Policy Research.

Pennsylvania is staring at an unfunded liability estimated at roughly $53 billion. Last year, all three major bond rating agencies lowered the commonwealth's bond rating, citing the liability and chronic budget imbalance.

Moody's Investors Service rates Pennsylvania Aa3 with a negative outlook. Fitch Ratings and Standard & Poor's rate them AA-minus, with stable outlooks.

The stet budget is nearly five months overdue. Two weeks ago, Gov. Tom Wolf and legislative leaders said the "broad outlines" of a roughly $30 billion budget agreement were in place, including a commitment from lawmakers for an additional $350 million in basic education funding.

Progress, however, is still at a stall point. The hoped-for deal by Thanksgiving will not materialize.

Among the compromises at play is a proposal to boost the sales tax to 7.25% from 6% and the shifting of $600 million in gambling revenue to the general fund to offset the commonwealth's high pension-obligation costs.

In what simply could be another bargaining chip, the House last week passed a bill to privatize the state-run system of liquor stores. Wolf vetoed a similar bill in early July.

While Wolf, a Democrat, and the Republican-dominated legislature differ over how to change the pension system, Dreyfuss said neither party grasps the underfunding problem.

"No plan design scenario for not-yet-hired members justifies continued underfunding of the pension benefits of existing members," said Dreyfuss, who added that the continued use of collared contributions – part of the budget negotiations – would sound more alarm bells to rating agencies.

"I would have to believe that the credit rating agencies will take a dim view of such an action should that be passed into law," said Dreyfuss.

The combined interest cost alone for the State Employees' Retirement System and the Public School Employees' Retirement System, Pennsylvania's two major pension funds, is about $4 billion per year, said Dreyfuss, while the total amount of the unfunded liability is spiraling at a rate of about $2 billion per year.

An anticipated lowering of the assumed interest rate from 7.5% to 7% would add about $6 billion to the combined liability.

Pennsylvania and Illinois are still without a budget. Wolf having vetoed such an $11.2 billion spending plan on Sept. 29.

School districts and counties dependent on state aid, notably those distressed, have been feeling the pinch.

"Many of the organizations that rely on the state for crucial funding have continued to wait for payment. Counties, schools and non-profits have done their best to make ends meet by dipping into reserves, cutting services, or both," Wolf told the Pennsylvania Press Club in Harrisburg on Monday. Meanwhile, a coalition of 100 nonprofits held a press conference at the state capitol on Monday urging passage of the budget.

Moody's earlier this month downgraded Pennsylvania's pre-default intercept programs for school districts to A3 from A2. Affected were 13 ratings, including the Philadelphia, Chester-Upland and Reading school districts.

Gurtin Fixed Income said it implemented strict credit guidelines for any new purchases of Pennsylvania school district bonds and reviewed all its school holdings within the state to identify schools with heightened exposure to the delays. San Diego-based Gurtin said it sold holdings in a "very small" number of school districts it believed would be most vulnerable to the impasse.

Members of the Luzerne County Council in Wilkes-Barre are scheduled to meet Tuesday night. They are split over an 11th-hour plan motion to borrow $22 million that is hanging from the state budget crisis. The divided council may also vote whether to dismiss county Manager Robert Lawton.

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