Pennsylvania Gov. Tom Wolf is scheduled to propose his fiscal 2017 budget on Tuesday without a full budget in place for the current year and after a dire rating-agency warning about escalating state pension costs.
Wolf, a first-term Democrat, and the Republican-controlled legislature have quarreled the past year over a proposed $30 billion spending plan. On Dec. 29, Wolf approved three-fourths of the budget to free up funds for school districts and social service agencies, while holding out for increased basic education aid through line-item vetoes.
Last month, state Treasurer Timothy Reese extended a $2 billion line of credit to the commonwealth to prevent its general fund cash balance from falling to as much as $922 million in the negative.
Moody's Investors Service in a comment Friday said the commonwealth's options for curbing pension costs are limited. While statutory caps limited short-term pension contributions, Pennsylvania's long-term situation worsened.
According to Moody's, the combined unfunded liability for the two major state pension funds, the Public School Employees' Retirement System and the State Employees' Retirement System, spiked from $12 billion in 2005, when the state stopped fully funding its actuarially required payment, to $54 billion in 2014.
That represents a compound average annual growth rate of 18%, said Moody's. Over that period, state government revenues rose at a "comparatively slow" pace of 2.3% annually, reaching $59 billion in 2-14.
All three major bond rating agencies downgraded the commonwealth in 2014, citing the pension liability. Moody's rates Pennsylvania's general obligation bonds Aa3. Fitch Ratings and Standard & Poor's rate Pennsylvania GOs AA-minus.
"With stringent legal protections on public pension benefits, the commonwealth has little flexibility to reduce accrued liabilities through benefit reforms," said Moody's. "As a result, Pennsylvania and many of its local governments face inevitable increases in pension costs."
Moving new employees from a traditional defined-benefit plan to a 401(k)-style defined contribution plan does little to curb existing liability, according to Richard Dreyfuss, a Hummelstown, Pa., actuary and adjunct fellow at the Manhattan Institute for Policy Research.
"It's not playing out very well here," said Dreyfuss, a retired Hershey Foods executive.
Dreyfuss said Pennsylvania is vulnerable to another round of downgrades.
"It's almost inevitable," he said. "Even before we start looking at the capital markets – which aren't performing well – it's not a good omen."
The problem, said Moody's, is also affecting the state's two largest cities, Philadelphia and Pittsburgh.
Philadelphia's liability has steadily increased because it shifted to lower investment-return assumptions. According to Moody's, outstanding principal from $1.3 billion of pension obligation bonds and reported Municipal Retirement System unfunded liabilities have soared to $6.5 billion as of 2014, from a combined $2.7 billion in 1999.
Although Pittsburgh earmarked decades of annual parking revenues to offset pension costs, its funding metrics, said Moody's, are still weakening because contributions fall short of annual interest on its reported net liabilities.
Pittsburgh's $55 million annual pension contribution in 2014, which included $13.4 million in dedicated parking revenues and $18 million in state aid, fell $15.3 million below Moody's calculated "tread water" payment of $70.4 million, which gauges cost associated with current-year benefit accruals, or service cost, and interest on the reported net pension liability.
