Pennsylvania will continue to struggle with rising costs related to unfunded pension liabilities despite a pension-overhaul measure Gov. Tom Wolf signed, according to Moody’s Investors Service.

“The level of cost savings for new employees’ benefit accruals will depend on future investment returns. Public pensions are strongly protected by Pennsylvania law, so any benefit changes can only affect new employees,” Moody’s said in a commentary on Monday.

Pennsylvania Gov. Tom Wolf signed a hybrid pension-overhaul measure last week. Pennsylvania Internet News Service

“Thus, any significant savings from risk shifting will take decades to materialize.”

Moody’s, which rates Pennsylvania’s general obligation bonds Aa3 with a stable outlook, called the pension bill a credit positive because it will gradually shift a portion of investment and other pension risks to future employees.

Under the election-year compromise, which Wolf signed June 5, new employees who participate in Pennsylvania’s two largest statewide pension plans, the Public School Employees’ Retirement System and the State Employees’ Retirement System, will choose among one of three new pension options.

Two are hybrids that fuse traditional defined-benefit pension elements with those of a 401(k)-style defined-contribution plan. The third is a straightforward 401(k)-style defined-contribution plan.

One day after the signing, S&P Global Ratings said the bill “does not address the state's acute budgetary stress.”

Other states that have moved to shift pension risks to employees, said Moody’s, include Tennessee, which implemented a hybrid plan for new employees beginning in 2014 to limit its pension costs, and Oklahoma, which moved to a defined-contribution plan for many new public employees.

“In Pennsylvania’s case, Act 120 of 2010 already subjects some employees to additional ‘shared-risk contributions’ if investment returns fall short, but the state’s latest reform goes further,” said Moody’s.

S&P and Fitch Ratings each assign AA-minus ratings to Pennsylvania with outlooks of negative and stable, respectively.

Wolf, a Democrat, and leaders of the Republican-controlled legislature are negotiating a roughly $32 billion budget for fiscal 2018 as a June 30 deadline nears.

In a statement Monday, Wolf said the final agreement should represent a long-term solution through savings, efficiencies and loophole closures; protect his proposed spending on education; and include the creations of the departments of health and services and criminal justice.

School districts statewide must adopt budgets without knowing how much state aid they will receive.

According to Moody’s, a declaration of credit positive or credit negative does not connote a rating or outlook change. “It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.”

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