Pennsylvania treasurer calls for exploring pension bonds
In calling for Pennsylvania’s General Assembly to consider issuing pension bonds to backstop the commonwealth’s two largest public systems, outgoing state Treasurer Joe Torsella warned that such a move is no panacea.
“There is no cure-all to the extreme deficits at our pension systems—but the commonwealth’s public servants and retirees deserve to know their retirement is secure, and taxpayers need to know we are taking all steps possible to mitigate budgetary pressures on them,” Torsella said.
Torsella, whose term will expire next month after falling short in his re-election bid, said taking advantage of low interest rates and exploring the issuance would be a proactive step to improve funding at the Pennsylvania State Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System.
Legislative approval would be necessary to amend a 2010 state law that prohibits the use of such bonds for PSERS and SERS.
Bond rating agencies have frequently called out the commonwealth for its high unfunded pension liability.
S&P Global Ratings, citing pandemic-induced revenue shortfalls and with pre-existing budgetary and structural deficiencies, revised its outlook on Pennsylvania’s general obligation bonds to negative from stable on Sept. 1.
Among other factors, S&P cited a “weak” three-year-average funded ratio of 56.9% across the commonwealth's pension plans.
"On pension obligation bonds, it’s ironic that Mr. Torsella makes his pension obligation bonds proposal as he is about to leave office," said Richard Dreyfuss, a Pennsylvania business consultant and actuary who has consulted and written extensively on public pension topics. "I have yet to note a single example of where they have worked successfully."
S&P rates Pennsylvania GOs A-plus while Fitch Ratings and Moody’s Investors Service rate them AA-minus and Aa3, respectively. Fitch and Moody’s assign stable outlooks.
According to Torsella’s office, SERS and PSERS combined are less than 60% funded and face a $72 billion deficit as of 2020 — less than 20 years after having a combined $20 billion surplus.
Factors include investment performance, benefits changes and repeated patterns of insufficient employer contributions below the actuarially required contribution.
Pension bonds are taxable debt instruments that state or local governments issue. Retirement systems invest the proceeds to produce higher returns than debt service owed over the long run.
Pew Charitable Trust in June pegged the national public pension funding gap at $1.24 trillion.
“After a decade of economic recovery, the aggregate pension funding gap remains historically high and could increase by up to $500 billion based on market returns through March 2020, including recent losses related to the COVID-19 pandemic,” Pew said.
“In addition, the disparity between well-funded and underfunded state retirement systems is greater than it has ever been.”
Torsella recommended establishing a statutory framework to govern the use of such bonds, including the creation of an advisory committee to assess offerings, as well as consideration of “limited pension obligation bonds,” requiring the investment of bond proceeds only in index investments, offering voluntary pension benefit buyouts and hedging risk through multiple bond issuances.