Would you take out a second mortgage on your home to bet on the stock market? Such an idea deserves ridicule—if not alarm. You’d be putting your home and your family at risk.
Unfortunately, as part of his original pension reform plan and in his the latest so-called “compromise” proposal, Gov. Tom Wolf has similar plans for borrowing money to play the market—and you and your children would be cosigners on that debt.
Wolf wants to borrow $3 billion via state bonds and put the money into the school employee pension fund. He’s hoping stock market returns outpace the 3 to 4 percent interest rate taxpayers will pay on bonds. But that’s a shortsighted bet frowned upon by financial experts, criticized by ratings agencies, and which has proven a failure when field tested in Pennsylvania’s major cities.
In fact, pension bonds are “the dumbest idea I ever heard,” according to former New Jersey Democrat governor and investment banker Jon Corzine. Yet politicians love them, as they offer the illusion of a “fix” to the pension problem. Instead, they simply push costs onto the next generation.
State pension fund administrators claim Wolf’s borrowing plan would “save” $8 billion in pension costs over the next three decades. But this ignores the $5.5 billion cost of paying off the bonds with interest.
Rather than protecting working families, pension bonds would burden our children with the costs of today’s bills. In fact, a baby born tomorrow would pay interest on Wolf’s bonds until her 30th birthday.
Look no further than Pennsylvanian’s major cities to see the danger of borrowing to “save” costs.
Philadelphians are still suffering the consequences of former Mayor Ed Rendell’s $1.29 billion pension bond fiasco, with no balanced budget and even more debt to show for it 16 years later.
And Pittsburgh Mayor Bill Peduto notes the Steel City’s pension bonds—almost $300 million—nearly took them into bankruptcy. “Pittsburgh should be the litmus test showing that’s not the solution,” he told the Pittsburgh Tribune Review.
Pennsylvania cities aren’t alone—across the country, pension bonds have a horrendous track record. Indeed, pension funding worsened after borrowing in 15 of the 20 largest pension bond issues, according to an analysis by the liberal watchdog group ProPublica.
Financial experts agree that pension bonds are a bad bet for taxpayers. Alicia Munnell, director of the Center for Retirement Research at Boston College, told the Washington Post, “These bonds are pernicious. They discourage pension funding. They shift costs forward to future generations.”
And Matt Fabian of Municipal Market Advisors told the New York Times, “These deals are being done as a budget gimmick. They should not be done at all.”
As experts reject pension bonds, history discredits them, and Philadelphia and Pittsburgh families suffer from them, why is Wolf still pushing a harmful and ineffective plan?
He claims state bond rating downgrades—which it more expensive for the state to borrow—justify his plan. But borrowing even more, at a higher interest rate, won’t improve our outlook.
Instead, pension obligation bonds will likely cause further downgrades. Moody’s rating agency even warns state and local governments against them, calling them a “red flag” that fails to find “sustainable solutions.”
Where should Wolf look instead? Moving to a 401(k)-style plan, like virtually all private businesses have, would improve not only public employees’ retirement security but also our long-term fiscal condition. While rating agencies support this idea, Wolf summarily vetoed it.
Hardworking Pennsylvania families already face the costs of the pension crisis. Adding even more to their burden because Wolf prefers a risky gambling scheme to sustainable solutions is unacceptable.
It’s time for the governor to abandon his ill-conceived borrowing plan and embrace real pension reform.
Nathan A. Benefield is vice president of policy analysis for the Commonwealth Foundation (CommonwealthFoundation.org), Pennsylvania’s free market think tank.