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Future credit-rating downgrades among unseen costs of PA pension crisis

By   /   May 31, 2013  /   No Comments

By Eric Boehm | PA Independent

HARRISBURG — When looking at Pennsylvania’s pension crisis, some of the problems are obvious — like $47 billion that is owed to current workers and retirees.

Other costs are less well defined, but should be a part of the discussion as state lawmakers decide whether changes to the state’s two pension systems will be included in this year’s state budget process.

One of those hidden cost is the threat of another downgrade to the state’s credit rating, which took a hit in 2012 largely because of pension debt.

ZOGBY: Budget Secretary Charles Zogby says there are more problems than just the unfunded pension liability.

ZOGBY: Budget Secretary Charles Zogby says there are more problems than just the unfunded pension liability.

Budget Secretary Charles Zogby said this week that another rating downgrade would be coming at some point if the state Legislature did not address the pension crisis.

“It would be more expensive for us to go to capital markets for debt if we were downgraded,” he said Wednesday during a Senate Finance Committee hearing.

Moody’s Investors Service, a credit-rating agency, downgraded Pennsylvania’s rating last year from Aa1 the second highest rating, to Aa2, the third highest rating.

The ratings agency has Pennsylvania’s outlook — a forecast of potential changes in credit rating over the next 12 to 24 months — set to stable, but that does not mean there could be changes further down the road.  After l, the pension crisis is here to stay. It will take the state several decades to pay off the unfunded liability, according to current projections.

Gov. Tom Corbett’s administration has proposed a set of changes to the pension systems designed to make them more sustainable in the long run and prevent the state from getting into this kind of mess again, assuming it can dig out of the hole.  Lawmakers in both chambers have introduced legislation modeled on the governor’s plan, but there seems to be little appetite to pass anything.

Moody’s and other credit-rating agencies do not comment on proposed changes to state laws and will not assess how a pension plan overhaul in Pennsylvania would affect the state’s rating unless changes actually become law.

But the agency clearly is concerned about the direction the state is headed.

When it downgraded Pennsylvania’s rating in July, the agency noted “the expectation that large and growing pension liabilities and moderate economic growth will challenge the return to structural balance, contributing to a protracted financial recovery.”

David Jacobs, a spokesman for Moody’s, said this week that Pennsylvania’s budget is balanced with “a series of stop-gap measures” that could be worrisome for its future ratings, but the pension situation is the biggest problem facing the state.

“The pension costs are going to absorb a lot of financial flexibility in the coming years,” he said.

Making things worse, any credit downgrade at the state level will have a ripple effect for all agencies that rely on state dollars.  That means everything from state universities to local school districts could feel the pain of higher borrowing costs.

It’s a potential double whammy for school districts, many of which already are bracing for their own hit from the increasing pension costs in the next five years.  About 80 percent of districts are going to have to raise taxes or cut programs in order to meet the pressing pension costs, according to the Pennsylvania Association of School Budget Officers.

Between the State Employees Retirement System, or SERS, and the Public School Employees Retirement System, or PSERS, the state has a $47-billion unfunded pension debt that must be paid in full sooner or later.  The total will climb to around $65 billion within a few years, which amounts to a cost of about $13,000 for every household in the state.

Though Corbett has proposed a variety of changes, the biggest piece of the puzzle is creating a new pension system for new employees that would be modeled after the 401(k) plans commonly found in the private sector.

Advocates for placing all new employees in a 401(k)-style system say it would be a positive for the state’s credit rating because it would indicate a shift away from the current policy of piling up debt in the existing pension system with no end in sight.

Moving to a defined contribution plan for new hires would force the state to move towards closing the current systems — meaning fully paying off the debt — by the time the last current employee dies.

“I think Moody’s is looking for us to have a plan to decrease our unfunded liability,” said Rick Dreyfuss, a retired actuary and pension expert with the Manhattan Institute, a national free-market think tank. “All we’re doing now is increasing the debt.”

But public sector unions representing the state workers  are opposed to any and all of the changes pitched by the governor. They have threatened to sue over any attempt to scale back benefits for workers, even if those changes only affect benefits that have not yet been earned. And, it is unclear if the state would win that fight.

The opposition from unions and the variety of other major issues pressuring lawmakers during the upcoming budget season seem to be enough to keep pensions from rising to the top for now.

And to top it all off, lawmakers would have to vote to cut their own pensions if they are going to make any changes to the system for all other state workers.

“I don’t see it happening,” said state Sen. Rob Teplitz, D-Dauphin. “At the end of the day, do you really believe the same body that increased its own pensions and caused this mess 12 years ago is going to vote to cut their pensions?”

Those political concerns might keep the state from doing anything to address the pension debt for now, but the cost of doing nothing will eventually have to be realized.

Contact Eric Boehm at [email protected] and follow @PAIndependent on Twitter for more.