Pennsylvania Confronts $41 Billion in Pension Deficits

Pennsylvania’s two public pensions face a combined shortfall of $41 billion, and their costs will consume 62 percent of fiscal 2014 revenue growth, according to a report from the state budget office.

The State Employees’ Retirement System has 65 percent of assets needed to cover projected liabilities, and the Pennsylvania Public School Employees’ Retirement System is 69 percent funded, the report said. The plans cover 817,000 people.

In July, Moody’s Investors Service cut the state’s general-obligation debt rating to Aa2, its third-highest, citing rising pension obligations that will weigh on its economic recovery. Funding for state retirement plans across the U.S. fell in fiscal 2011 for a fourth straight year, to a median coverage ratio of about 72 percent, data compiled by Bloomberg show.

“Absent meaningful structural pension reform, the state’s general-fund budget is on a very predictable path that will force a choice between either fully funding pension obligations or making cuts to the core functions of government,” Charles Zogby, Pennsylvania’s budget secretary, said in a statement.

State revenue is projected to rise by about $818.7 million in fiscal 2014, according to the report. Pension cost increases, estimated at $511.2 million, will account for almost two-thirds of the additional revenue, the report shows.

Narrowed Premium

The yield premium for holders of 10-year general-obligation bonds issued in Pennsylvania has narrowed by 0.11 percentage point since Governor Tom Corbett took office, data compiled by Bloomberg show. An index of 10-year debt yields 2.09 percent on average, or 33 basis points more than a gauge of top-rated state and local securities. A basis point is 0.01 percentage point.

The extra yield was 44 basis points on Jan. 18, 2011, when Corbett was sworn in. Yield premiums have declined on state and municipal debt partly because investors have bought tax-free bonds as a hedge against higher taxes.

Corbett intends to propose a pension overhaul in his 2014 spending plan, for the year that begins in July, according to the report. Retirees and current employees with accrued benefits won’t be affected, it said. Steps taken by other states, such as increasing worker contributions, raising the retirement age and adjusting payment formulas such as credit for years of service, provide potential models for Pennsylvania.

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