Poor Pension Policy Could Harm Bond Rating

moody'sLast week, Moody’s Investor Service released a warning to state and local governments on borrowing to finance underfunded pension systems, commonly referred to as pension obligation bonds. The report stated:

[P]ension bonds are often a red flag associated with greater rigidity of long term obligations, failure to find sustainable solutions to pension funding and a pattern of pushing costs off into the future.

Exploding pension costs are on course to bankrupt state and local governments, drain public school resources and force local property taxes to skyrocket if unaddressed. Pennsylvanians need real solutions, not pension obligation bonds, a form of political punting that could result in a further bond rating downgrade by Moody’s.

Issuing a pension obligation bond is like taking out a second mortgage on your house, investing the money in the stock market, and hoping for an 8 percent annual return. It’s risky speculation that bets investment returns will exceed interest payments on bonds.

Moreover, pension obligation bonds encourage future pension underfunding. For example, under Philadelphia Mayor Ed Rendell in 1999, the city issued $1.29 billion in pension bonds to balance the city’s budget. But city officials continued to underfund the city’s pensions, leaving Philadelphia in the same predicament as before the bonds were issued, only now with additional bond debt.

Lawmakers must tackle the unsustainable pension spending without budget gimmicks. The first step is to stop the crisis from growing and move all new employees to a 401(K)-style plan that is affordable, predictable, and not pushed onto future generations of taxpayers.