Editorial: Funding pensions on credit is crazy

Some people say the definition of insanity is doing the same thing over and over and expecting a different outcome.

Does that count if you do the same thing someone else did and expect it to turn out differently?

The Westmoreland County Commissioners are giving that a try with $125 million in pension fund bonds.

No, the county isn’t doing something it has done before and seen fail. It is, however, following a path that has been the road to ruin for other communities and state agencies alike.

Let’s take Pittsburgh, which issued more than $300 million in pension obligation bonds in the late 1990s. The plan took a city already barely treading water financially and threw it an anvil instead of a lifeline when the market tanked.

Philadelphia had similar experiences. The Pennsylvania School Employees Retirement System and State Employees Retirement System — both of which have enough problems already — are not allowed to use POBs due to a 2019 state law.

It’s not just a Pennsylvania thing. New Jersey had problems too. A University of Minnesota study showed “mixed at best” issues with the funding method that put Detroit, Stockton, Calif., and San Bernardino, Calif., deeper in the red.

The national Government Finance Officers Association warns against it. So does the free-market think tank Commonwealth Foundation in Harrisburg.

So why would the commissioners think Westmoreland County will make it work when so many others haven’t? Timing.

The county is receiving $107 million in American Rescue Plan money but it can’t be used for funding pensions, so that doesn’t help the county with its $125 million in unfunded pension debt. While being funded at 82% is generally a good position for a pension fund, commissioners say they want to “reduce the general fund burden,” saving that money for other uses.

There is also the interest rates, which are low right now. They are not, however, as low on POBs as they would be on general obligation bonds like those for a building project. The county’s 3% interest rate up to doubles what it would be if they were actually borrowing money for a brick and mortar purpose.

The goal is to take the risk rather than have to raise taxes. The problem is that if it doesn’t work, taxpayers could not only still owe that pension money but the millions in costs for the bond issue, too. Then there’s also the cost of the potential hit to the county’s credit rating. Moody’s already downgraded the county’s rating in September 2020, saying “the outlook remains negative.”

In essence, the county’s plan is like taking a cash advance on your credit card to buy stocks in the hope they will make enough to fund your 401(k). Could it work? Maybe. Have other people crashed and burned trying this shell game? Yes.

But the commissioners are confident that won’t happen. And that is the definition of insanity.