Save public pensions? Invest them in local projects

Investing in public projects such as toll roads can bring dependable returns to public pensions, those attending a gathering in Philadelphia were told.

Take pension money and invest it in local projects that produce a guaranteed return, such as a toll road.

That was one of the ideas suggested by former Maryland Gov. Martin O'Malley to fix the sorry state of public pensions nationally. Those in New Jersey and Pennsylvania were the nation's worst funded last year.

"There are opportunities we've yet to realize, such as having our pension funds invest in local, sustainable projects with a double bottom line," said O'Malley, one of the few politicians to reverse a state's pension deficit.

Maryland went from public pensions that were 59 percent funded to an expected 80 percent funding by 2021, said O'Malley, who spoke Tuesday at "The State of State Pensions," hosted by Penn Mutual Life Insurance in the airy space atop the Kimmel Center.

"We asked employees to contribute more, reduced anticipated benefits, and drew large protests," O'Malley said. "And these people were all my friends, but we needed a sustainable pension system. In better times, we perhaps can make adjustments."

"They booed me, but it is possible," he added.

New Jersey's pension crisis continues, said New Jersey State Senate President Stephen Sweeney, another speaker.

"I'm pro labor, and yet the unions are still coming after me," said Sweeney, an ironworker, noting that political suicide often accompanies pension reform. New Jersey's public pension system is about $44 billion in debt.

"We're living longer, and the 7.9 percent assumption is never going to work," he said, referring to the annual returns that pension funds expect. "The numbers don't lie. But when you tell the truth, you get a bad reaction."

Investing in local projects, through an infrastructure trust bank similar to the one set up in Chicago, can offer a guaranteed return. Giving the pension fund turnaround about a decade to work is "realistic," O'Malley said. "It's a 10-year problem."

Last year, Pennsylvania's pension funds for state and public school employees were deemed the nation's second most underfunded after only New Jersey's, said the National Association of State Retirement Administrators.

Plus, scandal now engulfs the management of those pension funds.

Auditor General Eugene DePasquale is interested in fees paid to outside investment managers and announced audits just days after federal prosecutors filed charges against former state Treasurer Barbara Hafer and fraud counts against a Philadelphia-area businessman, Richard Ireland, over contracts to manage state money.

New York City fixed its pensions in the mid-1970s, said former New York Lt. Gov. Richard Ravitch, and "we've never had an issue since. New York has a proven approach."

In the mid-1970s, Ravitch reorganized New York City's debt so it could gain federal guarantees. And he persuaded unions to join with the major bankers to buy the city's restructured debt. Aided by inflation, which reduced the costs of the city's obligations, New York edged away from the precipice.

Former Pennsylvania Gov. Ed Rendell introduced the panel and said, "I tried to fix the pension problem while I was in office," with a quick laugh, though critics say he never made it a priority. He then departed, skipping the discussion.

Portable pensions may be an answer for millennials, who by 2026 will represent three quarters of the U.S. workforce.

"When you're working 21/2 jobs, the technology is there" to create portable pensions, O'Malley said. He pointed to Ohio, which uses the OpenGov system to give checkbook-level data on every city, school district, and local entity. Ohioans can see how each tax dollar is spent.

215-854-2808 @erinarvedlund