Pa. bond sale likely to face challenges

Pennsylvania will see how much love and confidence Democratic Gov. Wolf and the Republican General Assembly inspire in bond buyers' cold hearts when its next $1 billion-plus general-obligation bond sale prices later in June.

Bondholders lend governments money, in hopes they will be repaid, with interest, by taxpayers, over decades, tax-free. They make risky borrowers pay them more.

Confidence has been heading the wrong way.

In January, at the end of Gov. Tom Corbett's term, Pennsylvania bond yields averaged an extra 0.31 percent over the lower rates that Delaware, North Carolina, and other AAA-rated states had to pay investors to buy their debt, reports Tom Kozlik, municipal-bond analyst at Janney Capital Markets.

By May 26, Pennsylvania's "spread" had jumped to 0.5 percent, says Kozlik, citing data fromThomson Reuters.

That half percentage point, times a billion dollars, works out to an extra $5 million taxpayers have to pay investors every year the bond lasts. That's vs. $3.1 million extra for the same debt under Corbett.

The only states where bond spreads rose faster were Illinois and New Jersey, which are also the only states with worse Moody's credit ratings and more expensive bonds than Pennsylvania.

Bond spreads went down in New York, Ohio, and Michigan.

Only New Jersey has done a worse job over the years than Pennsylvania at paying at least the minimum needed to keep pension funds from getting more insolvent, according to National Association of State Retirement Adminstrators data.

Not surprisingly, New Jersey pays nearly a full percentage point higher interest on its debt than top-rated states like Delaware or North Carolina.

Pennsylvania's rates are up lately because investors are spooked that the state can't get a handle on rising state employee and teacher pension costs after years of underfunding, Matt Fabian, principal at Connecticut-based Municipal Market Analytics, told clients in a report last week.

Wolf and the Republicans "agree that the Commonwealth's rapidly growing unfunded pension liability and required annual contribution must be addressed," Fabian added.

That's all they agree on. Wolf's budget proposal would borrow $3 billion (more bonds!) to reduce the school pension deficit, and pay it back by getting Pennsylvanians to buy more from the state liquor monopoly. Republican schemes would limit benefits and pension guarantees, and get future public workers to contribute more.

Those fixes, if they pass court challenges, might trim future liabilities but aren't likely to end today's $50 billion-plus in excess pension liabilities. Better pension funding means higher tax revenues, or big cuts in other spending. Or bankruptcy reorganization, rare in government.

Pension funding isn't Pennsylvania's only problem. The state also faces slow job growth, a pattern of spending more than taxes bring in, and years of raiding cash reserves to balance the budget.

Wolf inherited those problems, his spokesman, Jeffrey Sheridan, reminded me. "Governor Wolf's budget fixes the deficit without gimmicks and rebuilds our economy," he said.

Kozlik points out that Massachusetts, Maryland, and other states where pension liabilities are proportionately larger still borrow more cheaply than Pennsylvania.

Still, a long-term fix that levels pension costs would be "a top achievement of government," Kozlik told me.

Fabian doesn't expect fixes before this month's bond sale. He expects Pennsylvania's bond rating will keep dropping and its borrowing expenses will keep going up.

And taxpayers will pay investors more, without helping programs, or pensions.

215-854-5194@PhillyJoeD

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