Westmoreland places 'leveraged bet on market' to shore up county pension debt

Westmoreland County’s largest ever bond issue, which will put taxpayers on the hook for $173.6 million, won’t lay water or sewer lines, pave roads, fix aging bridges or set a single steel beam.

Instead, debt on the $126.48 million in bonds to be paid by taxpayers over the next 20 years will help pay off something already on the books: some $125 million in unfunded county pension debt.

County officials decided they needed to act when they learned the pension fund, which covers 1,879 county employees and pays benefits to 1,433 retirees, was funded at only 82%. After a year of gains that pushed the fund to a record $520 million, it was still about $125 million short of the total benefits already promised.

Experts consider public pension systems funded at 82% still relatively healthy and likely to be able to meet future obligations through a combination of fully funded annual employer contributions, employee contributions and market gains.

But Westmoreland’s three commissioners, faced with an aging population that is declining at the seventh fastest rate among similarly sized U.S. counties, were concerned they might have to raise taxes to meet the county’s annual contributions.

So commissioners, who serve as three-fifths of the pension board — which includes the county controller and treasurer — took what some call a risky dive into pension obligation bonds as they worked to balance their budget.

It was, the board concluded after reading a study by their financial adviser, one way to meet their obligations and not raise county taxes.

“This will reduce the general fund burden. We’re saving general fund expenditures that we can use for other means,” Commissioners’ Chair Sean Kertes said, explaining the plan earlier this year.

That independent financial adviser, Susquehanna Advisors, is under contract to counsel the county at a cost of $50,000. The firm prepared a study showing that borrowing $126.48 million to pay down the debt could save significant money over the next four years. It’s less certain how well it will fare over the long run. The study suggested the general fund will be out only $7.3 million over the next 22 years as taxpayers ante up $47 million in interest costs to Wall Street to pay off the bonds and fully fund the pension system.

It’s a gambit that could work — and one that elected officials elsewhere facing unfunded pension debt have turned to with varying results.

“Under most conditions, the investment will outperform the borrowing costs,” said Greg Mennis, director of the Pew Trust project on strengthening public pension system. “But it is also true that a pension obligation bond is a leveraged bet on the market.”

Not without risk

Many experts say it is bad public policy — something akin to using one credit card to pay off another — and carries significant risk.

The national Government Finance Officers Association strongly advises against pension obligation bonds. It issued a statement Feb. 21 reiterating that longheld advice and warning that pension obligation bonds are complex instruments that carry considerable risk.

Richard Dreyfuss, an actuary and senior fellow with the Commonwealth Foundation, called it another example of public officials “kicking the can down the road,” or offloading today’s pension obligations on tomorrow’s taxpayers.

Even when such plans pay strong returns, Dreyfuss said elected officials often go in the hole again by using them to pay an increase in cost-of-living benefits.

“Act 120 of 2019 outlawed pension bonds for PSERS and SERS (the massive statewide school and state employee pension systems). So why is it inappropriate at the state level, but appropriate here? Give me one example where these have ever worked in the long term,” Dreyfuss said, ticking off poor results in Pittsburgh, Philadelphia and New Jersey, among others.

Pittsburgh officials in the late 1990s found themselves scrambling on the brink of insolvency after they issued more than $300 million in pension obligation bonds. Shortly afterward, the markets went south, leaving the city with an even bigger financial hole.

When Gov. Tom Wolf briefly flirted with the notion of revising the law to allow the state to issue pension bonds in 2015, Mayor Bill Peduto reminded him of the travesty Pittsburgh faced when it turned to pension bonds.

“Pittsburgh should be the litmus test that pension bonds are not the solution,” Peduto cautioned.

Credit rating impact

The borrowing comes as Westmoreland recently banked the first installment of $107 million in American Rescue Plan money the county is scheduled to receive over the next two years. Although the federal stimulus money comes with few strings, it carries two prohibitions: It cannot be used to fund pensions or underwrite a tax reduction.

Unlike general obligation bonds that municipalities routinely issue for major projects such as infrastructure and construction, pension obligation bonds are taxable and carry a higher interest rate. While general obligation bonds are tax exempt and have been going to market at 1.50% to 2%, preliminary estimates show Westmoreland’s pension bonds will carry a 3% interest rate.

They also can be difficult to refinance, should the need arise.

The Government Finance Officers Association also warns that credit rating agencies might not view pension obligation bonds as a plus for a county’s credit rating if the move is not part of a comprehensive plan to address pension shortfalls.

Westmoreland County, which went into 2020 with an Aa3 credit rating from Moody’s Investors, already saw its rating drop two points last fall to A2. Although a strong rating, it upped the cost of insurance for bond issues. Moody’s also rated the outlook for the county as negative, predicting “reserves will continue to deteriorate absent a plan to address structurally imbalanced operations through both increases in reserves and expenditure cuts.”

Despite cautions about the pitfalls of pension obligation bonds, Mennis said there has been a slight uptick in pension bond issues over the past year. He speculated many of those issuing such bonds are experiencing the same kind of demographic and financial pressures facing Westmoreland County.

He said low interest rates make such deals attractive. But he noted those looking to earn high returns on borrowed money will be investing at a time when the market is at one of its cyclical highs.

“This is a case of buying high rather than buying low,” Mennis said. He added that, in the name of transparency, officials should provide some form of regular public updates as to how the borrowing costs fare versus the investment.