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Beware Using Bonds For School Pension Debt, State Told

Beware Using Bonds For School Pension Debt, State Told

HARRISBURG PA – State legislators have explored selling special bonds for up to $10 billion as a way to avoid steep pension payment increases that affect the Pottsgrove, Spring-Ford Area and Pottstown school districts, among many others. Financial experts, however, are warning them to be careful, The Pennsylvania Independent online news service reported Monday (March 11, 2013).

So-called “pension obligation bonds” might be used to pay off a portion of the combined $42 billion debt for the State Employees Retirement System and the Public School Employees Retirement System. Both are substantially underfunded and the public school pension is causing grief for districts like Pottsgrove, which must budget ever-larger percentages of their tax revenues to pay the debt.

[box type=”note” size=”large” style=”rounded”]The Pottsgrove Board of School Directors is scheduled to meet tonight (Tuesday, March 12) at 7:30 p.m. in Lower Pottsgrove Elementary School, Buchert Road, Pottstown. Its education report includes proposed 2013-2014 budget presentations from the technology and facilities departments. The meeting is open to the public.[/box]

But the bonds essentially swap one form of debt for another, according to experts interviewed by The Independent. Think of it as using your lower-cost Visa credit limit to pay off your higher-cost MasterCard, it suggested.

The overall savings, if any, probably won’t be enough to make a significant difference, The Independent reported. Besides, pension obligation bonds are illegal for the state to use under current law … although that could be changed.

Even worse, Moody’s, a major credit rating firm, issued a statement in December warning governments about the risk of using pension bonds. “If bond proceeds substitute for annual contributions to pension plans or are used to pay pensioners, we consider it a deficit borrowing and would view the financing as credit negative,” it said.

Such a determination would make any other future borrowing more expensive.

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