Pennsylvania's outgoing Gov. Bob Casey may sign into law two bills that would permit local governments to finance pension liabilities by selling taxable bonds.
Casey has until Dec. 30 to take action on the legislation, which comes as municipalities across the country scrutinize their money management practices following the Orange County, Calif., investment pool disaster. Many of the southern Californian municipalities that invested in the pool used money from taxable bond sales.
State law will not let Pennsylvania's cities, towns, and villages buy derivatives, the volatile securities that burned Orange County, but the two bills would let them generate pension profits by investing proceeds from taxable bond sales.
Many lawmakers expect Casey to sign the bills, but spokeswoman Rose Wuenschel said he is studying the matter. "He has not made any indication whether he will sign," Wuenschel said. "I can say that he will most likely not take action on it this week, but probably sometime next week."
Governor-elect Tom Ridge is not familiar with the legislation, according to his spokeswoman, Ellen Yount. "We have not taken a position one way or the other," Yount said.
The legislation, which would amend a state law on municipal debt issuance, would not apply to school districts or Philadelphia, the state's largest municipality. School districts are required by state law to participate in the Public School Employees Retirement System, a statewide pension fund containing more than $25 billion.
Philadelphia is not covered by the state law that the bills would amend, and state lawmakers have not announced any plans to give the city permission through separate legislation.
In November, the legislature passed the bills despite criticism that bonds sold to raise money for investment could wind up costing more in debt service than the investments generated in returns.
Such concerns have peaked across the country as the Orange County investment pool logged a $2 billion loss due to an increase in short-term interest rates.
The bills' supporters say interest rates are still low enough for a municipality to sell debt and realize a profit on investing the proceeds. Pension funds, with their diversified portfolios, often enjoy returns that exceed the costs of a taxable bond issue, the supporters say.
"No one anticipates the kind of leveraging that was the case with Orange County," said state Sen. David Heckler, the bill's sponsor. "We're going to get the bonds, invest them, and make money."
Heckler said he expects Casey to approve the bills, which passed the Senate unanimously and sailed through the House with substantial majorities.
Many Pennsylyania cities have significant pension fund liabilities. Pittsburgh, for example, has one of about $400 million.
"Pittsburgh is a number one contender for this approach," Heckler said.
Even so, in reviewing the legislation, the Public Employees Retirement Commission said that the main risk of bond financing for pension liability was adverse market conditions.
The commission, a state agency that monitors Pennsylvania pension. systems in the state, released a policy statement describing risks associated with the legislation. The commission warned that a municipality could lose money if investment returns were lower than the costs of a bond issue.
"The key item is whether they can invest the money at a higher rate than they borrowed," said Anthony Salomone, executive director at the commission.