Treasurer Torsella Recommends Exploring Use Of Pension Obligation Bonds To Ease State Pension Burdens

POBs, along with other measures, could help alleviate COVID-19 budget strain and counteract negative effects of previous underfunding at SERS and PSERS

Harrisburg, PA - Pennsylvania Treasurer Joe Torsella today announced his plan and support for the General Assembly to consider pension obligation bonds (POBs) to help address the outstanding unfunded liabilities of the state’s largest pension systems—Pennsylvania State Employees’ Retirement System (SERS) and Pennsylvania Public School Employees’ Retirement System (PSERS).

“Taking advantage of the present low-interest rates and exploring the issuance of pension obligation bonds would be a proactive step to improve funding at SERS and PSERS. There is no cure-all to the extreme deficits at our pension systems—but the Commonwealth’s public servants and retirees deserve to know their retirement is secure, and taxpayers need to know we are taking all steps possible to mitigate budgetary pressures on them.”

Pennsylvania State Treasurer, Joe Torsella

POBs are taxable debt instruments issued by state or local governments. Proceeds are invested by the pension systems to produce higher returns than debt service owed over the the long run—reducing long-term liabilities.

Torsella recommends establishing a statutory framework to govern the use of POBs including the creation of an advisory committee to assess POB offerings, as well as consideration of “limited pension obligation bonds,” requiring the investment of bond proceeds only be in index investments, offering voluntary pension benefit buy-outs, and hedging risk through multiple bond issuances.

SERS and PSERS combined are currently less than 60% funded and face a $72 billion deficit as of 2020—less than twenty years after having a combined $20 billion surplus. This downturn can be attributed to a combination of factors, including investment performance, benefits changes, and repeated patterns of insufficient employer contributions below the Actuarially Required Contribution (ARC).

More information about POBs and how they can be used to help SERS and PSERS is available in the most recent issue of Treasury Notes.

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