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(Bloomberg) — Pennsylvania Governor Tom Wolf called for selling $3 billion of bonds to bolster the state’s public- employee retirement system as part of his first budget. Wolf, a Democrat who took office in January, said Tuesday that Pennsylvania should also boost the profits of the state-run retail and wholesale liquor business, which provides $550 million a year in revenue. He said the extra funds could be used to help schools cut their pension payments and pay off the bonds, according to a budget briefing.“With these and other improvements, we are going to save taxpayers nearly $1.3 billion over the next five years while creating savings of $10 billion in the unfunded liability,” Wolf, 66, said during a speech in Harrisburg.
The Pennsylvania governor joins officials in Kansas and Kentucky who have proposed borrowing money for cash-strapped pension funds, wagering they can earn more on investments than it will cost to borrow. A group of state and local-government officials has advised against such speculation, saying it could backfire if investment returns trail expectations.
Pennsylvania administers two pension plans covering about 700,000 people. The funds had 62 percent of what they needed to cover promised benefits in 2013, down from 75 percent in 2010. Pennsylvania’s pension liability as a percentage of revenue, at about 130 percent, is ninth-highest among states, according to Moody’s Investors Service.

Investment Fees

As he seeks to reduce the retirement-fund shortfall, Wolf said he would create a restricted account to ensure the state continues to make its pension contributions, according to a budget presentation. He also called for curbs on “excessive management fees” paid to investment firms, without providing details.“Our state has been wasting hundreds of millions of taxpayer dollars on Wall Street managers,” Wolf said. “But studies have shown that simply investing this money in a safe, conservative account would produce a similar return over the long term while eliminating these excessive management fees.” Leaders of the Republican-led legislature said Wolf’s plan doesn’t address the rising retirement costs that are taking up funds that could be spent elsewhere. Pensions account for almost one-third of the $1.6 billion in spending increases required in the $29.9 billion budget for the year beginning in July, according to a presentation.

Costs Persists

Wolf also proposed a property-tax cut.
Republican Senator Jake Corman, the majority leader, told reporters that such a reduction “would get eaten right back up by the school districts’ pension contribution over the next few years.” “This doesn’t solve any problems,” he said. “It’s sort of a mirage.”Pamela Hile, a spokeswoman for the State Employees’ Retirement System, said the fund earned $3.7 billion and paid investment firms $175 million in 2013. The system, known as SERS, “sees great value in the fees it pays to its managers, as they have assisted in capital growth, protected fund value against volatility, and ensured that SERS could meet its obligations to its retired members,” Hile said in an e-mail.The state’s second retirement fund, the Public School Employees’ Retirement System, said in an audit released in October that using investment managers boosted its performance. Such firms produced excess returns of about $6 billion in exchange for $2 billion in fees from fiscal 2011 through 2014, resulting in a net gain of $4 billion, the fund said.

To contact the reporter on this story: Romy Varghese in Philadelphia at rvarghese8@bloomberg.net To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net William Selway, Mark Schoifet