How much does it cost for a state to borrow, say, $100 million?
Depends on how much investors trust you. If you're Delaware, Maryland, or Virginia, which live within their means — about $1.9 million a year, at recent rates.
States that spend a little faster than they raise money pay more: Pennsylvania, about $2.4 million. New Jersey, $2.9 million.
And if you're Illinois, $4.6 million. (Thanks to Tom Kozlik, municipal strategist at PNC, for recent bond yield spreads and trends.)
Big states borrow billions for schools, roads, and prisons. Interest adds up over the decades. Because Illinois' leaders can't agree on how to balance its budget or fill a $100 billion-plus gap between public pensions and the funds to pay them, it has the worst credit rating of any state.
New Jersey's borrowing costs are also up. Investors make the state pay more because its budget and pension deficits make lending it money riskier.
Pennsylvania's borrowing costs, by contrast, are lately down. Gov. Wolf and the General Assembly still have to close a scary gap between tax and spending plans. But Harrisburg impressed Wall Street when it finally passed a pension reform bill last week, seven years after the last one slowed but didn't stop the growing drain on public funds.
That looks like progress to financiers who set the price of money. But for Pennsylvania as a community, it's mixed news. Cutting guaranteed pensions for future hires and forcing them to bet part of their retirement funds on Wall Street through 401(k)-type savings plans is both a victory for living within our means and a sign of decline.
Going from guaranteed, professionally managed pensions to savings plans that rise and fall with stock prices is like turning concrete highways back to gravel paths. The actuaries cited by the state Independent Fiscal Office estimate new hires who keep a partial guaranteed pension plus a savings plan will retire at roughly half a typical salary of $70,000 a year, down from the 85 percent that many veteran workers now qualify for. (Most also get Social Security. State police and prison officers will still get the old pensions.)
That's not progress, but it became inevitable after 2001 when then-Gov. Tom Ridge, with henchmen of both parties and union leaders, cursed the pension systems with fat future deficits by boosting checks to themselves and favored constituents while cutting pension funding. Their successors hoped in vain that the U.S. economy would grow fast enough to bail them out.
It's not just state governments (and cities like Philadelphia, Pittsburgh, Chicago, and Dallas) that over-promised and underfunded pensions. National policy encourages corporate employers to "freeze" guaranteed pensions and replace them with less-costly but also less-productive 401(k)-style savings plans.
And U.S. growth has slowed, choking revenues that used to fund growing governments. (Pennsylvania has grown at just half the national average for decades, stressing Harrisburg more than other state capitals.)
To keep public pensions from going broke, taxpayer payments to state and school employee pensions have grown from zero in the early 2000s to more than 30 cents of every dollar paid to Pennsylvania's public workers last year. The new law, passed by fat majorities in both houses and assured of Wolf's support, will not cut those payments. Nor will it trim the $60-billion-plus state pension deficit any time soon. Many thousands of today's public workers will retire under the old rules and collect for decades before that deficit, and the need to pay extra, will go away.