Pennsylvania has so many stocks and bonds piled in state pension and insurance accounts that it has been lending them out to hedge funds, short-sellers, and other global speculators for the last 10 years in exchange for cash.

The state reinvests this "security-lending" cash with money market funds and other safe-looking investors. Other governments and companies do this, too.

Pennsylvania collected net profits averaging $50 million a year from the program - until last fall, when one of those investors turned out to be a world-class deadbeat.

Sigma Financial Corp. said it couldn't give Pennsylvania and other clients their money back last September, after the value of Sigma's portfolio of U.S. home-mortgage loan bonds collapsed, and its credit ratings were cut (several times, last year) by Standard & Poor's and Moody's.

According to a letter state Treasurer Rob McCord sent Gov. Rendell last week, Pennsylvania's Sigma loss totaled $133 million, including:

$57 million from the Public School Employees' Retirement System, and $20 million from the State Employees' Retirement System.

$9 million from the State Workers' Insurance Fund, and $2 million from the Workers' Compensation Security Fund.

$10 million total from the Tuition Account Program, the Tobacco Settlement Fund, and several smaller programs.

And a total of $25 million from two funds that pool assets for state agencies, which could force cuts in some agency budgets.

Pennsylvania wasn't the only investor burned in Sigma's blowup. Sophisticated institutions from Switzerland's Zurich Financial Services to the central bank of Colombia declared nine-figure Sigma losses, Bloomberg News reported last year.

Pennsylvania's money-minders kept quiet about the loss. But Robin L. Wiessmann, the former state treasurer, stopped the security-lending program for a "reevaluation," said John Lisko, McCord's chief of staff. Treasury officials at first hoped the loss could be reversed or absorbed without making it public, Lisko said.

The state recovered $13 million in March when Bank of New York Mellon Corp. gave the state back its fee for last year, McCord said.

But beyond that, "we cannot assume" the other $120 million "can be rectified," McCord told Rendell in his letter, which was copied to General Assembly leaders.

That was the first time anyone in Pennsylvania, beyond Treasury, knew about the loss, State Sen. Robert J. Mellow (D., Lackawanna) told me after he made details of the letter public.

"I've been in the Senate since 1970, and this is the worst budget cycle we've ever had," Mellow said. "To lose $135 million in taxpayer money this way is inconceivable."

He's asked state officials to weigh lawsuits against Sigma, its owners, and Bank of New York Mellon, which collected $65 million for running the security-lending cash program from 1999 to 2007.

Mellow blamed Wiessmann, a fellow Democrat, for not stepping in before the loss became total and for not reporting the loss to legislators.

"We did challenge it. We did extra due-diligence. This is not something Treasury could have prevented," Wiessmann told me. "When I left office, we were still negotiating in hopes of recovering it."

The pension funds lost billions more in the stock market downturn, she noted.

The bank thought Sigma would be able to pay the state back before it blew up, and it has worked with the state to try to recover losses, said bank spokesman Ron Gruendl.

Sigma is run by London-based Gordian Knot Ltd., owned by financiers Stephen Patridge-Hicks and Nicholas J. Sossidis, and European lenders Deutsche Bank AG and Sarofim & Co.

Gordian Knot didn't respond to a query.

The firm took its name from the ancient Gordian Knot, which world conqueror Alexander the Great cut with a sword when he couldn't figure out how to untie it.

It's a metaphor for taking the easy way. Like getting paid for being rich, which is what security lending is supposed to do. When it works.

Talking health insurance

As the Obama administration pushes for more efficient medical records, new health coverage for the uninsured, and other fixes for the employer-paid private health insurance system, backers of a "single-payer" national health-care plan will rally this weekend to demand what they say is a more efficient way.

Walter Tsou, former Philadelphia health commissioner and former head of the American Public Health Association, along with hospital union leaders, will address a noon rally tomorrow outside health insurer Cigna Corp.'s Two Liberty Place headquarters, at 16th and Market Streets.

On Sunday, U.S. Rep. John Conyers (D., Mich.), sponsor of H.B. 676 calling for a single-payer system, will speak at Princeton Theological Seminary's Mackay Center in a program starting at 1:30 p.m., cosponsored by the Presbyterian Church (USA).

Also speaking in Princeton will be Michael Paluszek, president of Princeton Satellite Systems. "I have an insurance plan for my employees. It's expensive and complex," said Paluszek, who employs 50. "Every year the plans change, with more fees. The cost for employees with families is prohibitive."

"I think that universal health care should be paid for by a progressive income tax paid for by all taxpayers," Paluszek told me.

I ran that by Cigna spokeswoman Gloria Barone Rosanio. "We don't agree there should be a single-payer system run by the government," she told me. "But we have more in common with proposals that are out there than you might realize."

The positions she outlined don't sound far from Obama's - "build on the current employer-based system" while "guaranteeing coverage for everyone, even people with preexisting conditions," which Cigna used to oppose.

"A lot of people are uncomfortable if this is a step toward government-run health care, which the administration says is not their goal," Rosanio added.

People who already have health insurance (and aren't paying for it) "tend to oppose change," Paluszek acknowledged.

But Americans are less satisfied with their health care, he added - and small employers are leading the charge for change: "If my company didn't have to pay for health care," Paluszek said, "we'd spend the money on increased internal research and development. Or higher salaries."

Contact staff writer Joseph N. DiStefano at 215-854-5194 or