Pittsburgh, Philadelphia, Scranton and others “severely distressed”
By: Eric Boehm | PA Independent
Editor’s Note: This story appears today as part of the PA Independent’s Year in Review series. This week, we will re-post several of our top stories from 2011. The article below was originally published on February 17, 2011.
A recent report on the status of municipal pension plans in Pennsylvania found nearly half of all active local government employees are enrolled in a “severely distressed” plan, thanks to three of the commonwealth’s major cities.
The report, compiled by the state’s Public Employee Retirement Commission (PERC), identified 27 municipalities as falling into the “severely distressed” category, meaning the plans are funded at less than 50 percent of liabilities. Included in the group are the cities of Philadelphia, Pittsburgh and Scranton, which alone account for 45 percent of all local government employees in the state.
Pittsburgh is facing a $1 billion public pension obligation and a funding ratio of about 30 percent.
The report also identified 162 “moderately distressed” plans which are funded at between 50 and 70 percent and 474 “minimally distressed” plans funded at between 70 and 90 percent.
Pennsylvania has more than 3,200 local government pension plans, about a quarter of all such plans in the nation, though two-thirds of the plans have 10 or fewer members.
The multitude of small pension plans for county and municipal workers are more susceptible to low funding ratios but can also recover much more quickly, said James McAneny, executive director of PERC. The real problem is the large pension plans in the cities which have become woefully underfunded and have obligations exceeding $1 billion, he said.
“When you’re below 50 percent funded, you’re really screwed,” said McAneny.
None is in worse shape than Pittsburgh, which has a set of three public pension plans collectively funded at about 30 percent. With more than two retirees for every active employee, the fund is in a state of negative cash flow and will enter a pension “death spiral,” said James Allen, secretary of the Pennsylvania Municipal Retirement System, which manages more than 900 local government pension plans on behalf of the municipalities.
“The best place to get the money is to grow the investments. In the case of a plan like that where you have more retirees than actives, they have a negative cash flow because they are taking more out per year in monthly benefit payment than they are putting into the plan in monthly contributions,” said Allen.
In such a state, increasing investment returns becomes nearly impossible, he said.
Last year, Pittsburgh narrowly avoided a state takeover of the pension systems, which had about a third of the money needed to cover $1 billion in obligations. A state takeover would have eliminated public sector unions’ ability to collectively bargain for benefits and forced the city to double or possibly triple the $60 million contribution made to the pension plans during 2010.
The state takeover would not have decreased costs of the plans but would have “taken away the shovel” and kept the hole from getting bigger, said McAneny.
In Pittsburgh’s case the problem runs even deeper. The city is spending more than $3 million annually on the management of three pension systems: one for firefighters, one for police and one for city employees, according to a report this week in the Pittsburgh Post-Gazette.
McAneny said Pittsburgh played “hokey-pokey” for years with their actuarial assessments, frequently using an assumed 10 percent rate of return, far beyond realistic numbers.
While Pittsburgh has become the poster child for pension issues in the state, the PERC report reveals the cities of Philadelphia and Scranton are in deep trouble as well.
While they are in relatively better shape than Pittsburgh – thanks to better funding of the plans over the last three decades – they are unlikely to recover from their funded ratios of 45 percent and 40 percent, respectively, without making changes, said McAneny.
“Can they climb out of it? Sure. But do they have the discipline to do it? History suggests they don’t,” said McAneny. Even making changes to benefits for new employees would not affect current obligations, but would reduce future ones, he said.
When it comes to small municipalities, such as townships and boroughs, being less than 70 percent funded is cause for deep concern.
“With the townships you’re not talking about big dollar, but you are talking about big percentages relative to their revenues. So they are going to have a hard time digging out too,” said Mcaneny.
To some degree, municipalities at all levels have their hands tied by the state. Laws mandating defined benefit plans – in which investment losses affect contribution requirements instead of benefits – for all police and firefighter pensions should be changed, said Elam M. Herr, assistant executive director for the Pennsylvania State Association of Township Supervisors.
“[The state mandate] prevents the municipalities from making the changes they might want to make,” said Herr.
Municipalities can receive state aid for their pension plans through a formula based on the plan’s size and funding status. Last year, the state gave out $217 million in aid, with about 25 percent going to Philadelphia alone, but it hasn’t been enough to keep pace with increased costs.
According to the PERC report, state contributions to municipal pension plans increased by 4 percent between 2007 and 2009 while, municipal contributions increased by 27 percent.
Contributions at the local level are expected to climb by another 200 percent over the next six years to make up for investment losses during the recession of 2008, according to the report.
If pension obligations force municipalities to default on payments or seek refuge in bankruptcy, there is no mechanism in place for the state to bail-out underwater pension systems.
State Sen. John Eichelberger (R-Blair), chair of the Senate Local Government Committee, said the General Assembly will likely have to address the municipal pension issue within the next year, but there is nothing currently working its way through the legislative process.
While the big cities face a much tougher road ahead, an improving economy – particularly in the housing sector – would go a long way towards improving many municipalities’ pension plans, said Herr.
Any municipalities with ratings of “moderate distress” or “severe distress” must submit a report to the state demonstrating a plan for administrative improvement. Municipalities in “severe distress” must also establish a revised benefit plan for all newly hired employees.
