HARRISBURG – Scranton has one of the most underfunded public pension systems in the state, and the city is offering an important lesson about what not to do.
Generous benefits combined with contribution rates lower than necessary to keep the fund solvent have created negative cash flow in the city’s pensions, giving officials little hope of climbing out of a $90 million unfunded liability accounting for more than a quarter of the city’s overall debt burden.
Meanwhile, a state law preventing Pennsylvania cities from significantly changing the way their pension funds operate is blocking any hope of reform and adding to Scranton’s woes.
The northeast Pennsylvania city of about 75,000 proudly wears the moniker “Pennsylvania’s Progressive City.” But it made national news this month when Mayor Chris Doherty took the unprecedented step of cutting all city employees’ pay to the minimum wage, $7.25 per hour.
Doherty said the move was necessary because the city was out of money and could not meet payroll. The City Council, he said, refused to pass a budget with a 78 percent tax increase over three years, and no bank is willing to lend Scranton the money it needs to continue to operate.
James Allen, secretary of the Pennsylvania Municipal Retirement System, which operates about 900 municipal pension plans in the state – not including Scranton’s, which is managed by the city – said about 85 percent of the state’s more than 2,500 municipal pension plans are well-funded and sustainable, but those that are in trouble, such as Scranton’s, are only getting worse.
In Scranton, the city’s immediate cash crunch is part of a larger problem stemming from $300 million in debt; the result of several structural problems, not the least of which is $90 million in pension debt.
Scranton maintains four public pension plans, which operate independent of one another — one for firefighters, one for police officers and two for the city’s nonuniformed employees, which includes employees ranging from clerks to blue-collar workers.
Collectively, the plans are funded at only 47 percent and listed by the state Public Employee Retirement Commission as “severely distressed.” PERC oversees and analyzes state and local pension plans in Pennsylvania.
The most recent data available from PERC – a snapshot of the pension plans as they were in July of 2010 – shows Scranton with about $64 million in assets to cover $138 million in liabilities.
More recent — though unofficial — figures from this year showed liabilities had climbed above $150 million while assets had shrunk to about $60 million.
One of the problems plaguing Scranton’s public pensions is a generous plan for the city’s nonuniformed workers that promises benefits equal to 3 percent of each year’s salary for workers, said James McAneny, PERC executive director.
“They are never going to get their pension costs under control as long as they have that,” he said.
While all four of the city’s pension funds are behind the proverbial eight ball, the nonuniformed plan is leading the way with only 28 percent of liabilities covered by assets. The police plan is 55 percent funded, and the firefighters’ plan is 42 percent funded.
The city is also not adequately funding its pension plans, which digs the hole deeper.
Randee Sekol, CEO and actuary for Beyer-Barber Co. in Allentown, an actuarial consulting firm, is chief consultant for the board managing Scranton’s public pension system. He declined to comment for this story.
But on May 24, the Scranton Times-Tribune reported Sekol told the board contributions for 2012 were in line with state law, but they were well below what was necessary to keep the pension fund solvent.
The city budgeted about $4.2 million on pensions in 2012, including about $3.3 million for police and fire pensions. Sekol told the board in May the city needed to put in more than $10 million this year.
He told the board that contributing the minimum was “complying with the law, but it’s not funding your plan. It’s leading to running out of money at some point,” according to the Scranton Times-Tribune.
McAneny said the state law sets a “bare-bones standard” that works for municipalities that have done everything right in the past.
Once you fall behind in your payments, however, the standard set by the law is not enough to catch up.
“If you did everything else right, compliance with the law would work. But as long as people are trying to reduce the contributions instead of putting the money in that you need, you’re going to need larger payments to cover the costs,” McAneny said.
According to Gary Lewis, a freelance accountant and Scranton resident who tracks the city’s finances on his blog – titled “Scranton Is Broke” – the pension funds are in a state of negative cash flow in which the amount being paid out each year in benefits is outpacing contributions made through the city budget.
Lewis estimates that at the current rates, the funds will be completely insolvent in a little more than four years.
Scranton isn’t alone. It’s one of 26 municipalities listed as “severely distressed” in the 2010 PERC report, which was published in January 2011. An update is due later this month.
Municipalities with less than 70 percent of the assets needed to cover their liabilities are listed as “moderately distressed” and must streamline costs of administering the respective plans. Those with less than 50 percent of the assets needed to cover their liabilities — such as Scranton and 25 other municipalities in the state — are designated as “severely distressed” and must streamline costs, implement a new pension system for future hires and make changes to members’ contribution rates.
Most of the other severely distressed pension plans are in relatively small municipalities, with liabilities of less than $100,000. But Scranton is not the only city to make the list. In fact, its $90 million in unfunded liabilities is dwarfed by Pittsburgh’s $600 million in unfunded pension debt.
For now, cities are prevented from taking some steps that would help reduce their future pension obligations, such as moving to a defined contribution system similar to 401(k) retirement plans in the private sector.
Because of a state law, all cities in Pennsylvania must maintain a defined benefit pension formula – in which benefits are calculated by a formula of salary and years of service, instead of being based on a set contributions by employees and employers each year, as in defined contribution plans.
Eileen Norcross, a senior research fellow on state and local pension issues for the Mercatus Center, a free market think tank at George Mason University in Virginia, said the state mandate on pension systems was not helping municipalities in dealing with millions of dollars of debt.
“That’s a very bad setup because the locality doesn’t have the fiscal autonomy to make those decisions,” she said. “That’s something the state of Pennsylvania should look at changing.”
Gov. Tom Corbett and lawmakers in Harrisburg have pledged to begin focusing on the state pension systems — which are facing a nearly $40 billion unfunded liability of their own — when they return to session in the fall, with a goal of passing some kind of pension reform before next year’s budget.
Richard Vilello, mayor of Lock Haven and president of the Pennsylvania League of Cities, says reforms have to address the looming municipal pension crisis as well, which affects not only Scranton but other cities and towns across Pennsylvania.
“They can’t forget about the municipal pensions,” Vilello said last week. “There are fewer current workers to support more and more retirees in the system. It’s just all upside down.”