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July 27, 2012 | By | Posted in General News

Municipal pension crisis — ‘$6B is still a big number’

By Eric Boehm | PA Independent

HARRSIBURG — New figures show municipalities in Pennsylvania are facing more than $6 billion in unfunded liabilities.

That total is actually a slight improvement over where things stood two years ago, but the state and its municipalities have a long way to go.

The new numbers provide a snapshot of Pennsylvania’s roughly 1,400 municipal pension plans at the end of 2011.  The state Public Employees Retirement Commission, which oversees and analyzes state and local pension plans in Pennsylvania, compiled the report.

Pittsburgh's pension system is only 62 percent funded, but that's way better than it was just two years ago.

“What you’re looking at is really the effect of the improvement of the funding status in two cities: Philadelphia and Pittsburgh,” said James McAneny, PERC executive director. “But $6 billion is still a big number.”

Philadelphia’s funding ratio has improved from 45 percent to 50 percent in the past two years. While the increase is small, the massive size of the city’s pension plan — which accounts for half the municipal workers and therefore half of the municipal pension costs in the entire state — means the improvement skews the rest of the state’s results.

In Philadelphia, McAneny said the improvement is due to the city sticking to a decades-old plan to slowly improve the funding of a pension plan that was once barely funded.

Taking Philadelphia out of the picture leaves about $2 billion in unfunded liabilities spread across the remaining 1,400 municipal pension plans, with Pittsburgh accounting for around $380 million of that total.

For some context, the two state level public pension systems are facing a roughly $40 billion unfunded liability.

Pittsburgh moved from “severely distressed” to “moderately distressed,” thanks to some changes made at the city level that put more money into the system after a decade of underfunding.

Pittsburgh made a $45 million lump sum payment into the pension fund earlier this year and has tied future revenue from its parking tax to help pay down its liabilities, said Cathy Qureshi, the city’s assistant director of finance.

Even with the changes, Pittsburgh’s pension plan is funded at 62 percent, according to the PERC report.

On the whole, 35 fewer municipalities are listed as “distressed” in the new report when compared to 2010. Any plan that has less than 90 percent of the assets needed to pay its accrued liability is listed as distressed, while funds with funding ratios below 70 percent and below 50 percent are labeled as “moderately distressed” and “severely distressed,” respectively.

Scranton is the big loser in the new report. The city’s pension liabilities have grown by about $50 million since the July 2010 PERC report, while assets to pay those costs have declined by about $5 million.

The city of Johnstown is one of 26 municipalities in Pennsylvania with a pension funding ratio of less than 50 percent.

As a result, the city pension plans’ funding ratio has dropped from 47 percent — already in “severely distressed” status two years ago — to 34 percent this year.

Calls to the city business managers were not returned Friday.

For some cities that were already in trouble — Scranton leads the way, but Johnstown and Hazleton are newcomers to the “severely distressed” listing — things are getting worse.

In Johnstown, which dropped from 52 percent funding in 2010 to 47 percent this year, city financial manager Carlos Gunby said annual contributions were being made in compliance with the law, but legacy costs were pulling the overall funding level downward.

“The amount going in isn’t necessarily enough to cover the amount going out each year,” Gunby said.

Hazleton’s funding ratio has tumbled from 52 percent to 49 percent over the past two years.

State law prohibits cities like Scranton, Hazleton and Johnstown from changing their pension plans to defined contribution plans — similar to 401(k) plans that are common in the private sector — which could save money in the long term.

McAneny said many places could benefit from such a change, but reforms must be enacted at a state level.

Some municipalities have managed to start digging out from their problems.

In Montgomery County, the Borough of East Greenville was among the “severely distressed” municipalities two years ago, with less than 40 percent of its liabilities covered by assets.

In the new report, the borough has improved to 68 percent funded and moved into the “moderately distressed” category.

“We took a hard look at it a couple of years ago and we had to do something, because it wasn’t looking good,” said East Greenville Mayor Ryan Sloyer.

The borough sought assistance from the Pennsylvania Municipal Pension Commission and has been making larger contributions to the plan during the past two years, he said.

Like many other municipalities with underfunded pension plans, East Greenville had a relatively easy time climbing out of its pension hole because it has only a few employees on its rolls.

Most of the plans funded at less than 50 percent are relatively small municipal plans with only a few employees enrolled and less than $100,000 in liabilities. Some of them are new plans that have been established only within the past few years.

Experts agree that the smaller plans can more easily fall into distressed status, but can also more quickly pull themselves out.

But on a larger scale, the answer is the same.

Higher contributions to the pension system have helped Pittsburgh start on the long road to recovery, after the city’s pension system bottomed out at 34 percent funded in 2010.

Even though it is in recovery, Pittsburgh has a lot to teach other cities about how easy it is to get buried in pension costs.

For about a decade, the city was using a 10 percent discount rate, which is the assumed annual rate of return for pension investments. During that time, it never realized those high levels of expected returns and lost 40 percent of the value in its pension fund within a decade, McAneny said.

“It was obvious why. (The city wasn’t) putting in as much as (it) needed to,” he said.

Even in a time when most municipalities were assuming unrealistically high rates of return — usually around 8 percent — Pittsburgh stood out.  Now, most municipalities and the state’s two major pension plans are assuming lower rates of between 6 percent and 7.5 percent.

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Eric Boehm is a reporter for PA Independent. He can be reached at Eric@PAIndependent.com or at (717) 350-0963.

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