Gov. Wolf’s spokesman says only state — and not municipal — pension systems will change as part of budget compromise.
Lawmakers have advanced a proposal meant to address Pennslvania’s multibillion-dollar municipal pension problem — but some critics say it would severely compromise retirement security and fail to adequately address how funds are managed.
Collectively, the Commonwealth’s municipalities are projected to be $7.7 billion short of what they’ll need to pay promised retirement benefits. The estimate makes assumptions, in some cases about events decades in the future. But already, municipalities have been dealing with ballooning annual expenses. Some of the most dramatic illustrations are Scranton, Pittsburgh and Allentown.
The issue prompted Gov. Tom Wolf to appoint a task force on municipal pension reform. Although the panel released recommendations last summer, Wolf’s spokesman Jeff Sheridan says talks with stakeholders (unions, local government advocacy groups, legislators, mayors, etc.) aren’t far enough along. So municipal pensions won’t be addressed as part of whatever compromise finally ends the nearly six-month state budget impasse, Sheridan says.
“There is an urgency for us to address the municipal pension problem,” Sheridan says. “That [is] why he put together the task force in the first place … but we don’t expect it to be part of the final budget.”
State pension reform will be, though, Sheridan acknowledged. And that’s partly why state Sen. John Eichelberger, R-Blair, says he filed amendments earlier this week to House Bill 414. (Originally, 414 dealt exclusively with hiring financial professionals to manage municipal pension funds.)
“We didn’t want to lose the opportunity to act on municipal pension relief when we are working on state pension relief,” Eichelberger said. “That’s why this is happening now. We do have a full plate down here, … but this is important as well. We don’t want to go home with some resolution to statewide pensions and then say, well, someday we’ll come back and we promise we’re gonna take a look at municipal pensions — because we all know how things work down here and that might not happen.”
The amendments reflect some — but not all — components of two other municipal pension bills: HB316 and SB755, which haven’t moved in months.Under the amendments, municipal workers already hired, vested or retired wouldn’t experience changes to their promised pensions. But all municipal pension plans also would be subject to stricter disclosure rules and parameters for actuarial assumptions. And they’d be prohibited from counting overtime more than 10 percent of a worker’s base salary as part of the compensation on which pension awards are based.
The amendments also call for overhauling the structure of some municipal pension funds, depending on funding levels — an estimate, essentially of how much money the fund’s expected to have relative to what it’s obligated to pay pensioners over their lifetimes.
Nearly 2,200 plans are required to report related data to the Pennsylvania Employee Retirement Commissions. At last check, about two-thirds were less than 100 percent funded, meaning they won’t have enough and/or might run out of money at some point unless something changes (that something could be borrowing money, for example, or stronger-than-expected investment returns).
Twenty-five police and fire pension systems reporting to PERC are considered severely distressed, which means their funding ratio’s below 50 percent. The amendments call for them to be managed by the Pennsylvania Municipal Retirement System, which already handles more than 600 municipal pension funds, under amendments voted through the state Senate Finance Committee Wednesday.
The most stable — more than 90 percent funded — would have a choice: stick with their current defined benefit plans, or establish for future hires one of two other types of pension funds outlined in Eichelberger’s amendments. This would be the case for more than half of plans.
Those with funding ratios between 50 and 90 percent would have to change, but could choose how or defined contribution. Both set employee contributions at 6 percent or 9 percent, depending on whether the person participates in Social Security, and employers at 4.5 percent. Employers would guarantee a return of 4.5 percent annually for cash balance plans. Any excess investment earnings would go toward eliminating debt tied to pre-existing defined benefit plays, after which they’d benefit cash balance participants. Municipalities would have to make up any under performance as it occurs, Derr says, and the current proposal doesn’t address reimbursement if the fund later exceeds expectations.
Points of contention
The amendments discussed Wednesday would include Philadelphia, which was excluded from the prior bills on which they’re based. Because Philly’s police and fire pension funds are severely distressed, PMRS would manage them going forward if the amendments become law.
State Sen. Art Haywood cast one of four votes against the amendments. The Democrat represents Philadelphia, and part of Montgomery County. Haywood says the switch for moderately distressed pension systems would cut retirement income to less than half of what they get now, Haywood said, citing analyses for the stalled bills inspiring the amendments.
Lawmakers say they expect to change the formulas to address retirement security.
State Sen. John Blake, D-Lackawanna, the committee’s minority chairman, says he’ll advance other amendments that more closely match what the task force recommended. Blake, whose district includes Scranton, read the same list of points in a Wolf administration document given to reporters.
- Giving Pittsburgh and Philadelphia five years to stabilize their pension funds instead of treating them the same as other municipalities
- Expanding rules to include nonuniform pension funds, which Derr says he anticipates happening.
- The amendments allow excess investment earnings to be distributed among pensioners once the system’s 100 percent funded, but the task force advised 130 percent
- Municipalities would be required to publish reports on their websites detailing fund performance, management fees and other information biannually under the amendments. Blake wants that every year.
- Limits on investment fees to 50 basis points (half a percent) were not part of the amendments