For Pa. small towns, there are better ways to manage pension plans

The very nature of how pensions are organized in the Commonwealth makes them unwieldy and inefficient.

Homer City Police Chief, Louis Sacco, is one of just three people – two active and one retired – in his pension plan. He drives around the tiny borough, about 50 miles East of Pittsburgh, with views of looming power plant stacks in the distance and a partly shuttered Main Street.

He’s constantly waving at passersby, many of them people he grew up with, people whose tax payments help fund his pension. What’s it feel like to be the guy in such a small plan? I ask.

He laughs. “That’s not only the pension, that’s a lot of things. You know, when somebody needs something, everybody’s got that guy, I’m that guy in Homer City.”   

Turns out, many communities have a guy, or gal, like that. Most of the state’s thousands of municipalities have multiple plans — one for police, firefighters, office workers, road crews – and nearly 70 percent of those plans have 10 or fewer members. Pennsylvania has more than a quarter of all pension plans in the United States.

Pennsylvania likes keeping things local. On the one hand that results in intimate governance, on the other hand that kind of fragmentation introduces systemic issues that can weaken pension funds. The very nature of how pensions are organized in the Commonwealth makes them unwieldy and inefficient.

Scale 

“The core issue is economies of scale,” said Jim Allen, who for decades ran the Pennsylvania Municipal Retirement System, or PMRS. The state system manages funds for municipalities that voluntarily join. It manages one big fund, around $2 billion, made up of many small plans. Homer City’s police pension plan is not part of PMRS, though its non-uniform plan is. 

“When you’re a small borough or township and have maybe five employees and only $100 million in assets you can’t buy the market,” Allen said. It’s harder to diversify investments for plans with a small pot of assets. And, Allen, added, you can’t make certain kinds of investments, like real estate, at all. 

In addition to limited access to the best investment choices, he said not buying in to a bigger system makes plans more expensive to manage, as well. “The average municipality with five employees is not going to have it administered for $800 or $1000. It could be $2000 to $3000 per person,” he said.

Actual costs may be much higher. Homer City paid nearly $6,000 dollars per person in 2012 in administrative and investment expenses. The state’s pension oversight agency, the Public Employee Retirement Commission, or PERC, has estimated that getting small pensions’ administrative costs down to the same level as the largest plans’ could result in savings of more than 40 percent.   

But Allen said size alone doesn’t cause problems. “It’s not size doesn’t matter, it’s fiduciary responsibility matters as well,” he said.

Fiduciary responsibility

Pennsylvania, in addition to having many pension plans, has many laws governing pensions for different municipalities. In a recent report, PERC put it this way: “Pennsylvania’s local government pension plans are governed by numerous disjointed statutes and can be characterized as technically deficient and outmoded.” But the statutes are just guidelines – many of the specifics are determined through the collective bargaining process – so each municipality ends up with unique pension plans. There are few professional standards for managing plans and the state has limited tools to oversee or to right poorly funded plans. The tools it does have, it doesn’t always use.

Even when the state flexes its muscle, outcomes aren’t guaranteed. Take, for example, Pittsburgh. In 2010 the city’s pension fund was only 27 percent funded. The state came in and mandated it reach 50 percent or hand over management to PMRS. The city wanted to retain local control; while then-mayor Luke Ravenstahl pushed for leasing Pittsburgh’s parking assets, a coalition of council members started working on an alternative plan. The plan – signed into law just in time for the midnight deadline – dedicated revenues from parking assets to the pension fund. 

If you read the ordinance that eventually passed, it’s clear the Council was trying hard to make sure the law would stick. It dedicates parking revenues “irrevocably” to the pension fund until 2041. But if a future council wants that money for something else? “They could theoretically undo that legislation with another piece of legislation, it’s that simple,” said Patrick Dowd, who worked on the ordinance.

The future parking revenues helped inflate the city pension funding ratio to 58 percent. Today, excluding that income would bring Pittsburgh’s pension funding ratio back down to just 31 percent. 

For now, Pittsburgh’s parking revenue contributions are holding. But that tenuousness brings up a bigger issue: “One of the biggest questions here is whether an elected body, can a person who has a four year window, can they legitimately make decisions for that community that go out 30 and 40 years into the future?” said Brian Jensen, Executive Director of the Pennsylvania Economy League of Greater Pittsburgh. Some think the answer is no.

One solution is to separate the people who make decisions about benefits, the politicians, from the people who make decisions about funding those benefits.   

Take, for example, the Illinois Municipal Retirement Fund, or IMRF. It’s very similar to Pennsylvania’s consolidated fund, PMRS, but bigger and more streamlined. IMRF is 93 percent funded. Executive Director Louis Kosiba says some of his organization’s success is due to an independent board that plans long-term. Though board members can be high-ranking public officials serving local communities, “they are fiduciaries for all 2,960 employers in IMRF. They literally do not represent their unit of government on the board.” That leaves little room for math tricks that could help elected officials please constituents now while underfunding future pensions.     

Other factors distinguish IMRF from PMRS: all municipalities (except the city of Chicago and Cook County) have to join, employees choose from a limited number of set plans, there are caps on income that can be used in pension calculations, and IMRF has policing power over municipalities, which it has resorted to using at times. They manage $34 billion, which means it can be very efficient. Kosiba said smaller plans are “going to be paying retail; IMRF is always buying in almost at less than wholesale.”

It’s not perfect; local governments still manage their own police and firefighter plans, just like in Pennsylvania. But many see IMRF as a model. 

In Pennsylvania, some communities with small pension plans are joining PMRS – it has grown since its inception in 1974, now managing nearly one thousand plans, but more stringent consolidation efforts have failed and it remains a voluntary move. Other communities are shutting down their police and fire departments because they can’t bear the cost. But for those who continue to maintain these small plans, it won’t get easier. In Homer City, Chief Sacco is up for retirement this summer. His retirement will put a strain on the small plan, and the borough.