How Scranton’s pension system took a nosedive and what other cities can learn from it

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A view of downtown Scranton. (Lindsay Lazarski/WHYY)

A view of downtown Scranton. (Lindsay Lazarski/WHYY)

Underfunded pensions are a problem across the state, but Scranton is in particularly dire straits.

Underfunded pensions are a problem across the state, but Scranton is in particularly dire straits. As part of Keystone Crossroads’ series on underfunded pensions, Kate Lao Shaffner spoke with investigative reporter Terrie Morgan-Besecker. Morgan-Besecker has been covering the Scranton pension crisis for The Times-Tribune in Northeast Pennsylvania.

You’ve noted that even up to the year 2000, Scranton’s pension funds were actually flush with money (due to record market yields in the 1990s). And yet just 10 years later, the funds are in bad shape. What happened?

Well, there were a couple of major factors. One of the big things was the stock market crash—which affected funds across the state, of course—but Scranton was really particularly hard hit. They lost about $21 million dollars. But there are some other things that happened here as well.

Some of the main things were some retirement incentives that were given to employees that really impacted the funds. And there are some real serious questions about how diligent the municipality was in reviewing disability pensions.

One of the big things is that because Scranton is a distressed municipality, it’s been able to reduce its minimum municipal obligation, which is the amount that it must pay to the fund each year to ensure that it can continue to pay future and current benefits.

Since 2009 they’ve been able to reduce it by 25 percent. They should’ve put in roughly $47.9 million dollars but because they got that reduction, they’ve only put in $37 million. So that really has a big impact on the plan. It certainly helps them in the bottom line for each of their budgets for the year, because they’re not having to come up with that amount of money, but it really really hurts the plans in the long run.

In other words, they’ve made decisions that are politically favorable now—like increasing pension benefits—while pushing off payments to the future?

In Scranton a couple things happened. In 2002, there was a retirement incentive offered to non-uniformed pension workers that really had a big impact on the fund. And also in 2002, the city had a recovery plan in place where they were going to remove health care benefits, so it led to a very large flux of retirees going into the fund. About 70-80 people retired that year. The liabilities just skyrocketed in that time period because they had so many more people they were paying pensions to.

The problem of underfunded pensions is NOT exclusive to Scranton—it’s a statewide problem. In fact, a new study by the National Association of State Retirement Administrators finds that Pennsylvania has the second most underfunded pension plan in the United States. But you’ve said that Scranton has it particularly rough—in part because there are extremely high percentages of uniformed officers with disability pensions.

Scranton has the highest rate of police officers and firefighters receiving disability pensions in the state. Fifty percent of police and 58 percent of firefighters receive a disability pension. That’s an astronomically high number compared to other municipalities, most of which have maybe 3-10 percent.

That costs the fund a great deal of money. In 2014 alone it cost $5.2 million dollars.

And that’s because for people who retire on disability, they’re not necessarily retiring at 50 to 65?

Right. So in Scranton a disability pension pays the same amount as a regular pension. But the key issue is these people are retiring much earlier. Typically you have to have 25 years and be age 55 to retire. But you had some people retire in their 40s, some in their 30s. When an actuary does the evaluations on the pension funds, they assume that people are going to be retiring more towards their 50s. So when you have someone retiring when they’re 30, the fund is paying out a lot more money for a lot more years than anybody anticipated.

So the calculations that these actuaries made aren’t based on 50%, 58% of uniformed workers retiring early and drawing from a pension for many more years?

No actuary in the world would use an assumption like that. It’s just an astronomically high number.

But you’ve also said that for these disabled retirees, there’s also a problem because there are some who start working again with very similar jobs. But there’s no way for Scranton to reexamine those disability cases.

Right. In some other municipalities, if you’re out on a disability pension and then go get another job, they can reevaluate you and potentially require you to come back to work. But Scranton does not have that provision within their disability or their pension plan. There are actually some people in Scranton, some retired police officers who are now working as prison guards.

Scranton is also in the spotlight right now because there are legal proceedings in motion about a number of Scranton employees who have been drawing double pensions under the retirement incentive that you mentioned from back in 2002. And there’s a question right now of whether those employees qualified for those incentives. Can you give us an update on that?

Right now there’s a criminal investigation by the Pennsylvania state police as well as the federal government. They’re looking into these double pensions that were rewarded. What happened for non-uniformed people there was an incentive that if you retired by December 31, 2002, you would receive health care benefits and also they would double your pensions. They went from about $700 to $1400 dollars a month. But you had to have 25 years in and it was discovered, recently, that at least six of the people who got the incentive did not have the required years of service. And no one knows how that happened, how their names got on the list. So that is what is being investigated right now.

Is there a hint that this was more than an accidental oversight?

Certainly that’s something they’re looking into. Unfortunately I’m unable to get too much information regarding where they’re heading with it and what they have. I know they have subpoena records and are looking closely at that to figure out what happened. There’s also a separate investigation by the Pa. auditor general. That’s a non-criminal probe. They want to see what happened as well. He has said that if he finds anything of criminal nature he will turn that over to the proper authorities.

Besides this double-pension issue that’s being investigated, there are also some pretty dramatic stories in Scranton that kind of exemplify the problems and some might say abuses enabled by current pension policies. For example, there are a convicted murderer and an arsonist who are currently drawing pensions. And they’re doing this legally under the current rules.

Yes, that’s right. You know there is a pension forfeiture law out there, but that law pretty much only deals with financial crimes that were committed while you were an employee. So if I’m an employee of a municipality and I embezzle money and I’m charged while I’m an employee, I will lose my pension. However, I could go out and shoot my neighbor and be convicted of murder and I’ll still be able to collect my pension. There has been some movement to change that and add violent crimes to that list, but nothing’s happened with that so far.

In Scranton, the other issue with the two people you mentioned is their crimes were committed after they were retired. So there’s really nothing that could be done with them even if the pension forfeiture law required forfeiture for things like murder–they would still be safe.

You’ve done the calculations in your reporting and you’ve said that things don’t look good for the future of Scranton pensions. How long before Scranton’s pension fund will completely dry up if the city doesn’t change its course?

It’s been projected that the police fund will become insolvent within five years and the firefighter and non-uniform pension would be insolvent within 2.5 years if something isn’t changed right now.

And the situation is going to get worse.

What will happen if the pension fund runs out?

If the pension fund goes insolvent, the city’s still obligated to pay pensions to its employees. It will have to come out of the general fund. If that happens, everyone believes that that will be the straw that breaks the camel’s back and send Scranton into bankruptcy. Because the pension fund pays out $1.1 million dollars a month right now in benefits. If the city has to do that every month, there’s just no way they’d be able to sustain itself.

Right now in Pennsylvania, state law says that public pensions are a contract that you can’t break. Like you said, even if their fund runs out, they need to pay out those pensions. If the city declares bankruptcy, can those terms be changed?

There’s a lot of questions as to what would happen. There are some cases out there now—I believe in Detroit, there have been some rulings made where pensions were affected. But it’s going to be really independent and specific to the different state laws. So it’s not clear at all as to whether or not the city would get any relief regarding the payment of pensions should it go bankrupt.

Right now, from what you’ve observed, is there a solution? Is there any way out of this mess?

For Scranton one of the things they’re saying is they need a really large influx of cash. They are looking at a couple different things. One is to sell some large assets like the sewer authority. If they can get a big infusion of cash that would help things, but it certainly will still not save the fund. It will at least buy them some years. They simply are not going to be able to sustain the fund doing what they’re doing now. They have to get a big supply of cash into it.

What can other municipalities learn from what Scranton is going through?

There are a couple of different things: one of the things they need to do is carefully monitor what they’re offering with their pensions. I think one of the big issues with some of the municipalities is this mindset of kicking the can down the road, that we’ll give great pension benefits in lieu of giving raises. If they are going to increase pension benefits, they need to do an actuarial study to determine the impact it’s going to have on the fund. There’s a lot of municipalities that don’t do that or they may do it and find out it’s going to hurt the fund but they still give the raises anyway. That’s one of the big things that got Scranton in trouble and other municipalities as well.

Right now the state law requires them to do an actuarial study, but it doesn’t actually have any teeth to it. Because if they don’t do it, they’ll get cited by the auditor general but nothing really happens to them other than being cited. They might not be able to use state money to pay some of their pension benefits, but that’s really the only thing that happens. And that may be something that has to be looked at by the legislature.

Keystone Crossroads is a statewide public media initiative, reporting on the challenges facing Pennsylvania’s cities.

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