Pennsylvania’s municipal pensions are underfunded by $7.7 billion, and here’s why

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Adjusting assumed rates of return on investments and setting a higher retirement age could go a long way to better funding pensions.

Standing in a sun-drenched room, Jim Rosipal pointed to a framed assemblage on the wall. In it, a police officer’s uniform shirt, a medal for valor, a gas cap cover from the Harley Davidson he rode, and valve stem covers in the shape of little pigs. “Back in those days we were called pigs every now and then,” Rosipal said. “Didn’t bother us at all.”

Rosipal worked for the Monroeville Police Department for 28 years. After serving in the Vietnam War and a brief stint as a security guard, it was his first and last full time job.

“My dad was a policeman in Patton Township before it became Monroeville,” he said. “My brother was a policeman in Monroeville. So to me it was in my blood. I always wanted to be a policeman, and I always wanted to be a policeman in Monroeville.”

He retired 18 years ago, when he was 52 years old. He has some income – he performs drug tests, rates golf courses, and drives a hearse—but he relies on his pension for most of his support. “It’s my paycheck for the work that I did do in the past,” he said.

Rosipal has what’s called a defined benefit plan. That means he’ll receive pension checks—calculated based on his salary during his work years—until his death. It’s a kind of long term bargain public agencies make with their employees: relatively low salaries now in exchange for steady benefits upon retirement.

But the pension fund that cuts him a check every month is distressed. It has about 73 percent of the money it needs. In all, 562 municipalities in the state are at some level of distress, underfunded in total by $7.7 billion.

A problem for everyone, not just retirees

Most communities make contributions to their pension funds from their general funds. As a result, Tim Little, Monroeville borough’s manager, said any increase in pension contributions affects the services a municipality can deliver. That includes everything from maintaining roads, to making new hires for the local government, to programming in parks.

“It’s state law that you have to pay the pension obligation. You can’t get around that, you have to pay that,” Little said. “So when it comes time to making out the budget, you pit all the fixed costs into the budget and whatever’s left over you put into buying vehicles, repairing roads, buying commodities, salt, aggregate, whatever the case may be. So if your pension costs go up it’s just taking away from something else.”

In Monroeville taxes went up recently, but there’s still less money for road work than in the past. Some municipalities, like Allentown, have sold off assets to fund their pensions. Other inflexible costs have the same effect, but pension costs have been growing in many municipalities. In Reading, pension obligations will have risen by more than 800 percent from 2003 to 2016 estimates. In Lancaster they’ve gone up more than 200 percent since 2006. In Philadelphia in 2005 pension obligations made up 9 percent of the budget; today, that number stands at 15 percent. In Monroeville, pension costs make up 9 percent of the entire budget.

2015 pension burden on the budgets of the 10 largest Pennsylvania cities
City Percentage of pension liability that is funded Total 2015 budget Total 2015 pension contribution (including state aid) Percent of budget dedicated to pensions
Philadelphia 48% $3,865,000,000 $576,000,000 15%
Pittsburgh 58% $507,817,535 $64,271,353 13%
Allentown 60% $96,878,202 $12,578,517 13%
Erie 74% $72,699,290 $10,838,919 15%
Reading 70% $89,900,000 $14,500,000 16%
Scranton 23% $107,398,625 $12,657,667 12%
Bethlehem 76% $71,161,381 n/a n/a
Lancaster 83% $52,668,059 $6,372,703 12%
Harrisburg 109% $59,470,699 $2,840,000 5%
Altoona 75% $30,618,618 $5,734,788 19%

How we got here

There are many reasons why municipal pension funds in the Commonwealth are struggling (though, in actual dollars, they’re doing better than the state pension funds). Many funds lost money in market downturns, like the one in 2008, and have not been able to recover. Systemic issues make funding municipal pensions, especially for smaller jurisdictions, inefficient. But there are also factors affecting pension funds that municipalities actually have control over.

Here’s how it works:  pensions are long-term commitments similar to mortgages, said Brian Jensen, Executive Director of the Pennsylvania Economy League of Greater Pittsburgh. “You have a debt with your mortgage that has to be paid, maybe over a 30 year period, so you have an annual payment that’s due to the bank.” Each year a certain amount needs to go into a pension fund, made up of employee contributions and, if a municipality qualifies, state aid. The fund’s money is invested and whatever the investments earn also goes into the fund. The municipality is the funder of last resort, contributing the remainder of what’s determined to be the total necessary annual payment.

But what if estimates about the wildcat variable, investment returns, are wrong?

“If they don’t make that return, now they have a shortfall and there’s not a real effective way for the state then to make them make up that last year’s shortfall,” said Jensen. “It takes a long time to make back those underpayments in the pension plans.”

Pennsylvania law allows municipalities to assume a rate of return between 5 percent and 9 percent. Many municipalities skew toward the lower, more conservative end of that spectrum. But the cities with the highest unfunded liabilities—Philadelphia (7.85 percent), Pittsburgh (7.5 percent), Allentown (8 percent), Scranton (8 percent), Reading (7.5 percent)—have chosen to use higher assumed rates of return.

Those assumptions may be unrealistic, but they can help municipalities in the short term: it means less comes out of the general fund because more is supposedly coming from investments. All in all, funds may see less money annually than they should.

“There are so many games that get played with that number with respect to actuarial studies, lifespan, all this math that goes into that can be played, so to speak, so that you end up putting less in that you really should,” said Pittsburgh City Controller, Michael Lamb.

Lifespan is another big issue. A state law from the 1950s set the floor at 50 years of age for retirement for police officers in most cities. Back then, average life expectancy was 67.

Today, “if you’re 50, you’re probably going to live until well into your 80s,” Lamb said. “So you’ve worked 20 years, but you’re going to get a pension for 30, or more. So the math there is a problem.”

On the policy side, solutions can come at the state or local level, or both, according to Lamb. Municipalities can stop the funny math and make more realistic calculations and, therefore, payments that would result in more solvent pension funds. Municipalities can also try to secure more amenable contracts, like a higher retirement age, with unions during contract negotiations. Or the state can pass laws that do those things, and more.

However, in addition to policy issues there’s also the post-industrial reality of many Pennsylvania municipalities, one of diminished populations and tax bases. In many towns there are more retired people receiving pensions than young workers paying into them. The remaining taxpayers tend to make up the difference.

Rosipal, the retired Monroeville police officer, said he’s worried about the viability of his pension. “In my age I’d feel silly going on welfare or trying to get food stamps or something,” he said. “I don’t know how we’d survive without our pension.”

Cutting pensions in Monroeville hasn’t been on the table, though in places like Scranton—which has the most distressed pension fund in the state—that could be a real issue in the near future. But Rosipal is also worried about how his beloved town will stay vibrant. He said he watched Monroeville grow and now he’s watching it struggle.

 

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