With all the talk about pension reform, a look at whether existing guidelines are enforced

Some Pennsylvania lawmakers say the rules governing public pensions need to change, but not everyone follows the guidelines already in place.

And it looks like they might not have to.

For example: The state audited 325 public safety retirement funds in the past year. More than one quarter of them were cited for awarding pensions in excess of what the law allows, according to an analysis by Keystone Crossroads.

That’s a problem.  But not much effort seems to go into fixing it.

The state Auditor General’s office sends letters to leaders in cities where the violations occur. And that’s about it, even if it’s not the first time.

Shamokin, for instance, has been awarding retiring police officers inflated pensions since in 1998. Maybe it’s been going on longer, but that’s the first time it shows up in an audit report.

The overage has added up to more than $200,000 for just three retirees since 2005 alone.

The amounts might seem small, especially in a state where municipal pensions are nearly $8 billion behind where they need to be to pay what’s been promised retirees. But it adds up quickly in Shamokin, where the local government has an annual budget of less than $4 million.

Pensions demanded more than $400,000 from the city’s operating budget this year, up 25 percent from 2014.

“It did accumulate to be a problem. Even our local auditor pointed it out several times to the council,” said Councilman Craig Rhoades.

Ingrained financial problems

Rhoades says Shamokin officials considered collecting the excessive amounts from retirees. But the outcome was uncertain at best, and the unlikely returns would not, even if they came through, justify the cost.

That’s a particularly critical consideration in the coal region that Shamokin sits in. Shamokin’s decline started decades ago when the mines closed, worsened when factories were shuttered and culminated in state intervention to attempt to stabilize the city’s finances.

Pension costs contribute to fiscal problems in city hall.

They prompted the city to sell its sewer system in 2006, to the Shamokin-Coal Township Joint Sewer Authority.

By 2012, Shamokin was short on cash again, due in large part to $1 million in unpaid taxes that still remain outstanding three years later. The city guaranteed debt taken by the authority, in exchange for a cash payment – some of which was used for pension expenses. (Some lawmakers propose banning such transactions).

All the while, the city was giving retiring police officers pensions that state law considers too generous.

How it works

Pennsylvania’s code for cities Shamokin’s size says retirees should get half of whichever is greater: their final year’s salary or the average of their highest five annual salaries.

Shamokin, however, tacks on the cash value of unused sick and vacation time, plus longevity bonuses up to 15 percent.  One retiree got 71 percent of that – not half.

City officials first agreed to fix these problems in 2001. But 14 years and half as many warnings later, nothing has actually changed.

Loopholes in state law

Shamokin’s local laws did get revised at first, in 2002.  But four months later, a neutral arbitrator issued a ruling.  It backed the old rules conflicting with state law.

In Pennsylvania, those decisions are binding. And the old rules have appeared in every police contract since, including one finalized in March, months after Shamokin became the latest entry into Pennsylvania’s Act 47 program for cash-strapped communities.  Act 47 is the last resort for municipalities facing fiscal distress, and a potential first step toward independent stability or, failing that, dissolution of the local government in favor of an appointed panel that might not include residents.

(There are other options and steps along the way. For more see our Act 47 explainer).

By the time Shamokin’s latest police contract negotiations got underway last year, the city’s tradition of inflating pensions was a fact well-documented by five successive state audits.

But the calculation formula wasn’t addressed in the interest arbitration ruling.

If these binding decisions are made by a panel including an attorney appointed to a neutral party, how does that happen?

John Skonier, who was the neutral arbitrator in Shamokin’s last police contract negotiation, did not return multiple calls seeking comment.

The Pennsylvania Bar Association recommended  contacting Philadelphia-based attorney Jonathan Hugg for an explanation.

State law requires the neutral arbitrator to deal only with contractual provisions that are raised and disputed in union and government’s respective proposals, Hugg says.

If a particular provision is illegal and raised – but not disputed – then either side would have grounds for an appeal later, according to Hugg.

The Shamokin police union’s lawyer Todd Eagen says he didn’t recall what, if any, the pension issues were raised in contract talks, one of 20 or so he says he handles in a typical year.

Eagen declined to talk specifics because he’d need to review Shamokin’s file—which he doesn’t “have time” to do—and is limited on what he can discuss, anyway.

Generally, municipalities don’t raise every issue, so some provisions—using part-timers, or overtime provisions, for example—might take priority over pensions, Eagen says.

Given Shamokin’s broke, it might make sense if the city gave more weight to short-term cost considerations.

Politics come into play, too, since the media and general public tende to focus on operating costs – such as wages, staffing levels and health care contributions – rather than long-term and/or deferred expenses such as pensions and other post-employment benefits.

But the city did raise the issue, according to attorney Keith Mooney.

Mooney represented the city until its entry into Act 47, at which point Susan Friedman took over. Friedman works for Stevens & Lee, a firm frequently retained by the state to represent municipalities in Act 47 or its precursor Early Intervention Program.

Friedman says the city expects to voluntarily negotiate a change to the pension formula. The voluntary piece is important, she says, because although the change would not affect retired officers, it would change benefits to officers working now – not just future hires.

Friedman says that won’t happen until after an actuarial study, which hasn’t even been requested yet.

 

No accountability

Eileen Norcross heads the State and Local Policy Project at George Mason University’s Mercatus Center. She says local negotiations are only part of what makes Pennsylvania’s municipal pension system so complex.

An exacerbating factor is Pennsylvania’s aid to municipalities for their locally-run retirement systems, Norcross says.

“I’m not a fan of this model of financing Pennsylvania has of giving out state aid to strictly municipal plans. That’s subsidizing behavior that, you know, leads to bankruptcies. They don’t internalize the costs,” she said.

Officials from the state Public Employees Retirement Commission, known as PERC, say the potential for encouraging bad practices is minimized by the current aid formula because individual funds’ distress levels aren’t a factor in how much money they get. It also gives the state leverage to make sure local pensions are managed properly.

But state Auditor General’s office could not tell Keystone Crossroads when it last withheld pension aid from a municipality, for any reason.

Rhoades acknowledges that the state’s inaction left officials fairly unmotivated to fight to change the city’s police contract.

“There was never any ramification from it. So as long as there was no noise, we didn’t grease it,” Rhoades said.

PERC Executive Director Jim McAneny says, even in instances where the state Auditor General’s office can withhold aid, it almost never happens.

“As long as the excessive benefits don’t entitle the municipality to additional state aid, there is not enforcement, there’s no teeth,” McAneny said.

Even if a municipality improperly manages its pensions, and costs to local taxpayers increase as a result.

“Are the taxpayers of Shamokin paying more because of this? Yes,” McAneny says.

Universal issues

One thought is that voters could  hold elected officials accountable at the ballot box. Former councilman Ray Splane, 80, doubts that will happen in Shamokin.  Particularly over pensions and other financial issues, even if they’re greatly impacting people’s lives.

“It goes over their head, they don’t understand it. It’s a community of—they say it’s 7200, I think it’s more like 6800—mostly elderly, not very well-educated in politics, I don’t think. Right now, there’s no opposition to City Council. The two people who are running will be elected in the primary,” Splane says.

And typically, financial missteps of city fathers are not criminal actions, even if they could be described as imprudent or damaging.

Detroit pension funds attorney Robert Gordon says those missteps didn’t cause the pension crisis.

“If you come from a manufacturing type background, you’re seeing your economy and you’re seeing your government and your population shrink. Between that and the recession of 2008 and 2009, they’re contributing in a much more significant way,” Gordon says.

But those wider economic shifts created unprecedented public awareness of pensions and their costs, and an economic climate where covering those costs are harder, maybe impossible. And in the rallying cries for reform, you don’t hear much about what should happen when the rules are broken.

Editors note: this story was updated to include more information about the Shamokin police interest arbitration ruling.