CRANBERRY TWP — Pennsylvania’s public pension system crisis may be grabbing headlines, but there’s also trouble brewing among municipal pension plans.
It’s an issue that has flown under the radar for most Pennsylvanians, said Auditor General Eugene DePasquale, who is the state’s top fiscal watchdog and is responsible for auditing the use of public money.
He says that if action is not taken to correct the problem — which amounts to billions of dollars in unfunded liabilities for the municipal plans, which are controlled by local governments — the consequences for residents and taxpayers could be dire.
“If something isn’t done on this, public safety is going to be jeopardized, or taxes are going to go up, or both,” DePasquale said.
He spoke Thursday at an event in Cranberry Township hosted by SMC Business Councils, which is a trade association and insurance broker.
He said the state’s network of thousands of municipal pension plans are footing a collective, unfunded liability of $8 billion to $10 billion, depending on how the calculations are done.
Municipal pension funds generally cover police, paid fire departments and nonuniformed employees. Under state law Pennsylvania is required to contribute to these plans. The money comes from a 2 percent tax on premiums for casualty and fire insurance sold by out-of-state companies, and ranges from tens to hundreds of thousands of dollars, depending on the size of a municipality’s plan.
Not every municipal plan is in trouble, DePasquale said. But years of fiscal gaming — like projecting outlandish investment returns to depress the amount a local government should contribute to its plans each year — has pushed the municipalities charged with managing these plans toward a quiet desperation that continues to go unnoticed.
“When you’re a smaller municipality and that unfunded liability is
$100,000 or $1 million, it’s hard to get the public’s attention about that,” DePasquale said.
In terms of raw numbers DePasquale said Philadelphia, with $5 billion, and Pittsburgh, with $1 billion, make up the majority of the unfunded municipal pension liabilities.
Those numbers are huge, DePasquale acknowledged, but not “the biggest part of (the problem).” Neither city, which are the two biggest metro areas in Pennsylvania, is among the worst offenders when it comes to the percentage of its plans that are unfunded.
For that, DePasquale said, you have to visit places like Scranton, where the city’s fire department pension plan is only 16 percent funded, or York, where officials had to take pension payments back from retirees to stave off a furlough of 40 percent of the city’s police force.
He called those examples cautionary tales for residents and business owners, who he said could face higher taxes or cuts to public safety services as a result of pension crunches at the municipal level.
“That’s what happens when you wait too long (to take action),”
DePasquale said. “Cities and boroughs across Pennsylvania have been playing that game for decades, and the day of reckoning is coming.”
Overall, of the 1,223 municipal governments that administer pension plans, 562 municipalities have plans that are “distressed,” according to a report released by DePasquale’s office in January 2015. Those figures were based on financial data from 2013.
Pennsylvania defines a distressed plan as one that funds 89 percent of its liabilities or less.
The state also breaks those plans down into different levels of distress. The vast majority of the distressed plans — 438 — fall into the “minimal distress” category, meaning they fund 70 to 89 percent of their liabilities; 102 municipal plans fund 50 to 69 percent of their liabilities; and 22 fund less than 50 percent, according to the report.
The crisis at the municipal level mirrors a larger and more visible problem revolving around billions of dollars in unfunded liabilities for Pennsylvania’s two state-owned pension plans: SERS, which manages pension benefits for more than 230,000 state employees, and PSERS, which manages pension benefits for more than 600,000 public school employees.
According to the systems’ websites, they collectively manage more than
$70 billion in assets.
State Rep. John McGinnis, R-Blair County, who also talked at the event, said the systems are facing a collective, unfunded liability of $63 billion to $130 billion, depending on how the calculations are done. The liabilities equate to a debt of $10,000 for every man, woman and child living in Pennsylvania, McGinnis said.
He called the pension crisis the cause of Pennsylvania’s recent credit downgrades by rating agencies, and something that’s contributing to an exodus of young, working-age people from the state.
The 65-years-and-older age group is the only demographic growing in Pennsylvania, and the state’s 25-to-44 age group, which McGinnis called a major driver of economic growth, lost 500,000 people in the last decade, he said.
“Who’s going to want to live (and) work in a commonwealth that hasn’t addressed this issue,” McGinnis said. “We’re becoming a geriatric ward in this state.”
McGinnis made news last March when he lashed out at past governors and members of the Legislature over the pension crisis, and proposed a fiscally painful, 20-year payment plan that would cost the state $3 billion per year more than it pays into the systems now.
McGinnis said the state faces crises of leadership and finance that are sustaining each other, and pointed to the state’s budget impasse as an example. Lawmakers and Gov. Tom Wolf are caught up in the moment, McGinnis said, when they should be thinking about the long-term ramifications of the pension system’s fiscal crunch.
“It’s very disheartening when you have this overwhelming problem that threatens to force our children somewhere else, and (government is) quibbling over a yearly budget and $2 billion,” McGinnis said.
He warned that within 15 years the systems — which are guaranteed by law and can’t declare bankruptcy or fail to pay their liabilities — could be insolvent.
That would mean more than $10 billion in yearly payments to retirees would have to be made from the state’s general fund, McGinnis said — effectively cutting the state’s annual budget by about one-third.
Both DePasquale and McGinnis called the pension problems complicated and politically fractious, and both agreed on the need to reform the systems. But even they disagree over how.
DePasquale, whose office published a pension report in 2015 to pull public attention to the municipal pension crisis, said he favors funnelling municipal pensions into the Pennsylvania Municipal Retirement System, which administers more than 900 municipal pension plans worth about $1.4 billion.
That would cut down on the fiscal games run by many municipalities, DePasquale said, because of the system’s rules on specific plan contributions. It would also remove the pension plans from municipalities’ collective bargaining process, DePasquale said, eliminating another major hurdle to keeping them financially healthy.
DePasquale also favors reforming the state pension plans, but said current employees aren’t behind the crisis with SERS and PSERS, and noted that even with reform, the underlying unfunded liabilities would remain an issue.
That would need to be addressed by something like a 30-year bond issue the state would take on after the systems had been reformed, DePasquale said — though he acknowledged the idea wouldn’t please everyone.
“You cut a deal that doesn’t fix everything but moves the ball forward, and you go out and tell constituents why you did that,” DePasquale said.
McGinnis called the notion of Pennsylvania floating pension obligation bonds “a nutty idea” that wouldn’t work. He continued to advocate for the plan he proposed last year — though he acknowledged that it would be “painful” and could result in average class sizes at public schools growing by “four or five” students.
“State government is full of trade-offs,” McGinnis said. “We need to find every place in the budget that absolutely doesn’t have to be funded ... and move that money into pensions.”