Adequately funding Pennsylvania’s pension system while imposing reforms has long been an issue facing the state’s political leadership, and the contentious issue is back in the spotlight, thanks both to a recent report released by Pennsylvania Auditor General Eugene DePasquale and the introduction of pension reform legislation by State Rep. Seth Grove (R-Dover).
In DePasquale’s recently released report on the condition of the state’s municipal pensions, the auditor general noted that Pennsylvania is facing a whopping $6.7 billion municipal pension liability.
“The state pension issue gets most of the media and legislative attention. However, my report shows the municipal pension problem is just as widespread and, without changes, could push some municipalities into bankruptcy,” DePasquale said. “This is a Pennsylvania-wide problem, not a Pittsburgh or Philadelphia problem, and it is not going away. We are talking about nearly a $7 billion unfunded liability which impacts small townships, mid-sized boroughs and big cities throughout our state.”
DePasquale said the issue must be addressed before the issue “cripples” state and local taxpayers; according to the report, 573 municipalities out of 1,218 municipalities that administer pension plans are distressed and underfunded, posing a huge liability to taxpayers.
“Some pension plans are so underfunded that promised retirement commitments are at risk. If they fail, the cost will be passed onto the taxpayers. This liability can truly become every taxpayer’s nightmare,” DePasquale said, adding that the report includes 12 recommendations that the state legislature should consider. “No single action or recommendation can solve these monumental problems alone. We need state and local elected officials to work together to come up with solutions that will likely need to include the integration of a number of these recommendations.
“We can no longer afford to do nothing,” DePasquale added. “The current system is not sustainable and municipal employees, including police officers and firefighters, deserve to know that the pension they are counting on will be there when they retire.”
Grove said he agrees both with DePasquale’s blunt assessment and the recommendations, and said a bill Grove recently introduced in the House will go a long way toward finally reform the pension system.
“I strongly support the Auditor General’s findings, which reinforce why I authored House Bill 1581, a cash balance reform plan to fi the system and lessen the financial strain on local governments,” Grove said. “My legislation would reduce the financial burden on local governments while ensuring sustainable municipal worker pensions.”
Grove’s reform plan would apply to all townships and boroughs with full-time public safety personnel and all cities, except Philadelphia. Cash balance is a defined benefit plan of members’ accounts where the balance is made up of mandatory employer and employee contributions and an employer guaranteed interest credit.
Grove said his plan would apply to only new hires after an established date, and current employees would maintain all existing rights and benefits – which will be frozen at current levels. Each municipality will maintain two plans until there are no more beneficiaries in the old defined benefit plan.
Grove’s plan authorizes an optional 457 plan as an additional employee investment tool with optional employee contributions, for full vesting at 12 years and partial vesting at 8 and for the retirement age to be increased to age 55 and 25 years of service.
According to Grove, 25-year modeling projections of municipal plans based on actuarial assumptions show a tremendous benefit just from freezing the current DB plan benefits. Then the additional ability to put interest earnings from the cash balance plan toward existing unfunded liability closes the gap even more. There is no quick fix to the current pension crisis without a huge influx of revenue and even that won’t fix the underlying problem of benefit structure. The cash balance concept draws a line in the sand on the existing DB plans, reduces benefits for new hires and has the ability to provide a source for additional revenue for unfunded liability.
HB 1581 is now under consideration by the House Local Government Committee.
“As pension reform has hit the forefront of the public policy debate in the State Capitol for state pensions, we cannot forget our municipal pensions. Currently our municipal pensions have an unfunded liability, statewide, of over $2 billion,” read, in part a memo Grove attached to HB 1581 and also circulated among House peers. “This is putting a huge financial strain on local government services, specifically in our urban cores. In order to reduce the financial burden on local governments, ensure public safety employees have increased job opportunities and upmarket pensions, and ensure the financial sustainability of our urban cores.”