Auditor General DePasquale Says Within Five Years Scranton Municipal Pension Funds Could Run Out of Money for Retirees

August 27 2014

Auditor General DePasquale Says Within Five Years Scranton Municipal Pension Funds Could Run Out of Money for Retirees

Audit reinforces need for statewide solution for municipal pension challenges

Click here for Scanton Municipal Pension Report

SCRANTON (August 27, 2014) – Auditor General Eugene DePasquale today said based upon a recent audit and current estimates, the City of Scranton’s municipal pension funds could run out of money in less than three to five years, possibly forcing one of Pennsylvania’s largest cities into bankruptcy.

“It is not news that Scranton’s municipal pension funds are in severe distress,” DePasquale said. “However, the fact that the funds may be exhausted in fewer than five years and may not be able to pay police and firefighters the retirement benefits they have worked so hard for should be a wake-up call for action.” 

The latest audit shows that over a five-year period, the city’s annual pension payment obligations nearly tripled from $3.3 million in 2008 to $9.3 million in 2013. 

“In its current financial state, the city simply cannot deal with these rising costs, making bankruptcy a clear possibility within five years,” he said.

DePasquale noted that while the city is making an effort to help resolve its pension debt, there is no guarantee that it can raise the revenue needed to fulfill the city’s obligation to the pension funds and workers. The audit report notes that benefit payments from the three pension plans is nearly $13 million each year.

“There is a very human side to the pension challenges. Here in Scranton, hundreds of people who have retired, or soon will retire, from Scranton city government could lose the retirement benefits they earned in their public service,” DePasquale said. “Based upon the benefits owed to retirees or their families as of Jan. 1, 2013, and current funding levels, the fire fighter and non-uniformed pension plans only have three years of retirement payments left; the police plan has assets to pay benefits for just five more years. This could be devastating to so many people.”

DePasquale said while Scranton is a severe case, the city is not alone in its pension challenge. Earlier this year, he issued a special report on municipal pensions that showed 573 municipalities out of 1,218 municipalities that administer pension plans are distressed and underfunded, posing a huge liability to taxpayers.

“This is not just a Scranton challenge and not just a large city issue; and clearly this challenge is not going away. We are talking about nearly a $7 billion unfunded liability that is hitting cities, small townships and mid-sized boroughs all across Pennsylvania. I would hate to see Scranton, or any Pennsylvania municipality, forced into the devastating route of bankruptcy taken by cities like Stockton, Calif. and Detroit.”

DePasquale’s municipal pension report includes 12 recommendations that could be considered to address the underfunding of municipal pension plans and the systemic issues associated with the administration of the plans. 

To address underfunding of municipal pension plans, the report includes the following recommendations:

• Exclude “spiking” overtime and lump-sum payments for accrued leave when determining pension benefits.

• Update age and service requirements for normal retirement eligibility to account for increased life expectancy.

• Establish consistent member contribution provisions.

• Narrow the range of acceptable investment rate of return assumption options to reflect current economic conditions.

• Establish a new distress recovery program that would amend the current formula of state aid distribution to provide for additional state aid based on distress level.  Additional aid should only be provided if municipalities meet certain requirements such as funding plans in accordance with Act 205 standards, agreeing not to provide any benefit increases to current employees, and establishing a revised benefit structure for new hires.

• Set limits on the amount of pension costs that may be reimbursed by the commonwealth, thus ensuring that municipalities contribute a portion of a plan’s annual pension costs exclusive of state aid allocations.

• Mandate that each municipality publish its annual pension costs, by plan, for public review.

• Reduce administrative and management fee expenses.

To address systemic issues associated with the administration of municipal pension plans, the report includes the following recommendations:

• Consolidation of local government pension plans into a statewide system plan segregated by different classes of employees, e.g., police officers, firefighters, and non-uniformed employees, for both current and/or future municipal employees.  Such consolidation should consider the size of local government plans currently in existence and prohibit the merger of plans with unfunded liabilities with plans that are currently maintaining adequate funding levels.

• Consolidation of the administration of the local government pension plans by one entity while maintaining the existing system of individual pension plans. This overall administrator could be entities such as the Pennsylvania Municipal Retirement System (PMRS), the State Employees’ Retirement System (SERS), or another large multiple-employer plan administrator.

• Develop portability options for existing municipal employees to allow changing municipal jobs without fear of forfeiting accrued pension benefits.

• Mandate a state agency, such as DCED’s Bureau of Local Government Services, to have responsibility for providing guidance to municipalities for compliance with applicable state statutory provisions.  This agency could also establish best practices, develop manuals, and offer training to municipalities related to pension plan administration.

The City of Scranton Aggregate Pension Fund audit report is available online at: http://www.PaAuditor.gov/Media/Default/Reports/mun62850CityofScrantonAggPF082514.pdf

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