Auditor General DePasquale Says Now is Time to Address $6.7 Billion Underfunded Municipal Pension Liability

February 26 2014

Auditor General DePasquale Says Now is Time to Address $6.7 Billion Underfunded Municipal Pension Liability

Click for Municipal Pension Special Report

PITTSBURGH (Feb. 26, 2014) – Auditor General Eugene DePasquale today said a $6.7 billion underfunded municipal pension liability must be addressed before the long-ignored crisis cripples state and local taxpayers.

DePasquale released a special report today on municipal pensions that shows 573 municipalities out of 1,218 municipalities that administer pension plans are distressed and underfunded, posing a huge liability to taxpayers.

“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 at a news conference with Mayor Bill Peduto who has been aggressively working to raise the issue. 

“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.

“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 commended Peduto’s leadership on municipal pension reform. Since January, Peduto has been working with a bi-partisan group of mayors who recognize the seriousness of the unfunded liability. Pittsburgh has the second highest unfunded municipal pension liability in the state at $380 million. 

The problem is expected to get worse later this year and in 2015 when new accounting standards will require municipalities to include net pension liability on their financial statements. 

“The accounting changes that are coming will make it more expensive for municipalities to borrow money and increase pension contributions, potentially draining more money from municipal services and triggering higher property taxes,” he said. “The impact will be dramatic for some, devastating for others.” 

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. 

“No single action or recommendation can solve these monumental problems alone,” DePasquale said. “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 said. “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.”

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.

“We need to explore ways to fix the broken municipal pension system and save money,” DePasquale said. “There is no simple solution, but we can begin by educating local and state leaders about the problem and start a conversation about setting realistic rates of return on investments, cutting duplication of service costs and trimming administrative expenses.”

A copy of the Municipal Pension Speical Report is available online here. 

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