Who is Severely Distressed?

Act 44 of 2009 addressed public sector pensions at the local level in Pennsylvania and came up with a typology of distress based on the funding ratio (assets/liabilities) of the plan to determine if there was no distress (90% or above), minimal distress (70 to 89%), moderate distress (50 to 69%), and severe distress (49% or lower). Pittsburgh was at the severe distress level for some time until the 2010 "revenue infusion" plan moved it, by PERC’s measurement, to moderate distress.

The latest PERC status report looks at this typology. In 2010, with 1,439 municipalities scored, 27 (less than 2%) had a designation of severe distress. In 2012, with 1,449 municipalities scored, 26 (1.8%) had a designation of severe distress. One can see the impact of plans in Pittsburgh, as well as Philadelphia, moving out of this level of distress: in 2010, the class of "cities" reported 32,524 active members in the severe distress level, and by 2012 "cities" had 782 active members in the severe distress group.

PERC notes that many of the severely distressed plans are newer plans (less than ten years old) and gave past service credit to employees, raising the liability of the plan. Makes one wonder how many plans are severely distressed because of mismanagement or underfunding and if officials view the local pension system as one in need of inclusion in statewide reform (like the systems for state workers or school teachers) or if there are enough plans in good shape that should be left alone.

What Does the Future Hold for Allegheny County’s Pensions?

The audited data for Allegheny County’s Retirement System shows that from 2005 until 2011 the system has slipped in health and the County is putting in a smaller percentage of what is required to keep the pension system on track for a strong funded position.


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How’s the County’s Pension System?

Earlier this year we issued a report on Allegheny County’s retirement system. Measured by the ratio of current employees to those receiving a pension, the County is in the opposite position of places like Pittsburgh or the Port Authority: there are more actives than retirees in the County system.

The report detailed the funding progress of the plan back to the mid-1980s. The funded ratio, which takes the plans actuarial assets divided by the actuarial liabilities, is a strong indicator of how healthy the pension plan is. The County’s most recent audit covers 2011 and 2010 and shows that the funded ratio was 58.7% in 2011. Note that in 2005 it was 84.9%. Last year’s ratio was low, but it still beats 2009 and 2010 and the lowest ratio in our available data, 53.3% in 1986.

Two important considerations to keep in mind. First, the County has increased the percentage of pay employees have to put in to the pension system the last two years. At the end of 2011, effective for January 1, 2012, the level was 8%. The Retirement Board will make a determination at the end of this year whether the contribution rate increases by a vote at a public meeting. Under the law that created the pension system, the County has to match what the employees put in. So when the Board tells the employee it is 8%, the County has to come up with money that equals the aggregate employee contributions. In 2011, the audit shows $23 million coming from both.

Second, though the employees and the County have been putting in a sizable amount of money, the County is not coming close to what it should be putting in under its Annual Required Contribution, or ARC, which makes the "R" looks more like "recommended" than "required". In 2005 the ARC was $22.5 million and the County put in 73%; last year it was $59.4 million and the audit shows the County put in 39% (the aforementioned $23 million).

Are Public Sector Pension Changes Coming?

It is not going to get any easier on the pension front in Pennsylvania.  Just this week, as the state put the final touches on the 2012-13 budget, the warning bells on the costs associated with the two statewide pension systems (one for state employees, the other for school employees) tolled  louder.  Doing nothing means the percentage of the state’s budget dedicated to pensions will grow to 10 percent according to one published newspaper report. 


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Pension Ratio Slips: What Does it Mean?

Under Act 44 of 2009, a law that dealt with municipal pensions in Pennsylvania, the two largest cities in the state were given special provisions regarding their pensions. Philadelphia got an extra point on its sales tax (taking it to 8%) and Pittsburgh was given the option of leasing its parking garages as a way to make a big cash infusion into the pension fund. The City could boost its parking tax as well if it did the lease. If the City’s funded ratio (assets/liabilities) was below 50% as of its 2011 valuation the fund would have been taken over by the state.

None of that happened: an alternative plan based on a thirty year funding stream came together and the Public Employee Retirement Commission valued the fund at 62% in September of 2011, making it "moderately distressed" under Act 44’s classifications. Just last week the City’s pension board was given a presentation by its fund manager that showed the fund now has a ratio of 55.8%: lower than PERC’s valuation but still "moderately distressed".

So what happens if the City should slip below 50%, into the land of "severely distressed" and the area from which the state tried to keep them out? Apparently nothing since the takeover trigger under Act 44 was a one time measurement: beat the benchmark and management of the fund stayed with the City. Conversely, if the pension fund’s health gets better and eventually reaches a 70% level, it would be considered "minimally distressed" under the statute.

A Look at the County’s Pension System

In mid-December the County’s Retirement Board voted to increase contributions to the retirement system by one percentage point to 8%. This was the second annual increase to the contribution level (it went to 7% effective January 1, 2011), one that had been at 6% since 2003. But this boost does not just affect employees of the County-the County, as the employer-must match the increase and also put in 8% per requirements of state law. "Any increase in employee contributions imposes a statutory requirement upon the County to match the employee contributions".

As pointed out in the most recent audit of the system (for year end 2010) the County put in $20.1 million and employees of the system put in $20.1 million. With investments and other income a total of $116 million was added to the plan while $70.1 million was deducted from the plan.

As of the audit there were 7,479 active employees to 4.602 retirees, beneficiaries, and deferred vested; the County exhibits a trend opposite that of the City and the Port Authority in that there are more "actives" than "non-actives". But there are some troubling trends displayed in the back pages of the audit.

First, the funded ratio of the plan (assets/liabilities) has fallen from where it stood in 2004: it was 92% funded then, and 58% funded as of 2010. Assets have fallen from $718 million to $652 million over the time frame while liabilities rose from $780 million to $1,119 million.

Second, while the County put in more than enough of its annual required contribution (ARC) for 2004 (it was $15,199 and they put in 111%, or $16.8 million) the record of meeting the ARC fell throughout the subsequent years while the ARC rose. In 2010, the ARC was $60.7 million and the County put in 33%, or the $20.1 million mentioned at the outset.

Dealing with City Pensions: What’s Next?

Following closely behind the oversight board’s approval of the City’s 2012 updated budget, which included putting an additional $10 million toward pensions and bringing next year’s total contribution from the City, state (including the state’s special allocation of $10 million), and employees to $65 million, a chorus of voices-including the City Controller, the City Finance Director, and the Act 47 coordinator-are saying that now is the time to put together a long-term fix for the City’s pension problem. 


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Distressed? Just Moderately

Following the determination of the PA Public Employee Retirement Commission (PERC) that its New Years’ Eve plan of diverting anticipated tax revenues for the next three decades satisfied the dictates of Act 44, Pittsburgh’s pension plans are now classified at "moderately distressed" under that statute.

Under Act 44, pensions that have a funded ratio (assets/liabilities) of 90% or greater are not distressed; those 89% to 70%, minimally distressed; 69% to 50%, moderately distressed; and 49% or lower, severely distressed. Pittsburgh has left the lowest class and has raised its funded ratio to 62%, placing it squarely in the moderate category.

So who does Pittsburgh join in this grouping? It is much larger than the class it was in, with 162 other municipalities/authorities/associations. Larger PA cities include Johnstown (50% funded), Allentown (68%), and York (58%). Several plans from Allegheny County likewise show up, including those belonging to the municipalities of Crafton (65%), Harmar (69%), and West Mifflin (67%).

Long term sustainability of Pittsburgh’s plan counts on present and future officials living under the terms of the December 31st plan, getting City employment levels to that of better performing cities, and further meaningful pension reform from Harrisburg and at the local bargaining table.

Pensions Stay in City’s Hands

Nine months following City Council’s December 31st pension bailout plan, which used a one time debt service transfer and pledged three decades of parking tax revenue ($13 million in the next few years, doubling in 2018) from the general fund to the pensions, the state Public Employee Relations Commission (PERC) has ruled that that plan constitutes an asset that satisfied the language of Act 44 of 2009. That language required the City to get its aggregate pension funded ratio (assets divided by liabilities) to a minimum of 50%. PERC’s assessment today puts the ratio at 62%.

Recall that Council vetoed the Mayor’s plan to have a long-term lease of parking assets to a private interest and opted instead for an "infusion of value" which relies on a long-term stream of payments instead of a lump-sum up front payment. If the plan had not worked and the pensions were below 50% funded, administration of the plans would have been transferred to the Pennsylvania Municipal Retirement System (PMRS).

Questions remain: many of these were pointed out in our first Policy Brief of 2011. For instance, since the promise of parking tax money, roughly $3 billion altogether, fell in the mid-range of the scenarios presented by PMRS, why was the City so afraid of a takeover? The state law clearly stated collective bargaining would remain at the City level. Also, where is the binding language that holds future City administrations and Councils to honor the promises of 2010? And, if we are to take the comments of the City Controller at face value when he said the bailout plan "is no long-term solution [but] a mechanism to avoid state takeover", then what is the long-term solution?

Who Else is Severely Distressed?

Under Act 44 of 2009, which was referenced in yesterday’s blog as the major thrust of reform for local government pensions, local communities had their pension plans defined in terms of levels of distress depending upon how well (or how poorly) funded their plans are. A municipality whose plans (in aggregate) had a funded ratio of 90% or more are classified "not distressed"; 89-50% represents the middle ground and is split between "minimal" and "moderate" with the cutoff coming at 69%; the other end of the distress level, those at 49% or below, received the tag "severely distressed".

Pittsburgh, with a funded ratio of 34%, is firmly camped in the land of the "severely distressed" and Act 44 contains special provisions applying solely to it. In short, if it is determined the City’s funds are not at 50% funded or better the plans will be transferred to a state agency for administration and oversight.

The Public Employee Retirement Commission (PERC) has distress scores for roughly 1,440 municipalities at present (some still have not submitted valuations to PERC). Twenty-six, or 2% of all reported, are labeled "severely distressed". There are nineteen townships, three boroughs, two authorities, and two cities (Pittsburgh and Scranton). Twenty of the Commonwealth’s 67 counties are represented. The counties of Allegheny, Beaver, Lackawanna, and Susquehanna each have two local governments in the group.

Nine just fell under the 49% cutoff with funded ratios of 48 to 45%. The lowest funded ratio was 23%, a level shared by Braddock Hills (Allegheny) and Columbus Township (Warren). In total this group of twenty-six has $409 million in assets and $1,141 million in liabilities, resulting in an aggregate funded ratio of 36%. It is plain to see that Pittsburgh, with assets of $339 million and liabilities of $989 million, is the largest member of this group.