Small Pension Plans in the County

Based on data from the Pennsylvania Public Employee Retirement Commission (PERC), there were 298 pension plans in Allegheny County in 2011 (most recent audited year). Based on active membership (in aggregate there were more than 18,000) about half of these plans had 10 or fewer members in them that year.

How does that compare statewide? In PERC’s 2011 municipal pension plan report there is a higher percentage of plans (68%) that have 10 or fewer members than in Allegheny County. PERC notes that it uses a threshold of 100 active members to determine whether a plan is "large" (100 or more) or "small" (99 or less) and, by that measure, 98% of local plans in Pennsylvania are considered small. Here the plans in Allegheny County track much closer to that calculation, with 96% of plans having less than 100 members. Only 10 plans have 100 active members or more-all of them are either related to the County or the City of Pittsburgh by being the primary plan of employees or of related authorities.

Has the Makeup of Local Pension Plans Changed?

The Pennsylvania Public Employee Retirement Commission-PERC for short-just issued its latest status report on local pensions in the state, municipalities, authorities, and counties. There are more than 3,200 local plans in the state, and the report is a real treasure trove for those looking to find data on specific plans or the overall characteristics of local plans in Pennsylvania.

Status reports date back to 1985 when PERC was charged by Act 205 with monitoring plans (Act 293 covers counties). Back then there were 2,372 plans: thus, another 856 plans have been created, about 33 per year through 2011, the year the latest status report collects actuarial data on.

So has the nature of plans changed much in that time? In the public sector pension lexicon there is the overarching distinction between defined benefit plans (where the employee is promised a defined retirement benefit that depends on retirement age, service length, and final average salary) and defined contribution plans (where the employee is promised a fixed contribution that is often matched by the employer and what is in the employee’s account upon retirement is the benefit).

In 1985 the PERC status report shows that 75% of plans were self-insured defined benefit plans, 21% were defined contribution, and 4% were "other". In 2011 the distribution of the pie (which had gotten bigger) shifted slightly with 70% of the plans defined benefit, 25% defined contribution, and the remaining 5% "other".

The number of employees covered by a specific plan has remained largely unchanged: in 1985 slightly over 94% of employees were participating in a defined benefit plan. By 2011 the percentage was 92%. There was a corresponding rise in the number of employees covered under defined contribution plans, rising from 5% to 7% over that time frame.

It is fair to conclude that the public sector plans at the local level in Pennsylvania are thus still defined benefit in nature. It is also fair to say that the majority of the plans are small: in 1985 67% of the plans had 10 or fewer members, and in 2011 68% had 10 or fewer.

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.

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?

Meter Parking Revenue: Cart or Horse First?

City Council members continue to importune the Parking Authority to send along additional revenues being collected from higher parking rates and extended hours requiring payment at the City’s parking meters.

The Parking Authority has turned down the Council’s entreaties on the grounds that, until the state approves the City’s pension funding plan, it will not adopt a new revenue agreement with the City. The Authority’s rationale seems highly defensible. If the state rejects the hastily constructed, last second Council plan when it rules in September, the City Council in all likelihood have to redo the legislation calling for extensive diversion of parking tax revenue and the new rates and rules governing meters. Who can say for sure what a state takeover of pensions would mean for how the City will meet the obligations imposed by the state pension managers?

There would seem to be a high probability of revisiting a variant of the Mayor’s plan to lease the Parking Authority assets. If that occurs any revenue agreement between the City and the Authority is out the window.

Besides, the answer from the state is only a month or so away. So why is the City Council in such a hurry to change the revenue agreement? If the state approves the City’s pension funding plan, the Council will be a on a much firmer footing to approach the Authority to draw up a new agreement. A little patience is warranted.

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.

Smooth Operators

A new article from the American Enterprise Institute tackles the thorny issues of assumptions on rates of return for public sector pensions and the practice of asset smoothing to level out variation of plans. These issues are critical in light of where things stand in the Commonwealth right now.

First, Act 44 of 2009-which aimed to reform local government pensions and made special provisions for the City of Pittsburgh-says that the determination for the City’s pension health "shall utilize an actuarial assumption as to investment earnings equal to the regular interest rate fixed by the [Pennsylvania Municipal Retirement System] board plus 1.5%". What does this mean? It means that when the state analyzes the actuarial tables and data for the City’s plans the rate of growth for assets will be 7.5% instead of the traditional 8%. It may seem miniscule, but as AEI points out "some analysts believe these returns are overestimated. Wilshire Consulting, for instance, argues that most plans will receive only around 6.5 percent average returns going forward. If this turns out to be the case, the typical plans’ costs will rise by almost 80 percent. Pension funding is very sensitive to rates of return".

Keep in mind that three weeks from today, on September 1st, the biannual valuation report for the City, using that 7.5% rate, is due to be filed with the Public Employee Retirement Commission. Recall that the end of 2010 bailout plan crafted by City Council, which dedicates a portion of parking tax revenue over the next thirty years, was done to bring the pension funds to 50% funded or better in order to avoid a takeover of the pensions by PMRS. The PERC valuation will determine if that threshold was met.

Second, to the smoothing provision, both Act 44 and Act 120 (which changed things for state workers and school employees) had provisions in it for stretching out when gains and losses were realized. Act 44 increased the time period from fifteen to twenty years and Act 120 changed the asset smoothing for the public school employees’ system (PSERS) from five to ten years. Both PSERS and the state system (SERS) received "fresh start re-amortization of unfunded accrued liability".

A Day of Bad News for Pittsburgh

Friday the 13th was not a propitious day for Pittsburgh judging from the negative news stories. The Tribune Review reported comments from James McAneny, who is very concerned about the City’s last ditch effort to avoid a state takeover of its pension plans. According to Mr. McAneny, head of the agency that will determine if the scheme meets the 50 percent funded requirement the state imposed on the City, the plan was put together without professional assistance and he needs to see what the City has done well before September if he is to do a proper evaluation.

The City’s plan is based heavily on its promise to dedicate large amounts of its parking tax revenue to the pensions for the next thirty years and to compel authorities to contribute more in payments in lieu of taxes, especially the Parking Authority, which will be asked for massive increases that it does not currently have or expect to have.

As we noted at the time of its adoption in late December, the City’s pledge to dedicate thirty years of large chunks of parking tax revenue cannot be seriously considered as a solid asset. There is no contractual obligation-such as a bank loan or bond repayment-that will force the City to honor their pledge if the financial picture gets tight or some future Council arbitrarily and capriciously decides not to make the payments. The City certainly has no enforceable contract with the state pension agencies that would solidify the present value calculations and make the alleged asset viable. The City’s past failures to live up to its obligations to the pension funds and its ongoing financial difficulties should disqualify the scheme.

A second Tribune Review report offers an account of the military’s assessment of Pittsburgh’s youth in terms of their fitness to be accepted into the armed forces. An amazingly high 90 percent of 18 to 24 year olds in the city are deemed unfit for reasons of obesity, physical condition, criminal records, drug addictions, and inadequate educational preparation. This is what comes of being America’s most livable city?

The Air Force Colonel in charge of the study believes more early age intervention will solve the problem. One may suppose the Colonel is unaware of the vast sums being spent on early childhood programs already. As we noted in the Policy Brief this week, it is not what kids know at age 5 or 6 or even 7 that tells us what they will be like at age 17. It is all the stuff they do and what happens to them in the intervening years. Without discipline at home or in the schools, without a culture that values academic achievement and without an environment that teaches manners, respect and decency, no amount of handwringing and monetary expenditures will solve what ails our youth.

And finally, on a somewhat less momentous note, the Bishop’s Pope-blessed cross was stolen. One can hope the cross will have an enlightening effect on the thief and he will return it. It is unlikely the Pope’s blessing will be transferred to him if he is simply planning to make a sizable financial gain from the theft- nor to anyone who buys it. And so it goes in the Burgh.