A Pension System for All?

The Governor’s report on public sector pensions-which we blogged about earlier in the week-has set a lot of discussion in motion. So too have the testimonies collected by the Public Employment Retirement Commission, which was mentioned in an editorial this morning by the head of the Township Supervisors Association. Some of the presenters mentioned consolidating plans, which the Association head disagrees with, noting correctly that many of the state’s biggest plans-SERS, PSERS, Philadelphia, and Pittsburgh-have significant problems and that a solution should not "make the healthy swallow the same bad medicine as those in trouble".

We agree: in fact, in testimony we presented in 2008 to a hearing of two state Senate committees, we noted "There seems to be little interest at the state level to consolidating plans based on past discussions. It has been mentioned before, but nothing has come to pass. The problem with such an approach is that municipalities with well-funded pensions will view a merger or consolidation as a bailout of the lower-performing plans. In addition, the nationwide experience shows that it is almost non-existent for a state to assume total control and responsibility for local pension plans."

But perhaps there is another way to think about consolidation in the future which does not involve lumping the good plans in with the bad if the state were to think about the employees of the state (SERS), the employees in education (PSERS), local police, firefighters, clerks (covered by one of the 3,000 local plans administered locally or through the PA Municipal Retirement System), county employees, authority employees, etc., etc., in which enrollment in those plans is closed as of a certain future date and all new employees of the Commonwealth, its local governments, its authorities, agencies, school districts, community colleges, state universities, are enrolled in one new statewide plan with a clear employer and employee contribution mix. The existing plans would stay in place until there are no more participants in them and then the state would fully transition to the new unified plan. It would obviously take a very long time (and extends the further such a change is put off) but might be worth exploring.

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?

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".

PMRS Wants Details ASAP

Under Act 44 of 2009 Pittsburgh had to get its underfunded pensions to 50% funded (enough assets to cover 50% of accrued liabilities) or face a state takeover by having its pensions turned over to the Pennsylvania Municipal Retirement System (PMRS). As of now, every pension plan administered by PMRS has ended up there voluntarily.

The head of PMRS recently saidthe organization"is concerned about the financial health of Pittsburgh’s pensions and how a takeover could affect the agency’s $1.5 billion in assets" and that officials "are not going to do anything to jeopardize the assets for our (nearly) 4,000 retirees." With a decision from another state pension agency due in September as to whether the City met the Act 44 goal, PMRS would be responsible for quickly folding Pittsburgh into its pension system. So either the City begins turning over data and documents or there might have to be a delay via state legislation should the takeover go into action.

We pointed out in a Brief last year (Volume 10, Number 57) about how a takeover would change PMRS’s balance sheet. As of 2009 audited data, PMRS had a surplus with assets exceeding liabilities by $88 million. Pittsburgh had unfunded liabilities of $650 million, meaning a "new" PMRS balance sheet would reflect a negative balance if Pittsburgh’s pensions were lumped together with PMRS’ current plans. In addition Pittsburgh had 1.3 retirees for every 1 active member, while PMRS had 0.39 retirees for every 1 active member.

In that same piece we wrote "it will be interesting to see the reaction of the PMRS board and other member municipalities to the way Pittsburgh’s plans are treated since any action affecting Pittsburgh’s plans will have significant effect on the aggregate health of the PMRS system." That reaction is apparently forthcoming some three months after the late-in-the-game bailout plan by City Council.

Pension Protectionism?

Was part of the motivation for avoiding a state takeover of the City’s pensions to preserve the jobs of the employees that handle those pensions? We may never know for sure, but a newspaper article over the weekend certainly had to raise some questions about that possibility.

To begin with, the piece pointed out that with twelve total employees, administrative costs, and separate attorneys the City’s pension system (a system that contains three separate plans for police, fire, and non-uniformed employees) is much larger than the office function at Allegheny County, a system with 7,300 actives to Pittsburgh’s 3,300 actives.

The City Controller, who was instrumental in putting together an alternative aimed at avoiding a state takeover, was more pointed in his view of the matter: "I don’t know that we need four lawyers [advising on the city pensions]…That doesn’t make a lot of sense to me…The city’s [pension] situation is so serious that every effort to contain costs has to be looked at. We’ve got to have more consolidation of those staffs."

If the City is to be taken over-it is still a possibility once the actuarial numbers of the New Year’s Eve plan are put together that the "infusion of value" did not meet the minimum 50% funded ratio-it will end up going to the PA Municipal Retirement System (PMRS). PMRS has 26 total staff members administering over 900 plans from various municipalities with 8,400 active employees. The total assets are valued at $1.5 billion. They would assume control over the City’s three pension plans with $339 million in assets. While the head of Pittsburgh’s fire union (who is also on the City’s pension board) intimated that the City pensions require attention seven days a week, a PMRS staffer covers 323 actives while a Pittsburgh pension employee covers 277. The administrative cost comparison, as much as can be derived from the article and PMRS financial statements, is slightly in favor of the latter at $380 per active to $391 per active in Pittsburgh.

Nevertheless, PMRS and the state will have some time to think about how they could handle Pittsburgh’s plans should that come to pass. But they won’t get any help from the City, since the article noted "the city’s Comprehensive Municipal Pension Trust Fund board…met [last week] but did not release a year-end balance for the fund, for fear that any figures released might be used to justify a state takeover of the city’s pensions". Whose best interests are at heart in this scenario?

Council’s Last Minute Pension Funding Plan Raises Many Questions

As the proverbial clock moved close to midnight on December 31st Pittsburgh City Council finalized a plan it believed would be sufficient to avoid a state takeover of the City’s underfunded pensions. Instead of a long term lease of assets that would have produced a lump sum of upfront cash for the pensions, the Council’s plan promises to dedicate thirty years of parking tax revenues along with what the City already pays in as its minimum obligation to the pension system.

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What is Council Really Afraid Of?

After witnessing the desperation of City Council this week, we have towonder what can be so frightening about the state takeover of thepensions. If they have to boost annual contributions from the parking tax to $27 millionto satisfy the 50 percent requirement, then in addition the contributionthey must make to continue improving the funding ratio and to keep upwith payments from the funds will boost annual contributions to $100million. That is the number Council is so afraid of if the state takes over the funds.

In effect, the Council is passing a bill requiring the City tospend what it would have to spend if it were taken over by the state.Something the Cityshould have done years ago without the threat of atakeover.

The question remains: the bill being passed is not anenforceable contract. What is to prevent a new Council three yearsdown the road from reneging on the obligation by passing a new law orrepealing the bill about to be passed? And that goes to the firstquestion about what Council members are so afraid of in a statetakeover. Under state management the higher payments would have to bemade. Not under state control, the City would start wriggling to getoff the hook.

Council’s first plan of the week was to generate $900 million over30 years while the latest plan is expected to produce $700 million.The executive director of PERC has indicated he was not confident that Council’s $900 million plan would be adequate. What will the executive director now say to this latest scheme Council expects to vote onat 11PM on December 31st? Why should the state have any confidence inCouncil’s promises?

A Blessing or a Curse?

On the subject of City Council’s latest attempt to craft a pension solution that averts a state takeover in two days by using dedicated parking meter revenue over the next three decades, there are dueling news reports over just how supportive the head of the Public Employee Retirement Commission (PERC) was of the plan.

One print report stated "council members last week consulted the state about dedicating future revenue streams to the fund. The concept won approval of [the] executive director of the state Public Employee Retirement Commission, the agency that enforces pension laws."

Another print report quoted the director as saying "It’s too late…even if they got $500 million next year, it wouldn’t change the takeover, unless the General Assembly changes the law." The law in question is Act 44 of 2009, the statute that dealt with municipal pensions and contains the specialized provisions for Pittsburgh.

Obviously there is a big difference between the original lease proposal, which would have given an up-front lump sum payment to show up on the audited books of the pension funds, and a dedicated revenue stream over a thirty year time period. There is apparently a big difference as to how convinced one official is of carrying out the latter plan.

City’s Dilemma—Loathing Privatization and Fear of Debt

Rarely in the annals of self-government has the elected government shown itself to be as inept as that in Pittsburgh. With a looming takeover of the pension funds by a state agency and pension funds with less than 30 percent of the money needed to meet obligations, the Council and the Mayor remain at loggerheads over a solution. The Council refuses to consider privatization or outsourcing and the Mayor will not consider a plan that involves borrowing more money.

To make the situation even more interesting some unions have actually supported a privatization plan, a virtual blasphemous act among organized labor, in order to ward off the state takeover. For some reason, union leaders fear the state managing the pensions more than their bête noir-privatization. One has to ask; why would that be?

Obviously, the relationship between the Mayor and Council is poisonous. There is no trust. Otherwise, they could come together on a plan to improve the City’s massively underfunded pensions. The Mayor’s position of not wanting to the City or its authorities to incur debt to resolve the plan is laudable. The Council’s abhorrence of privatization is ludicrous and detrimental to the City.

The problem is that an unwillingness to make the spending cuts necessary over the last five years, a too ambitious and wrongheaded approach to the bidding process to use parking garages as a way to raise money and Council’s obstinacy have combined to produce this preposterous stalemate.

Now the City has to swallow the bitter pill that is coming and begin planning where spending cuts are going to be made to free up money to meet pension fund obligations. If the City wants another solution they must look to filing for bankruptcy. In bankruptcy Pittsburgh could ask the judge to force unions to accept less generous retirement benefits than those called for in existing contracts. Some sharing of the pain is reasonable. Asking other Pennsylvania or U.S. taxpayers to provide money to meet excessively generous promises to unions is neither reasonable nor morally justifiable.