Legislature Restarts County Pension Reform Effort

Is this the year changes come to Allegheny County’s Retirement System, a self-insured defined benefit plan covering more than 7,400 non-uniformed employees, jail guards, deputy sheriffs, and County police officers?



If that question sounds familiar, it should: in the 2011-12 session the House version of a reform bill passed that chamber unanimously but never got past the Senate Appropriations Committee (it made it there just about this time last year).  Earlier attempts were likewise made in recent legislative sessions but the changes sought by proponents have proven elusive. We noted in a Brief in December (Volume 12, Number 61) that the proposal might come back.


Because Allegheny County system’s guidelines are codified in the Second Class County Code, any substantive change has to come from Harrisburg. The General Assembly has done plenty of tinkering with the County’s retirement statute over the last forty years. Consider that the statute as it existed in the 1950s required all employees to reach age 60 and have 20 years of service to attain normal retirement benefits.  Amendments lowered the age of retirement for police to 50 (in 1974) and to 55 for the sheriff and deputy sheriffs (in 1989), prison guards (in 1992), and probation officers (in 1998).     


Thus far, legislation has passed the House and is now in a Senate committee (there is an identical Senate companion bill that is in the same committee) and, based on a reading of the House’s fiscal note on the 2013 bill, not much of the tenor has changed from earlier versions of the legislation.  Should the reforms become law, new County hires would no longer be able to count overtime into their pension, would have to work more years for the County to be qualified for a pension (25 years instead of the current 20), would have a period to vest of ten years instead of eight, and would calculate final average salary from the highest two years of the final four to the highest four years of the final eight.  With interpretation of the state’s Constitutional language on the impairment of contracts taken to mean pensions for current workers cannot be touched, so savings are gradual and obtained by changes to future employees. As employees under the current system retire and new hires eventually replace them, there would be a corresponding decrease in the normal cost for the pension system (both the County and the employees contribute at the same rate) that would reach $16 million twenty years after the enactment. 


It is easy to see how the argument is going to shape up.  Those in favor of the reforms from the County government as well as the County’s legislative delegation are looking at a system that was 85 percent funded in 2005 that is now 58 percent funded as of 2011 and have probably taken note of the pension problems encountered by the City of Pittsburgh and may want to head similar problems off before things get really bad.  Every year that passes before changes apply to new hires postpones the time when cost savings would arrive.


Those opposed to the changes, on the other hand, have to make a convincing argument that employees who are not yet even employed by the County, don’t bargain with the County, and have no standing should not have a different pension than the one in place.  This is what happened in 2009 when a House committee took testimony in Pittsburgh on the changes and heard from heads of bargaining units.  One made an argument about a “two-tier” system which “…is a dangerous thing between workforces, unions in the workplace in general. You have certain people that are able to benefit from something and others that are not.  They do the same job, work the same hours, complete the same task…”  Presumably the insinuation was that there might be intra-union conflict if employee A could count overtime into his pension and retire after 20 years of service while employee B could not. Of course anyone taking the job would be willingly accepting the differential-no one would be compelled to work for the County. 


Maybe time will bear that out. In the intervening years since that testimony was taken several substantial changes have been made at the state and local level to differentiate new employees hired by the public sector:


  • The state passed Act 120 in 2010 that created two new tiers of school employees hired after July 1, 2011 with a lower multiplier rate on final average salary, a longer vesting period and a higher retirement age (to 65 from 62) and a new tier in the state employees retirement system for those hired after January 1, 2011 which did the same with the multiplier and increased retirement age by five years (changing most to either 55 or 65 years of age).  People hired since those dates are working alongside others who are not under those benefit structures.
  • The Port Authority made changes to its plans for non-represented and IBEW employees where new hires are in defined contribution plans, with those employees working alongside employees in defined benefit plans.  The Authority also negotiated a new contract with the ATU where new hires will only be eligible for three years of post-retirement health care, with those employees working alongside of current employees who are in various tiers of benefit qualifications tied to age and service requirements.
  • The Act 47 recovery plan for Altoona eliminates retiree health care for employees hired on or after January 1, 2014 and Harrisburg’s plan eliminates it for those hired after the adoption of the plan. 


That’s standard operating procedure: if pension benefits for current employees are viewed as sacrosanct and there are limitations for bankruptcy filings for local governments in steep trouble with generous retirement packages made by officials in previous years, then the gradual process of nurturing pensions back to health falls on new hires.


Whether the proposed changes to the County’s system makes it through the legislative process this year will provide insight as to the Commonwealth’s appetite to take on wholesale pension reform.

Pittsburgh School Board Election

In the school board election there have been many of the same old, same old nostrums offered up by the candidates. We need more money, let’s go after the non-profits. This in a school district that spends well over $20,000 per student and has little to show for it in terms of academics. This in a school district with a "Promise program" that offers scholarship money to virtually everyone who graduates. Yet school enrollment keeps falling and preparation for college languishes at abysmal levels. If money were the answer, Pittsburgh schools would be among the best.

There was one comment from a candidate that has a lot of potential. The candidate suggests changing union contacts to remove the overweening influence of seniority on personnel decisions and presumably on pay-although that was not explicitly stated.

There is little question that for too long teachers and the so called educrats who have been in charge have neglected the wellbeing of students, their parents and taxpayers in favor of political correctness, liberal ideologies and self- preservation of the employees and bureaucrats. The citizens of Pittsburgh and the taxpayers from across Pennsylvania who cover about half the cost of the school system deserve better.

Pension Reform Might Touch All

According to the website of the Pennsylvania Municipal League, whose mission is to "strengthen, empower, and advocate for effective local government", there is scheduled to be a press conference today to unveil municipal pension reforms. As we have noted in our work, going back to 2007, Pennsylvania has over 3,000 "local" plans-those covering uniformed and non-uniformed employees of counties, cities, boroughs, townships, home rule municipalities, and authorities. If the state’s 500 school districts were not consolidated into one system (PSERS) the share of pension plans concentrated in Pennsylvania as a percentage of all plans across the country would swell.

It would be a surprise if the proposed reforms to be outlined for municipal plans were to follow exactly what the Governor proposed for PSERS and the system that covers all state workers (SERS) earlier in 2013. One wonders how legislation would treat local governments who have placed their employees (almost exclusively non-uniformed) into defined contribution type plans (53 of the 298 plans in Allegheny County are non-defined benefit plans) if the goal is to move away from defined benefit plans. Age of retirement, length of service, overtime calculations, and many other areas will likely be addressed in one way or another.

Unions Threaten Court Challenge to Governor’s Pension Reforms

With the predictable certainty of robins returning in spring, public sector unions in Pennsylvania have thrown down the litigious gauntlet, promising lawsuits against Governor Corbett’s plans to head off a financial crisis stemming from massive unfunded pension obligations.

The unions are opposed to the idea of having new employees being placed in defined contribution pension plans but they are hopping mad over the prospect of having the formula for calculating retirement benefits changed on the future earnings of current employees. The reform plan calls for the current workers to retain the benefits accrued to date but will lower the rate of payout on earnings from when the law becomes effective through retirement. Obviously, for workers close to retirement the impact will be small but for those with 10 or more years left to go to retirement there will be a significant effect. The longer the time to retirement the greater the reduction in benefits will be.

But what choice does the Governor have? The pension systems for state employees and teachers are woefully underfunded and the state government is facing the prospect of having to allocate additional billions a year of state funds to return the pension funds to a financially responsible condition. These additional payments are money the state does not have unless it raises taxes substantially.

There is another option of course. The state could cut education and other funding as well as its own employment levels sufficiently to cover the pension payments. Or it could renegotiate contracts to lower dramatically current compensation including health care, vacations, salaries, sick leave, etc. And it could urge school districts to do the same. Absent any meaningful concessions, the layoffs should begin.

The proposition must be that the excessively generous pension and other benefits promised by irresponsible governments and school districts in the past must not be allowed to wreck the current economy by forcing ever higher taxes to sustain the promises. There must be some willingness on the part of the unions to recognize the plight taxpayers are facing. If they persist in their unwillingness to make any concessions, then there is little choice but to slash the size of payrolls to compensate. If they decide to play hardball, the state and school districts must be ready to throw down their own gauntlets.

Big Decision Day for Philly Schools

While the closing and reuse of Schenley High School has grabbed attention, the school district across the state is going to vote tonight on closing 27 public schools, an action that, if taken, is being described as one of the largest school closing plans in recent history.

Proponents of the action, including the District’s Superintendent, say that if it does not happen there might be issues with payroll or opening the District as a whole after the summer. We noted last fall how the Philadelphia School District borrowed $300 million to keep things afloat.

The District’s CAFR shows that it had 249 elementary, junior/middle, and senior public schools in FY 2003. There were 228 in FY 2011, a decline of 8% (the rate of closure in Pittsburgh has been much greater, with 88 schools in 2003 and 56 in 2011, a decrease of 36%). Twenty seven more would be a 12% decline from where the District stands now. Interestingly in both Philadelphia and Pittsburgh senior schools have stayed relatively constant; the biggest percentage drops in both districts occurred in the junior/middle school level.

Belief in the End of Assessments

Four years after the state’s highest court had the issue of base year assessments before them they said that the base year idea in and of itself was not bad, just that the way Allegheny County applied it violated the uniformity clause of the PA Constitution. Problems with a base year would arise across the state, but that would happen at different times for different counties.

Not long after a state senator from Allegheny County was quoted as saying "the impression I got from other colleagues around the state is, ‘If the court’s not going to make us do it, we’re not going to do it,’…It just seems like no one’s going to step up here." One long time assessing official from southwestern PA once quipped that upon starting his job colleagues told him that the state would soon be getting rid of property taxes.

That was in 1969.

So a huge grain of salt has to be taken when officials in Washington County prep for a hearing this month on moving forward with a reassessment note "We don’t want to be the last county to go under this process. We want to fight to get it changed." The County last did a reassessment in 1981, but don’t want to spend money on updating values that "might be outdated in three to five years". One official even jested that imprisonment might be on the table, a possibility that residents of Allegheny County who followed the most recent County Executive race might remember.

Why the argument if the County agreed to go forward in 2008 if the state had not yet reformed the assessment process in the state? Nothing happened, and now the County feels that it will?

Governor’s Plans for Mass Transit


In the proposed budget for FY 2013-2014, the Governor laid out a plan to increase transportation spending for state highways and bridges, help with local roads, Turnpike projects and mass transit. 



The plan calls for raising additional revenues primarily through the elimination of the cap on the wholesale price of fuel used to calculate the Oil Company Franchise Tax liability. Other transportation taxes will be lowered-such as reducing the liquid fuels tax on gasoline by 17 percent over two years-as an offset to the retail price impact that will likely occur as the Oil Company Franchise Tax moves significantly higher. Some administration accounts have suggested that transportation-designated revenues will rise about $500 million next fiscal year (FY) 2013-2014 and over five years increase to about $1.8 billion annually beyond the current level in FY 2017-2018. If the reports are accurate the plan will raise and spend an additional $5.4 billion more than would happen without the tax increase over the next five years.


However, based on data in the budget, these figures appear to be too high. First of all, the FY 2017-2018 total operating spending for transportation is only $1.2 billion above the current spending rate and, second, the cumulative five year boost above the current level is only $3.9 billion.


For mass transit, or public transportation as it is generally designated in the FY 2013-2014 budget documents, the Governor’s summary page describing the proposed transportation changes indicates mass transit will receive approximately $250 million more per year than it currently receives. However, that figure does not match up with projected appropriation in the Transportation Department budget.  It is only in year five, i.e., FY 2017-2018, that the increase reaches the $200 million mark above current year spending.  In the coming fiscal year the proposed appropriation actually drops.  Significant increases are not projected until year three (FY 2015-2016).


Note too, that in FY 2017-2018, five years out, the annual operating appropriation reaches $755.6 million, a rise of $45.6 million or just 6.4 percent above the current FY 2012-2013 budgeted expenditure. Next year, in FY 2013-2014, appropriations for transit operations are budgeted to fall before beginning a modest growth trend in FY 2014-2015.


Indeed, most of the five year jump in mass transit funding out of current revenues is slated for the line item called Asset Improvement-which next year absorbs the capital improvements line item to simplify the accounting. Asset Improvement appropriations hold flat until year three when they jump by almost $100 million and, after staying flat in year four, leap by more than $100 million in FY 2017-2018, reaching $251.6 million. Note that combined asset improvements appropriations and capital improvement appropriations in the current fiscal year stand at $53.3 million.  Thus, after five years this category of spending will have risen by just under $200 million and account for the bulk of new state expenditures on mass transit.


There is other funding for capital projects through the Capital Facilities Funds and the Public Transportation Assistance Fund but that funding appears to be level at $175 million throughout the period.


But there are more serious problems with the plan as revealed in budget forecast data. Based on estimates provided in the FY 2013-2014 budget documents, the elimination of the wholesale price cap on the Oil Company Franchise Tax will raise only $1.06 billion more in revenues five years from now in FY 2017-2018 than are forecast for the current fiscal year. Moreover, the budget documents’ projected five year cumulative addition to revenue from eliminating the wholesale price cap compared to current year levels is only $3.8 billion. Then too, other categories of motor license fees and taxes are being lowered considerably holding down net motor license fund revenue growth. 


By the same token, funds for transportation are also taken from other state revenue sources. For example, mass transit receives a 4.4 percent share of the state sales tax, payments from the Turnpike Commission, the Lottery, certain motor vehicle fees and from Capital Facilities Fund bond proceeds. These funds will help revenue available for transit to increase.


An immediate question arises concerning the use of the Oil Company Franchise Tax for mass transit. Motor fuels taxes are constitutionally not permitted to be used for purposes other than highways and bridges.  Unless there is a plan to shift fungible revenues to mass transit, the plan as proposed will probably not pass muster. If there is such a provision it is not spelled out anywhere in the Transportation Plan or in the recently released budget.


One thing is certain: motorists will not take kindly to having the price they have to pay for fuel raised to fund mass transit. Especially motorists in most of non-urban Pennsylvania where there is no public transportation.  And even more especially when the income transfer is going to support transit agencies that are egregiously expensive and cost inefficient.  Local transit should instead receive a large share of its support from a local tax levy that has been put to voters in a referendum. A local option sales tax for example distributes the cost of subsidizing public transportation to those who benefit most from the presence of the transit services.  A share of parking tax revenue in a county or city would be another option for raising revenues to subsidize transit. But there is a reason the Constitution prevents the use of motor fuels from being diverted to transit and that law needs to be enforced.


Beyond the funding source considerations, it is incumbent on the Commonwealth as creator of the transit authorities to take more responsibility to help ensure efficiencies of operation and to keep costs under control. For instance, Pennsylvania should immediately end the right of transit workers to strike. The right to strike has been the single biggest factor in driving the Port Authority to virtual bankrupt status. The appointment of board members of the Port Authority exclusively by the Chief Executive of Allegheny County is another serious problem.  The Legislature and Governor should look for ways to insure high quality, non-political appointments to boards as important as the Port Authority.


Moreover, Pennsylvania will continue to ill-serve its taxpayers until it eliminates the prevailing wage requirement on construction and maintenance projects that use state funds. Many millions could be saved each year that could be returned to taxpayers or shifted to other core services, reducing the tax burden on the state’s residents and businesses.  


Finally, the transit plan will gradually raise the local match to receive funds for capital projects to 20 percent from the current 3.3 percent and gradually raise the match to receive operating funds from 15 to 20 percent.  These changes are designed to help ensure better local management.  It could help restrain unnecessary and poorly thought capital projects. In Allegheny County the 20 percent match requirement could lead to a hike in the drink tax, which was originally created to generate the local matching funds but was lowered from 10 percent when it produced more than enough revenue to meet the County match.


Another provision in the proposed mass transit scheme requires local transit agencies to modernize services by carrying out consolidation studies. If cost savings can be realized and agencies implement the consolidation they will have their matching fund requirement for state dollars drop from 20 to 15 percent.  If they fail to adopt the changes their local match for state funds will rise to 25 percent.  Unfortunately, what is meant exactly by consolidation studies is not clear. Does it mean consolidation of routes or service runs within a county’s transit agency? Or does it mean consolidation of services with other counties’ transit agencies? If the latter, the opportunities for the Port Authority are slim indeed because of its very high labor compensation costs compared to the other regional agencies.  Who will evaluate the studies to see if they have assiduously looked for savings or considered sufficiently radical changes that would produce significant savings?


Rather than trying to force consolidation as a way to lower costs, the language of the bill ought to set outsourcing targets-with either private carriers or other regional carriers. For example, in the next five years 25 percent of Port Authority bus service should be provided by lower cost regional or private carriers. These carriers would get the Port Authority state per passenger subsidy passed through to them as the contractor carrier to enable them to compete for bus service.


In short, the proposed mass transit plan offers little in the way of real structural change either in management or in the underlying drivers of cost.


The Governor’s Pension Proposal

The budget for fiscal year 2013-14 was presented today by the Governor and reforms for pensions were outlined. To be clear, as we have written before, when the state level reforms are mentioned the focus is on personnel covered by either SERS (state workers) or PSERS (school employees). The remaining county, local, and authority plans aren’t the subject of reform. That’s not to belittle the plan: to be sure, the unfunded liability of SERS and PSERS is a combined $41 billion.

The highlights: as with most retirement cost reform, new employees (presumably all, with no exceptions for public safety) will come under a new pension system, here a proposed defined contribution plan with employees contributing 6.25% of pay; current retirees get no new benefits, and current employees will see no change to the benefits they have accrued, however, the future benefits of current employees will have a lower multiplier and compensation reforms (overtime and Social Security caps).

This will likely be a very contentious issue as there will be much discussion over whether Constitutional language on impairing contracts has an impact on future benefits for current employees. Note that the budget proposal states that current employees can pay more into their pension to keep the multiplier from dropping.

County Priorities Set for 2013

The County Commissioners Association of PA is a statewide association representing the interests of the state’s counties, and it has released its "wish list" by setting priorities for its members of what they would like to see the General Assembly act on. The priorities for county government include action on human services, Marcellus Shale, and 911, but let’s focus briefly on three issues that we have written about:

Property Assessments: The Association talks about the 2010 study done on assessment practices by the Legislative Budget and Finance Committee, task forces, work they have done with other professional associations in the state, and would like to see the recommendations of the 2010 study (training, funding, tools to determine timing of assessments, etc.). No word on the Association’s feelings on the court battles that took place in the member counties of Allegheny and Washington over doing a reassessment.

Transportation: The Association supports the work of the 2011 Transportation Commission on how to fund the state’s road, bridge, highway, and transit needs overall, but points out that it "does not have a unified position on mass transit" because of the differences between systems across the state.

Prevailing Wage: The Association notes how the prevailing wage requirement on public projects has not been updated since the 1960s and how a court decision brought what was considered "maintenance" under the auspices of the wage requirements. Priorities the Association would like to see acted upon include indexing the amount, opt out provisions, or a full repeal.

If Pensions Be Pac-Man…

Then does that make the various methods of reform the ghosts? The video game reference, made by the Governor and noted in a new report on pensions from the state Budget office, arises from the state’s pension contributions in which money put toward pensions devours dollars that would otherwise go to the fundamental areas of state policy such as public safety, infrastructure, education, and health.

The report deals with the two pension plans administered directly by the state-one for state employees (SERS) and one for public school employees (PSERS)-and no mention is made of dealing with the pension plans that exist at the county, municipal, or authority level. There are about 2,000 of those in Pennsylvania, but diagnosis of the problem (the report looks at the dozen years or so of legislative enhancements and corrections to pension funding) and exploration of solutions deals with the two big statewide plans. Believe it or not, the funding ratio for both hover around 68%, making them "moderately distressed", which is where the beleaguered City of Pittsburgh’s plans are as of now.

The report lays out a framework for how to achieve changes, including looking at other states for guidance. Interestingly, with data from the National Conference of State Legislatures there has been a fair amount of reforms that have affected new and current employees as opposed to just singling out employees that have yet to be hired. Increasing employee contributions, a reduction in increases to post-retirement benefits, and restrictions on return to employment tended to hit current and new employees in recent years. If there were changes to age and service requirements, changes to average final salary calculations, or vesting changes they tended to fall on new hires predominantly or exclusively. Pennsylvania’s Act 120 of 2010 made changes that mostly affected new hires.