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Auditor General Weighs in on Municipal Pensions

Almost a year ago the Auditor General (AG) pointed to two major problems he saw with the local pension system in Pennsylvania: one, there are too many plans and some type of consolidation should be in order, and two, the assumptions of investment rate of return was too optimistic. We wrote a blog on the AG’s work last February.

The release of the latest PERC status report on local pensions is the impetus for the AG to once again look at the issue. The AG’s report notes that “562 municipalities administer pension plans that are distressed and underfunded by at least $7.7 billion”. This is true, however, there are levels of distress under Act 44 of 2009 with cutoff points on funding ratio. So, while a pension plan that is 89% funded is distressed it should be noted that it is in the category of “minimal distress” and one point underneath the “no distress” category. In addition, when the pension plans in Philadelphia and Pittsburgh are removed from the picture the total unfunded liability falls to $1.8 billion.

The AG’s work also outlines plans by the assumed rate of return municipalities attach to them, which the AG notes is defined by state law and must fall between 5% and 9%. Recall Pittsburgh’s debate about lowering the rate of return from 8% to 7.5% and what that would mean for the budget (see here and here and here). Amazingly, 304 defined benefit plans are currently assuming a rate of return greater than 7.5% and about 30% of those have a funding ratio of less than 70%.