HARRISBURG – Auditor General Jack Wagner has proposed that the state’s 2,600 municipal pension plans be consolidated into a statewide system for different classes of employees such as police officers, firefighters and non-uniformed employees.
Wagner said that consolidation would yield higher investment return rates for municipal employees, reduce administrative expenses and help reduce the need for increased contributions from taxpayers. The General Assembly’s failure to reform the state’s municipal pension system will lead to higher bills for taxpayers in the near future, Wagner warned.
“Pennsylvania has too many small and underfunded municipal pension plans that could cost taxpayers millions of dollars to maintain,” Wagner said. “Consolidation is the best way to preserve benefits for retirees and future retirees while protecting taxpayers from higher tax bills they can’t afford.”
Wagner made his comments after presenting the Public Employee Retirement Commission with a new report completed by the Department of the Auditor General, which showed that 36 percent of the state’s municipal pension plans are considered distressed. The special report is available to the public at www.auditorgen.state.pa.us.
The report shows that 52, or 2 percent, of the plans are seriously underfunded with less than 50 percent of their plan liabilities covered. Those 52 plans, which are classified as severely distressed, could place an even greater tax burden on many Pennsylvania taxpayers, Wagner said.
The Commonwealth of Pennsylvania has more than 3,200 local government pension plans — about one-fourth of all the municipal plans in the United States. The plans provide benefits to police officers, firefighters, and non-uniformed personnel.
The Department of the Auditor General is responsible for auditing about 2,600 of Pennsylvania’s 3,200 local government pension plans; the remaining 600 are county and municipal plans over which it has no jurisdiction.
According to Wagner’s report, about two-thirds of the 2,600 local government pension plans audited by the Department of the Auditor General have 10 or fewer members. It says the 2,600 local government pension plans hold $10.2 billion in assets and $17.4 billion in liabilities for an aggregate funding ratio of 58 percent.
Wagner’s special report, titled the Analysis of Local Government Pension Plans, covered the period July 1, 2009 to June 30, 2011. The report noted that nearly 1,000 of the state’s local government pension plans audited by the Department of the Auditor General are underfunded by 8 percent or less, according to the most recent valuation reports submitted to the Public Employee Retirement Commission.
“With Pennsylvania mired in the worst economic recession since the Great Depression, and the fact that many of Pennsylvania’s local government pension plans are facing serious funding deficits, government officials at all levels must consider new ways of ensuring that local government pension plans are adequately funded, and that taxpayers don’t bear an unfair burden in meeting those benefit obligations,” Wagner said. “For the sake of Pennsylvania taxpayers, the time has come to seriously consider alternative ways of shoring up the funding deficits of local government pension plans including, but not limited to, consolidation of plans.”
According to data taken from the most recent available actuarial valuation reports dated Jan. 1, 2011, Wagner’s report noted:
- The assets of 52 plans identified as severely distressed totaled $760 million and liabilities totaled $1.69 billion, for an aggregate funded ratio of 45 percent.
- The assets of 234 plans identified as moderately distressed totaled $5.6 billion and liabilities totaled $10.6 billion, for an aggregate funded ratio of 53 percent.
- The assets of 663 plans identified as minimally distressed totaled $3 billion and liabilities totaled $3.9 billion, for an aggregate funded ratio of 79 percent.
Act 44 of 2009, the Municipal Pension Plan Funding Standard and Recovery Act, requires underfunded pension plans to proffer a distress recovery plan. For example, a plan that fits the severely distressed criteria is required to aggregate its pension funds for administration and investment as a single trust fund; establish a revised benefit plan for newly hired employees; and submit an administrative improvement plan to the Public Employee Retirement Commission.
The Department of the Auditor General released 2,023 audits on local government pension plans from July 1, 2009 to June 30, 2011; 648, or 32 percent, contained findings resulting in $2,074,829 due to the commonwealth, in addition to other monetary effects totaling $5,022,549.
Wagner’s special report identified seven common deficiency areas of pension plans, which affect the plans’ ability to ensure compliance with state laws and the financial health of the plans. The finding with the greatest impact on the financial health of the plans’ was the failure of municipalities to pay the minimum municipal obligation of the pension plan in accordance with Act 205, which totaled $4.4 million. Wagner’s special report also noted that a total of 78 findings cited municipal pension plans for providing excess benefits to plan members between July 1, 2009 and June 30, 2011, thus, increasing the plan’s pension costs and reducing the amount of funds available for investment purposes or for the payment of authorized benefits or administrative costs.
Wagner said the General Assembly should consider consolidating local government pension plans into a statewide system for different classes of employees – police, firefighter and non-uniformed. An alternative solution would be to maintain the existing system of individual pension plans but consolidate their administration into one entity such as the Pennsylvania Municipal Retirement System or the State Employees’ Retirement System.
Wagner also said that the General Assembly also should consider amending the formula for the allocation of General Municipal Pension System State Aid funding to ensure that distressed pension plans receive additional funding when properly managed.
The Department of the Auditor General is legally required to distribute the 2-percent foreign fire and casualty insurance tax funds to municipal pension plans in accordance with the provisions of Act 205 of 1984. In 2011, Wagner’s office distributed $361.6 million in pension allocations to benefit municipal pension plans statewide. Furthermore, in July 2008, Wagner initiated a new policy within the Department of the Auditor General which established that errors resulting in an underpayment of state aid to a municipality may, under certain circumstances, be rectified by the distribution of additional state aid to affected municipalities. This resulted in $687,623 of state aid reimbursements to qualifying pension plans.