Local govt. pension funding varies
At this point, it’s common knowledge the state is facing a growing pension problem.
What’s not as well known is that Pennsylvania’s municipalities are facing a pension crisis of their own.
According to a report released by the state auditor general’s office last week, of the 1,218 Pennsylvania municipalities that administer their own defined benefit pension plan, 573, or 47 percent, are classified as distressed by the state.
“The state pension issue gets most of the media and legislative attention. However, my report shows the municipal pension problem is just as widespread and, without changes, could push some municipalities into bankruptcy,” Auditor General Eugene DePasquale said in a release on the report. “We are talking about nearly a $7 billion unfunded liability which impacts small townships, mid-sized boroughs and big cities throughout our state.”
The state classifies municipalities as distressed based on the ratio of the value of their assets to their projected liabilities under the Municipal Pension Plan Funding Standard and Recovery Act. Municipalities whose pensions are 90 percent or more funded are considered “not distressed”, those with funding levels between 70 and 89 percent are labeled “minimally distressed”, those with funding levels between 50 and 69 percent are labeled “moderately distressed” and those with funding levels below 50 percent are labeled severely distressed.
The report focused only on defined benefit plans administered by the municipality. Defined benefit plans are those traditionally thought of as pensions, those with a guarantee of benefit rates. Defined contribution plans, meanwhile, have a set rate of contribution and base benefits on the value of their assets. By their nature, defined contribution plans’ assets are sufficient to meet their liabilities, as benefits are determined by plan assets.
“Some pension plans are so underfunded that promised retirement commitments are at risk,” DePasquale’s release said. “If they fail, the cost will be passed onto the taxpayers. This liability can truly become every taxpayer’s nightmare.”
Based on reported actuarial data from 2011, the last year which the state has reporting data for, two municipalities in Warren County have defined benefit plan funds which meet the criteria for a distressed classification.
The City of Warren is labeled as “minimally distressed”, with a reported funding level of 83 percent with projected liabilities of $12,525,412 and assets of $10,392,252.
Columbus Township is labeled as “severely distressed”, with a reported funding level of only 40 percent with projected liabilities of $228,705 and assets of $91,002.
Three additional municipal pension funds in the county have liabilities greater than their assets, but are listed as being more than 90 percent funded and therefore not distressed.
In total, county municipalities are listed as having a combined unfunded pension liability of $2,449,191.
Meanwhile, six municipalities have pension funds in which assets exceed liabilities, resulting in funding percentages of over 100 percent. Mead Township, for instance, boasts a 229 percent funding level with assets valued at $1,087,398 and liabilities of only $474,180.
Other municipal pension funds in the county are of the defined contribution type.
“Minimally distressed” municipalities are given a list of possible steps they can adopt toward improving the issue while “moderately” and “severely distressed” municipalities are given additional mandatory steps to take.
“The problem is expected to get worse later this year and in 2015 when new accounting standards will require municipalities to include net pension liability on their financial statements,” According to the auditor general’s release.
“The accounting changes that are coming will make it more expensive for municipalities to borrow money and increase pension contributions, potentially draining more money from municipal services and triggering higher property taxes,” DePasquale said in the release. “The impact will be dramatic for some, devastating for others.”
Self-administered, defined benefit municipal pension funds in the county, their assets, liabilities and funding percentages according to 2011 reported data included:
Columbus Township – assets of $91,002, liabilities of $228,705, 40 percent funded;
Conewango Township – assets of $1,921,135, liabilities of $1,756,639, 109 percent funded;
Freehold Township – assets of $102,528, liabilities of $75,830, 135 percent funded;
Mead Township – assets of $1,087,398, liabilities of $474,180, 229 percent funded;
Pleasant Township – assets of $1,076,248, liabilities of $1,161,153, 93 percent funded;
Sheffield Township – assets of $679,351, liabilities of $686,217, 99 percent funded;
Sheffield Township Municipal Authority – assets of $384,388, liabilities of $332,693, 116 percent funded;
Warren City – assets of $10,392,252, liabilities of $112,525,412, 83 percent funded;
Warren County Housing Authority – assets of $1,442,224, liabilities of $1,403,753, 103 percent funded;
Warren County Solid Waste Authority – assets of $638,496, liabilities of $378,512, 169 percent funded;
Youngsville Borough – assets of $916,293, liabilities of $1,001,851, 91 percent funded.
DePasquale’s report recommended eight steps municipalities could take to help address underfunded pensions and four more steps that could be taken to address systemic issues associated with pension plans. A copy of the report and accompanying recommendations is available at www.auditorgen.state.pa.us/Reports/MunicipalPensionSpecialReport022614.pdf.
Audits of pension funds, including those for municipalities, counties and school districts, are available on the auditor general’s website, www.auditorgen.state.pa.us, by clicking on the “reports online” button.