Issue Summary (Updated June 2009)

Local Government Pensions in Pennsylvania

The Issue:

The growth in pension legacy costs is hitting the state's largest cities and will eventually affect all municipalities in the state unless changes are made.  

What We Know:

There are more than 3,100 local government pension plans in the Commonwealth covering employees working for governments at the county, municipal, authority, and association level.  Most employers offer multiple plans, segmenting employees by type, most often into police, fire, and non-uniformed plans. When considered in aggregate, the assets of these pension plans top $18 billion and the liabilities are $23 billion, leaving a shortfall (unfunded actuarial liabilities) of $5 billion, resulting in a funded ratio (assets/liabilities) of 78 percent.  The majority of these plans are self-insured, defined benefit type where the risk of providing benefits lies with the government entity.  Philadelphia's unfunded liabilities account for about $3.8 billion of the total local shortfall, and Pittsburgh's $524 million shortfall is significant.  These numbers were collected prior to the national economic downturn, meaning that a lot of plans are in worse shape.

It is fair to say that the bulk of Pennsylvania's municipal pension problems are concentrated in these two cities.  They have higher ratios of retired to active members (1.37 and 1.25, respectively) and lower funded ratios (54% and 42% at the time of measurement) than many of the state's other larger cities and are far out of line with the majority of remaining municipalities in Pennsylvania.

In Allegheny County, there are 294 pension plans.  The shortfall among these plans is closer to $500 million.  When Pittsburgh's plans are removed from the equation, the remaining 288 pension plans share $32 million in unfunded liabilities.  There are few pension plans that would appear to be "in trouble", that is, those reporting a ratio of assets to liabilities of 69 percent or less.  In fact, the majority are funded at 100 percent or greater.  But though the rate and speed of descent into pension trouble is varied for these plans, problems are going to crop up.  We know that problems with the state's two pension plans (one for state employees, one for school employees) are a matter of rising concern and could result in massive tax increases to pay for obligations. 

Unfortunately, despite the enormous importance of dealing with the pension issues, the "pension time bomb" is competing for attention on the policy agenda and little progress has been made.   

Recommendations:

So what can be done to deal with the pension crises, especially those of the largest cities and those on the way,  The Allegheny Institute is recommending three steps; (1) Move to a defined contribution system for all newly-hired employees, (2) Establish an agency similar to the federal Pension Benefit Guaranty Corporation that could assume troubled pension plans and pay out fractional benefits to preserve the viability of plans from seriously distressed municipalities: as part of this plan the state might also have to consider allowing municipal bankruptcy as an option for municipalities that simply cannot find the revenue to meet their pension obligations-a scheme that would allow the pension plans to be treated as other creditors in a regular bankruptcy. This might require a constitutional amendment. This happens in other state and in the private sector. It should be an option for seriously distressed municipalities.  And (3), Sell the state liquor stores and outsource other functions to provide a revenue stream for funding state pension liabilities. 

Public pension plans need to be brought more in line with private sector plans and what taxpayers can afford.