Administration July 6, 2009

PA Proposal Would Move Distressed Municipal Pensions to State

July 6, 2009 (PLANSPONSOR.com) - In response to the faltering economy and difficulty many municipalities expect in meeting their pension obligations, Pennsylvania's Public Employers Retirement Commission (PERC) is recommending legislation that would move pensions with less than half the assets required to meet long-term obligations into a state-run pension plan.
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According to the Philadelphia Inquirer, James L. McAneny, PERC’s executive director, said severely distressed funds are estimated to number about 75 in the state “The idea of the takeover is really to stop the bleeding,” he said, in the news report. “The history is that municipalities – not all of them – don’t seem to be able to resist increasing benefits in spite of the fact that they can’t afford it.”

PERC was created to monitor public retirement plans in the commonwealth, review proposed legislative changes in those plans, and recommend legislation on its own, according to the PERC Web site. Under its proposal, all pensions funded at less than 50% would be directed into a pool administered by the Pennsylvania Municipal Retirement System, which now manages about 800 plans.

PERC’s plan would freeze benefits at the current rate, and bring in new employees under a plan that pays for itself. The accounting is based on a lower rate of interest for the fund – about 7% – that would allow the pension board to be more conservative in investments and the fund, therefore, to be more stable, the news report said.

The Philadelphia municipal pension system is against the proposal. It was funded at 53% at the end of May, but is projected to sink to 47% next June and remain below 50% for the next several years (see Philadelphia Pension Faces Most Severe Underfunding in over a Decade ).

According to the Inquirer, pension board actuary Ken Kent last week told board members that the state plan would result in much higher annual payments for the city in the long term, and a pension that is funded at lower levels than under the current city plan, which also requires state approval. In 2008, the city paid $439 million as its minimum contribution to the fund, while under the PERC plan, the city would pay $762 million into its pension plan in 2014, Kent said.

In addition, the PERC plan would result in the pension being funded at 56% by 2026, versus 86% if it stays as it is, he contended.

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